Saturday, May 22, 2004

Has Europe lost the ability to grow? That's the bold claim from Hamish McRae in The Independent.
My worry for core Europe is that the problems are really too deep to be solved by either the odd quarter per cent off interest rates or the extra half per cent on fiscal deficits. It is that the European economic and social model, for all its attractive features, has created a climate of non-growth. The underlying capacity of core Europe to grow may be only 1.5 per cent a year, and a lot of that growth has to be diverted into caring for the swelling army of elderly people. So young people entering the workforce may have a lower standard of living than their parents, which is liable to make them even more cautious about spending - particularly in Germany, maybe a bit less so in France. The problem for Europe is that Germany is the bigger economy. Until Germany comes right, even France will struggle.
If this is true, the world will be forced to depend more and more on the Anglosphere to drive global consumption and economic growth. France has had three good quarters in a row of over +2.4% annualized growth, but it is coming off three years of especially anemic economic expansion (2001, +2.1%; 2002, +1.2%; 2003, +0.5%). Over the last twenty-four years, French GDP has growth at or beyond a 3% clip just five times (1988-89, 1998-2000).

German growth was respectable in 2000 at +2.9% -- with three quarters of GDP growth over 3% back in 1999:IV to 2000:II -- but since then has been quite weak as this figure from the Statistische Bundesamt shows:



In fact, the German economy has been in the doldrums really since unification . If "core Europe" cannot hold itself up as an autonomous engine of global growth, East Asia truly is the only possible balance to the Anglosphere going deeper and deeper into debt, running larger and larger current account deficits and paying out greater and greater sums of net investment income -- the very definition of "unsustainable". The first quarter of 2004 looks barely promising on the re-balancing front as far as Japan and France go. But one quarter does not a balance make.

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