BERLIN — With a deal last week to cut Greek debt, there was a collective sigh of relief here and in other European capitals, echoed both on Wall Street and in Washington. The transatlantic economy has once again dodged the threat of Greece’s disorderly default on its sovereign debt, an event that many feared could have pulled down Portugal’s troubled economy, if not those of Spain and Italy as well.
But Europe’s recent heroic financial maneuvers have, at best, bought the continent time to revive economic growth. Already, calls for more growth and less austerity are being heard in Spain, in France’s current presidential campaign, and from the Social Democrats here in Germany.
But growth in Europe is clearly in the eye of the beholder. European elites—based on a recent informal sampling in Berlin, Brussels, Paris, and Warsaw, Poland—expect no more than 1 to 2 percent growth over the next decade, far less than that needed from Europe by the Obama administration and the rest of the world.
Europeans’ resignation in the face of these poor growth prospects and their unwillingness to consider major structural changes to put their economy on a higher growth path are the real long-term transatlantic economic challenge, irrespective of short-term developments in the euro crisis. Convincing the Europeans to do what they need to do to maximize their growth is an objective the White House will ignore at its own peril.
The European economic engine has been sputtering for some time, even before the financial crisis hit in 2008. The 17-country eurozone’s economy has grown, on average, about 2.1 percent a year since 1993. In contrast, the U.S. economy averaged 3.2 percent growth over that period.
Europe’s future prospects are no less disheartening. The International Monetary Fund expects the eurozone economy to shrink by 0.5 percent this year and to grow by no more than 0.8 percent in 2013. (U.S. growth expectations are for 1.8 percent this year and 2.2 percent next year.)
European economists argue this growth differential reflects long-term trends, an aging population, and slow productivity growth.
The nearly 5 percent annual growth experienced in western Europe in the 1950s and 1960s was, they note, an aberration, a product of the rebound from the devastation wrought by World War II. From 1820 to 1950, Europe averaged just 1 to 2 percent annual growth, and it is now simply reverting to that trend line, they contend.
Moreover, Europe’s overall population is rapidly aging. Some countries are destined to see their populations shrink, with more people dying than being born.
And productivity in the eurozone has grown on average by only 0.9 percent a year over the past decade, compared with 2 percent in the United States.
Europeans also maintain that Americans are obsessed with growth per se, while they are focused on the quality of growth as measured by a high per capita income.
This is a self-reassuring argument, but the internal contradictions in this line of reasoning suggest it really reflects European resignation in the face of economic challenges they don’t care to address.
High per capita income is certainly a laudable goal. Too bad income per head grew faster in the United States than in the eurozone between 2001 and 2007.
To be sure, Europe’s demographic problems are formidable. But demography is not destiny. Europeans’ unwillingness to increase immigration is a self-imposed growth limitation that suggests they prefer a weaker economy to coping with more foreigners. In Germany, for example, net migration flows have actually declined over the past decade; immigration of workers accounts for only a small share of all immigration, and the proportion of highly educated migrants is lower in Germany than in many other industrial nations, according to the Organization for Economic Cooperation and Development, the industrial-country think tank based in Paris.
Moreover, European productivity can be improved, even in the vaunted German economy. Over the past decade, productivity growth per German employee was only about half the average in other industrial countries, according to the OECD. In part, this reflects a decline in the number of hours worked per person; German women work only about 30 hours per week, a total among the lowest in the industrial world. This could change if children’s day care were more readily available and social norms adjusted to modern labor-force requirements. Moreover, productivity is particularly lagging in German business services. Reforms to remove entry barriers and foster competition are needed not only in Greece and Italy, but even in Germany.
Restoring growth is Europe’s new challenge. And over the next few years, Washington will hear a lot from here about how America should not expect too much. Don’t believe it.