No Flat World in Europe

No Flat World in Europe

Despite alarmist talk, the European economy is not in shambles.


The no vote on the EU Constitution by the French, then the Dutch. The fall, or seeming fall, of the Schröder government in Germany. Is Europe melting down? My friend V in Berlin says, “Relax–it’s just democracy.” Yet there is alarmist talk now that the EU might break up, or the euro be withdrawn.

To hear the violent rhetoric from the business elites in Frankfurt and London, Europe’s a shambles. In fact, things are pretty nice. Yes, French unemployment is at a very distressing 10 percent. But in Europe, while it can be much harder to get a job, it is much harder to lose one, too. In a two-year period, your chance of being jobless, laid off, is probably greater in America than it would be in France, and certainly greater than in many European countries. We may have lower unemployment at any given point, but it is a kind of “rolling” unemployment, shorter but still heart-stopping, that over time will affect a larger proportion of us. Would French workers want “lower” US-style unemployment, which means a greater likelihood of layoffs, firings, drop-offs into poverty for a half-year at a time every other year? I think not.

Indeed, except for Germany (dragged down by the cost of unification), Europe or the “euro-zone” part of it has been doing at least as well as the United States in the past ten years. This is among the stunning findings of a January 2004 Goldman Sachs study, Euroland’s Secret Success Story. As set out in the study, it’s true of productivity growth–a bit under 2 percent a year in both, if adjusted for the business cycle. It’s true for growth in GDP per capita (2.1 percent). And, yes, it’s true even for investors: In Europe you get the same return on capital. It’s true despite Europe’s higher nominal unemployment and shorter workweek. Indeed, if one could put a cash value on this extra leisure, one could argue the standard of living is going up faster there.

But that understates the case for Europe. While too few of us in America experience any rising GDP per capita in our own lives, the egalitarian Europeans do. Outside Britain, their people at the top are not doing nearly as well as ours. That may explain the violence of their rhetoric. In France the gap between “top” and “bottom” is slightly decreasing. It might have continued to do so in Germany, too, but for the skewing of all measures by East Germany. Yes, German unions have had to keep wages down of late. But that’s at least in part because in the early 1990s they pushed them up too high, even by my left-of-center standards. In total job growth, too, Europe’s been doing better than the United States.

Some economists even argue America overstates its productivity growth and GDP per capita. For example, Europe doesn’t get our unfair productivity boost from people working off the clock. Or the GDP growth from building far more prisons. It’s plausible that in the past ten years most of Europe has done better than the United States–even as Europeans keep working fewer hours.

Still, the business elites say the European model has to go. In a flat world, as Thomas Friedman proclaims, it seems obvious that high-wage Europeans will have to make a bonfire of their cushy way of life if they want to keep their precious industrial base.

There’s one problem with using the US and UK models for saving Europe’s industrial base: Both have wrecked their industrial bases. Some, or a labor lawyer like me, would argue that we wrecked ours not because our labor costs were too high but because they were too low. In the low-cost United States a firm can shut down and pay workers next to nothing–and the investors can open up a Wal-Mart. By contrast, in high-cost Europe, with expensive “closing plans” and labor vetoes in Germany and France, it is much harder than in the low-cost United States for a firm to go out of its industrial business altogether.

Over and over I hear intelligent people in America ooh and aah over the China miracle, and China’s export prowess. “Oh, China is what’s happening.” “China changes everything.” I don’t mean to scoff, but China is simply doing what others–Japan, for example–have done before. It’s ordinary catch-up. But Europe, and in particular Germany, is doing something truly new. Its highly developed countries have somehow kept their industrial base.

Last year, according to the WTO, German export goods had a value of more than $915 billion. China’s had a value of about $593 billion. In a so-called flat world, it turns out that the country with the world’s highest labor costs is the world’s champion exporter. Add in France et al., and the EU is even further ahead–last year, it had export goods of more than $1.5 trillion. What’s more, the endless dire talk in Germany about losing it all to Eastern Europe has turned out to be wildly overstated. It’s now 2005, and the recent data show that far from investing more in Eastern Europe, Germany of late has been slightly disinvesting. Of course, there is more outsourcing to Eastern Europe, but the bottom line is that Germany’s overall trade surplus is growing. US and other companies have passed over Germany and put money into Eastern Europe, and labor cost is one reason, but an equal and bigger reason is simply that there is a huge untapped market in Eastern Europe, while Western Europe is relatively sated. Yet Germans bemoan it, and neoliberals have been brilliant at rattling German self-confidence over, well, not much.

The European miracle is often said to be the one that took place in the 1950s, right after World War II. But that was catch-up, too. The real European miracle is the one that has happened in the past ten years: Europe (i.e., France and Germany) has engaged in a restructuring of its manufacturing–successfully. The threat to Europe right now is the violence of the rhetoric against the model, the bizarre gloom and doom when it is actually doing well. The nerve-racking thing about Europe at the moment is the possibility that ordinary Europeans will lose their nerve and just cave in to their American-wannabe elites.

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