Tuesday, June 19, 2007


Writing for TCS Daily, Richard Rahn explains dangerous effects of European anti-americanism and its origins as well. Contrary to popular beliefs, I believe that the phenomena of European anti-americanism is not rooted in political reasons but in a broader economic highlight reflecting the crisis of welfare state in Europe, leading to low economic growth while supply-side (tax reductions) measures on the other side of Atlantic strenghened the U.S. competitiveness and contributed a substantial part to the record levels of GDP growth in the U.S. in the past year.

Anti-americanism is dangerous for both sides. The EU now accounts for 21 percent of U.S. merchandise exports and 19 percent of U.S. merchandise imports, and about 34 percent of U.S. services exports and 37 percent of U.S. services imports. In the past year, nearly 1,1 trillion (more than half of total U.S. foreign direct investment) was invested in Europe. U.S. and the EU are thus the largest trade and investment partners in the world. Even more. The total population of the EU and the U.S. presents nearly 57 percent of total world population.

The economic climate in the U.S. is far more prosperous than the one in the EU, except for the emerging markets in Eastern Europe, currently standing at skyrocketing economic atmopshere equipped with rapid GDP growth rates. Supply-side economic reforms in Estonia, Slovakia and Latvia are now paying big dividends.

In fact, growth projections of Estonia, Latvia and Slovakia rapidly exceed the European average, further stepping-up after the acceleration of GDP growth. The latest release has shown that Estonian and Latvian economies are growing at a rapid pace. In Slovenia, the GDP grew 7,2% quarterly. But in Slovenia, there is much misunderstanding concerning GDP growth.

In Slovenia, construction reached 28,9 percent rate of the value-added. But the offspring of investment emerged from the government debt grants to DARS (Highway builder and a monopolist) what enabled an intensive pace of borrowing which will once have to be repayed together with interest. You don't have to be an economic genious to find out that building highways stimulates construction investment, especially in a country in transition such as Slovenia.

Another relevant reason for a sharply widening gap between the U.S. and Europe is the crisis of welfare state in the EU back in early 1990s and still today. Many European countries suffered from a severe economic backlash in early 1990s.

After Germany was reunified, the economic performance started to flow sluggishly. The reunification could hardly be blamed for poor GDP growth track, but rather measures determining economic atmosphere such as benevolently high tax rates on labor and capital and rigid labor market. The agony of labor market deadlock has indeed forced many Germans to fly away from the welfare state onto nearby locations such as Switzerland, Denmark and Austria. Many Germans have indeed become "Neue Gastarbeiter" (new guest workers).

France equally suffers from rigid labor market and publicly declared protectionism and economic nationalism. In previous year, France clearly demonstrated what is the output of generous welfare expenditures coupled with unflexible labor market and lazy immigrants. Italy is the next sick man of Europe. After hitting the historically lowest GDP growth rates, the economy is hampered by significant tax burden and heavy regulation which slashes the potential absorbtion of output gains.

Another "pain-in-the-ass" is an ageing population which triggers the welfare expenditure rate in an unchanged pension scheme where net financial pension liabilities rise twice compared to GDP sum. Sweden, once the cradle of welfare filth, was hit by a recession and continually falling GDP for two years. Riksbank, the oldest central bank in the world, had to pass the devaluation of Swedish krona several times as the public debt and fiscal pressure on expenditure growth became uncontrollable. The economic recovery, of course, was slow, sluggish and hit by a growing taxation pressure as the retirement rent in "Bismarck-designed" pension schemes skyrocketed,

(A few days ago, I noted an interesting insight from Milton Friedman's trip to Stockholm (Sweden) where he received Nobel prize back in 1976)

On the other side, the U.S. economy flourished further after tax cuts were implemented back in 2003. Generally speaking, the U.S. has created an economic and business environment that is an envy to the world. Europe's best and brightest escape the welfare at a record pace, seeking to find better opportunities in the U.S where regulation and excessive fiscal pressure are far lower than in nearly every European welfare 'cradle-to-grave' welfare state.

True, the U.S. maintains one of the most onerous corporate tax rates in the world. Even in Germany and France, there is much less corporate taxation pressure on companies. The economic course diverging the measures (productivity) between the U.S. and Europe is eventually one of the main reasons why the majority of Europeans envies the U.S. so much. The cure for "European stagnation warming" is quite simple:

1. Privatize social security
2. Eliminate as much welfare state services as actually possible,
3. Maintain the rule of law,
4. Enforce tax competition,
5. Liberalize/deregulate product markets,
6. Abolish trade quotas,
7. Abolish the collective union bargaining, and
8. Cut tax burden by reducing tax rates on productive behavior.

1 comment:

Anonymous said...

"The total population of the EU and the U.S. presents nearly 57 percent of total world population."

The worldwide there are approx 6½ billion people. In the US about 300 million and in the EU about ½ billion people, so combining those two figures we get 800 million or about 12 percent. That is nowhere near 57 percent.