Europe Is Recovering More Quickly than U.S. - Why? 26 comments
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The somewhat shocking news that Europe and particularly those two mixed-economy giants, France and Germany, appear to be emerging from their recession more swiftly than we are, has some free market types asking some atypical questions.
First, if you haven’t seen it here from the WSJ is a quick look at what’s going on:
Germany and France have escaped from recession surprisingly quickly, outpacing the U.S. in returning to growth thanks in part to government stimulus efforts and consumer spending.
Germany, Europe’s biggest economy, grew at an annualized pace of 1.3% in the second quarter, while France, the region’s second-biggest economy, expanded at an annualized rate of 1.4%. Both countries recorded contractions for the previous four quarters, and bounced back earlier than other advanced economies including the U.S. and the U.K.
The news that Europe’s economic engine is rebounding suggests the region is joining the recovery under way in China and increasingly elsewhere in Asia, exemplified by India’s announcement Wednesday that industrial production in June rose nearly 8% from a year earlier.
That contrasts with uneven consumer spending in the U.S., where retail sales unexpectedly fell 0.1% in July, as American households are hurting from job losses, a weak housing market and tight credit.
This week, Federal Reserve officials said U.S. “economic activity is leveling out,” but cautioned that it is likely to remain “weak for a time.”
Of course, this wasn’t supposed to happen. Conventional wisdom was that Europe would languish in recession far longer than the US because it wasn’t engaging in enough fiscal stimulus, quantitative easing and, you know it’s economies were just too old and sclerotic to recover very quickly. So much for conventional wisdom.
Now, before we get too far into this, let’s remember that one quarter does not a recovery make but at the same time, you do have to admit that so far they’re eating our lunch. So what gives?
A couple of bloggers that I wouldn’t exactly describe as socialists, Yves Smith and Henry Blodget, raised the question of who has it right in posts this morning. Neither delivered an indictment of the US economic system but at the same time their writings suggest that maybe we need to think about the road we’ve been following lately.
Smith notes that on a trip to Europe this summer she was struck by the lack of signs of economic distress she witnessed. Here are her thoughts:
Turns out my sample may not have been so unrepresentative. The Wall Street Journal reports that Europe appears on the cusp of a bona fide recovery, with France and Germany both showing decent second quarter growth, while the US is trying to pretend that “things are getting worse less quickly” is tantamount to recovery.
Now are any of the Euro bashers about to give the EU authorities some credit? I doubt it.
And this disparity, if it persists, points to a much deeper issue. The US chose to deregulate across a wide range of activities and let the devil take the hindmost. Europe cares more about institutional frameworks and collective outcomes. US commentators regularly describe Europe a sclerotic. But if the EU winds up delivering better growth, what justification do we have for a system that seems best at redistributing income to the top.
Blodget asks a few questions:
And yet look who’s recovering first?
And look who didn’t even bother with a stimulus (Germany). And look whose citizens enjoy basic services that many Americans can only dream of (Europe). And look whose income inequality just hit an all-time high (U.S.)
Our free market is tuned to encourage maximum growth, maximum competitiveness, and maximum wealth for corporate owners. Europe’s economy is tuned to balance growth with employment, services, and wealth distribution.
Over the long haul, the performance of Europe’s stock markets hasn’t been much worse than ours. Plenty of Europeans have plenty of money, and most of those who don’t have any money still have decent healthcare and other social services. The heavy government spending (and taxation) provides a natural counter-balance to the cyclical private sector (when markets crash, government spending keeps cranking right along).
So is Europe’s economy really that much of a disaster? Is ours really so great?
Now, I will freely admit that I have been a Euro-basher. I worked for a European (French) bank for over a decade, spent a considerable amount of time in Europe and, for an outsider, had a fairly good feel for the social compact under which they operate. I thought that it was suboptimal and the US system superior and one that they would over time be forced to migrate towards, and, in fact, I think a reasonable argument can be made that they have over time adopted more free market concepts.
Having said that, they never abandoned their sense of collectivism nor did they make the sorts of changes that would expose their citizens to the economic risks that Americans tolerate. The social safety nets stayed in place and may be a key reason that they’re now seeing recovery sooner.
When I saw the news about Europe yesterday, I have to admit that it took me back. The pain of this recession has for me, at least, seemed to have been spread somehow too unevenly throughout the country. Maybe it’s the banks getting back to business as usual just a bit too quickly or maybe it’s the lack of any plan from Washington other than reestablishing the economic status quo ante but too much has been loaded on the backs of those least able to bear the burden.
Expect to hear and read a lot more about this, particularly if Europe and for that matter the more centrally controlled economies of Asia continue to outpace us in recovery. Those on the Left will no doubt seek to use it to advance many of their social programs and their arguments are going to find a will audience among the citizenry.
As for me, I need to rethink a few things. It may be that we don’t have it right and need to do a bit of adjusting. Expect to see more on this over the weekend.
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On Aug 14 03:05 PM chap08 wrote:
> Why? Because this is fundamantally a debt crisis and France and Germany
> never participated in the debt bubble in the same way that the US
> and the UK did. Their banks and consumers have not had to face the
> same kind of crisis. De-leveraging does not have the same meaning
> for them.
>
> They're not out of it yet though. It is untrue to say that there
> has been no stimulus spending, so the question remains, what happens
> when this is dropped. The banks may yet have problems with commercial
> real estate and eastern europe. Also, troubles lie in wait for the
> Euro - the PIGS (Portugal, Italy, Greece, Spain) are suffering, Ireland
> too.
On Aug 14 04:17 PM Larry M. wrote:
> Alot of Money has been given to the European Banks that have some
> connections with US Banks and Corporations. It is No Supprise that
> the US Tax Payers have been stiffed again to help Foreign Concerns.
>
> The US Govenrment needs to Stop sending Bail Out Money to European
> Concerns and Pay for National Health Care from the Savings by Keeping
> American Money in America.
The huge bailout of AIG (at taxpayer expense, of course) enabled AIG to honor the obligations they had made when they recklessly sold too many credit default swaps to the large investment banks (and whoever else).
Although, Goldman Sachs was the biggest beneficiary of AIG's bailout, other beneficiaries included some very large foreign banks.
(Deutsche Bank ?? , for instance )
Had we not bailed out AIG, they likely would have gone bankrupt and, consequently, the counterparties to these credit defaults swaps (the banks, etc) would have had to stand in line with other creditors in order to receive some [much smaller] portion of what AIG owed them.
To other readers: Feel free to correct any factual / technical errors that I made have made in my above comments.
Bryan
So far, our current reponse to the crisis has been to do everything possible, no matter how morally hazardous, to perpetuate, rather than rein in, this unfortunate facet of our culture, and this will exacerbate our crisis while Europe pulls ahead.
Now if your arguement, or Blodget's, is the social saftey net Europe provides for it's citizens helped the economies of France and Germany see growth in the last quater. Why hasn't other members of the EU bounced back als including Great Britain?
On Aug 14 10:12 PM Joel87 wrote:
Why hasn't other members of the EU bounced back als including Great Britain?
Though I have tended to be a critic of large social safety nets, I am changing my opinion. I think they may act very quickly as counter cyclical stabilisers and may be one of the reasons that Europe or at least some European countries are pulling out quickly.
Check my blog tomorrow for some more thoughts.
On Aug 14 10:12 PM Joel87 wrote:
> Well seeing as the U.S was "ground zero" for the explosion of the
> subprime debt bubble, the fact that it would take a little longer
> to "clear the rubble" does make sense, the UK was up to it's neck
> in U.S and its own subprime mess also.
>
> Now if your arguement, or Blodget's, is the social saftey net Europe
> provides for it's citizens helped the economies of France and Germany
> see growth in the last quater. Why hasn't other members of the EU
> bounced back als including Great Britain?
In the same TV article the journalist interviewed a number of French shoppers. They were pretty much of the same view - that the 'global' recession was pretty much a US and UK bank farce and they, in France, should just get on with their lives. It wasn't so much confidence as a laissaz faire attitude to the global recession.
Maybe that's the answer, just don't care and go shopping? Oui!
Many companies set up manufacturing plants in Europe because it is cheaper to make it there than to try to pass discriminatory safety and quality checks.
The UK is a service led economy & all the big
financial institutions (both native & foreign) based
in the City were impacted by sub-prime, as you say, up to their necks.
Monetary policy in the UK has been slipshod to say
the least & the regulatory environment needs a
bigger shakeup, especially with regards to retail lending.
Also, mainland European (society) does not place such
a huge emphasis on property ownership, go to a dinner party in London & you hear nothing else.
On Aug 14 10:12 PM Joel87 wrote:
> Well seeing as the U.S was "ground zero" for the explosion of the
> subprime debt bubble, the fact that it would take a little longer
> to "clear the rubble" does make sense, the UK was up to it's neck
> in U.S and its own subprime mess also.
>
> Now if your arguement, or Blodget's, is the social saftey net Europe
> provides for it's citizens helped the economies of France and Germany
> see growth in the last quater. Why hasn't other members of the EU
> bounced back als including Great Britain?
When are US investors going to realize that Wall Street is ground zero of a "nuclear" financial bomb? Quit listening to the Wall Street types who are "advising" clients to run full speed toward the nuclear holocaust.
Our god has become consumptive glut: ever bigger homes and more stuff to fill them.
Both EU nations fought matching the Fed policy and insisted that their recovery was governed by NOT doing what the Obama administration has done. I think it will work and become too obvious that Obama and his friends have robbed the US of a prompt recovery, but plan to continue the smoke screen policy. Yes, we are in trouble as long as we believe this man.
Ben has taken all the absorbency out ?