Faster growth needed in Europe

Europe's economy is so enfeebled by high taxes and restrictive regulations that it can't pay for all the benefits promised by the social welfare state. The gap between promise and performance must widen and, in the process, spawn disillusion and discord, says Robert J. Samuelson.

What's needed is faster growth in Europe, which would reduce joblessness and bolster global trade. One obvious step is to cut interest rates:

  • Compared with the Federal Reserve, the European Central Bank (ECB) has been overly cautious. Its key interest rate is 2 percent; the Fed's is 1 percent.

  • The ECB's timidity reflects excessive worry about higher inflation (now 2 percent) and a more defensible belief that Europe's main economic problems are "structural" – meaning high taxes and regulations.

    Thoughtful Europeans now recognise this:

  • Last year Germany trimmed unemployment benefits and the tax used to pay for health insurance; that meant reducing some health benefits and requiring some co-payments by patients.

  • In France, the government defied street demonstrations to increase the retirement age for public employees.

    Although these were remarkable political steps, they won't single-handedly reinvigorate Europe's largest economies or avert the long-term budget problem.

    The predicament faced by Europeans – one shared to some degree by all advanced nations, including the United States – is this: Unless they take modestly unpopular steps today, they will be faced with hugely unpopular consequences tomorrow. But no one knows when tomorrow arrives and what those consequences will be. The temptation is to do nothing in the hope that nothing bad ever happens. The lesson of Europe's wobbly economy suggests that bad things have already happened, says Samuelson.

    Source: Robert J. Samuelson, The European Predicament, Washington Times, February 4, 2004.

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    FMF Policy Bulletin/ 10 February 2004
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