So what’s the problem? For starters, there is too much regulation in EU countries. Until recently, German stores were required by law to close by 4PM on Saturdays. Gas station convenience stores are only allowed to sell “travel provisions”, although the definition has recently expanded to include ice cream and other items. The EU also has problems with its fiscal policy. The Stability-and-Growth Pact sets limits of 3% of GDP on EU countries' budget deficits. Any eurozone country in breach of the pact could be forced to pay a fine of up to 0.5% of GDP. If recession occurs, there is an exception clause but it only applies if GDP falls by a minimum of 0.75%.
An RPCV writes on the European Union's Sluggish Performance
The EU’s Sluggish Performance
by a Returned Peace Corps Volunteer who served in Zimbabwe (10/13/2003)
Although Sweden’s September 14th referendum not to adopt the Euro was more politically than economically motivated, it nevertheless underscored some of the EU’s serious problems. Far from being the overnight economic superpower many EU proponents expected, its economic performance has so far been disappointing.
On Sept. 11 the European Central Bank downgraded its previous forecast and predicted that the EU’s economy would grow by a paltry 0.4 percent. According to an August 14 report by Eurostat, the EU's statistical service, the economies of 12 EU countries did not grow at all in the second quarter of 2003. In the first quarter, the EU economy grew by 0.1 percent.
Italy and the Netherlands are now officially in recession. Germany, which comprises 32% of eurozone GDP, had a 0.3 percent contraction in the second quarter. It has an unemployment rate of 10.4% (4.3 million workers) and is going through its second recession in three years. France is not far behind.
In contrast, the 2001 US recession, a predictable response to the investment bubble of the 90’s, was short lived. In fact, US economic growth has trounced that of Europe for the last seven consecutive quarters and, because the US continues to outperform Europe in productivity, unemployment, business investment, currency flows and stock markets, there is no sign this trend will reverse.
So what’s the problem? For starters, there is too much regulation in EU countries. Until recently, German stores were required by law to close by 4PM on Saturdays. Gas station convenience stores are only allowed to sell “travel provisions”, although the definition has recently expanded to include ice cream and other items.
The EU also has problems with its fiscal policy. The Stability-and-Growth Pact sets limits of 3% of GDP on EU countries' budget deficits. Any eurozone country in breach of the pact could be forced to pay a fine of up to 0.5% of GDP. If recession occurs, there is an exception clause but it only applies if GDP falls by a minimum of 0.75%.
The reason behind the pact stems from the German fear that EU countries would be tempted to run large deficits since the EU would collectively share the costs. But many see it as an unnecessary burden and, last year, European Commission president Romano Prodi even called the pact “stupid”.
Italy and Portugal have already broken the deficit limit this year and both France and Germany are expected to be in breach for a third time in 2004. Germany has even considered raising taxes in order to reduce its budget deficit.
Besides fiscal and regulatory problems, there are concerns about the Euro. Skeptics are concerned because the Euro forces several diverse economies to share one interest rate. This leaves the EU with few choices in times of economic crisis. And with the world’s over dependence on the US economy to spur international growth, it seems downright dangerous.
The Economist reports that the negative effects of sharing one interest rate could eventually be mitigated because, as members trade more among themselves, their economies could become increasingly similar. But this could give rise to another danger: if several members are heavily invested in one industry and that industry falls into a crisis, the entire EU will be hit hard.
Some eurozone governments are enacting reforms. Germany is trying to implement “Agenda 2010”, which would reduce the burden on companies who are by law required to pay their workers’ high pension and health care costs. France has followed suit and passed a big pension reform package in July.
But reform will not be easy and labor unions will not take benefit cuts lying down. Still, the German and French governments should be given credit for starting to take on the massive job of trying to make the EU more competitive with the US. Adam Posen of the Institute for International Economics says “overall, the eurozone will come back, but weakness in Germany will suppress the strength of recovery”.
Nevertheless, there are recent signs of optimism in Germany. PriceWaterhouseCoopers forecast on October 2 that the German economy will grow by 1.5% in 2004 and the IFO index, Germany's most important indicator of business confidence, rose for the third consecutive month in July after the government pledged to speed up ¤15 billion ($17 billion) worth of tax cuts. But without continuing reforms, these numbers may turn out to be an anomaly.
There are also cultural reasons for the EU’s weak economy. Compared to the US or Japan, Europeans tend to place a higher value on leisure time than on hard work. In some countries, the underlying belief that no one should be enslaved by a corporation also contributes to a lax work ethic. In France, corporate enslavement means working more than a 35-hour week.
Most eurozone citizens typically get at least twice as much vacation as Americans and sometimes four or five times as much as the Japanese. This practice has been known to cause inefficiencies with cross-border mergers. Asian workers in joint European-Asian ventures often complain that they can never seem to get their European counterparts on the phone during the summer because the Europeans are always on vacation
In many ways, valuing leisure time is healthy. Placing an emphasis on leisure time leaves more time for family life and allows people to relieve stress by pursuing hobbies or exercise. But Europeans are naïve to think they can take annual six-week paid vacations and still have a thriving and vibrant economy.
Dynamic economies are built on hard work and flexibility, not on over-regulated welfare states. If the EU wants to catch up with the US, it must continue its reforms. Similarly, Europeans must decide whether long vacations and shorter work weeks are more important than cutting unemployment and reviving a sluggish economy.
