Europe’s Bright Future?

Old myths die hard, and for a long time after the fall of Communism many thought that the US with low taxes, small social welfare system and de-regulated economy was a vision for a better future.   Europe with high taxes and expensive social welfare systems was seen as being out of touch with economic reality.   The argument that seduced both the left and right was that the market gets it right, and that the state should stay out as much as possible.

Though the economic crash of 2008 has shown glaring holes in that argument, many people still criticize President Obama for allegedly trying to bring “European socialism” to the US.   The term socialism is used their loosely — fiercely anti-socialist European conservatives tend to get called “socialist” by some Americans, simply because they believe in having a national health care system and a strong social safety net.   But while Europe-bashing remains popular for many on the right, the reality is that Europe is in the midst of a transformation that suggests a very bright future.

Consider:  since 1999 Europe has created 14 million jobs.   The US has created 8 million.   Europe has gotten ahead of the US in many innovative technologies, including green technologies Europeans forced themselves to produce when they vowed to meet (and did meet) the Kyoto accord goals.   I’ve even seen people claim that the Kyoto agreement was a European effort to slow down the US economy by stifling it with regulations.   The reality is that the US neither signed nor met the Kyoto goals, Europe did meet them, and Europe has produced more jobs.    Kyoto has turned out to be a net plus for the European economy.   That myth — that action to fight global warming will hurt the economy — has been debunked.

Europe also leads in the regulation of toxic chemicals in food, skin products and packaging.   In the US an ideology of deregulation alongside the power of the chemical industry has made it extremely difficult to limit the use of toxins in all aspects of our life.    If you want to read a sobering analysis of what this all means, click here and order this book by McKay Jenkins.   My wife and I read it and have started a massive project of changing how we care for our lawn, clean our house, and feed our family.    It’s not that there is proof all of this will harm us, but a lot of evidence suggesting the likelihood that problems such as cancer and increased autism rates can be linked to the chemicals that have become a daily part of our lives.

What does this have to do with Europe?   The Europeans have put regulations on many of these chemicals protect their citizens from possible harm.   They recognize the market can’t really handle this because information about the impact of chemicals is hard to get and most people don’t understand the science.  The US has rejected such regulation, reflecting the power big business holds in the US regulatory scheme of things.   In that sense the US looks more like a third world country, willing to expose its citizens to harm in order not to anger big money.    The good news is that most European products sold in the US follow EU guidelines so if you buy European produced skin products you too can be protected by EU regulations.

Military spending is another area where the Europeans are criticized.  Earlier this week Secretary of Defense Robert Gates chided the Europeans for continuing to cut defense spending.   European defense spending has been declining dramatically in the last decade, even as conflicts rage throughout the Mideast.   This threatens to make NATO irrelevant, as the US will see no reason to spend its resources to protect a Europe unwilling to spend theirs.    Gates may well be right — perhaps it is time to brush NATO aside and for the US to devote less emphasis on Europe.  The Obama Administration has been more overtly focused on Asia and the Mideast than on Europe, a clear shift in US priorities.

But is this bad for Europe?  If you’ve got the aspirations of French President Sarkozy, who pushed for the Libyan intervention and now is calling out for action in Syria, yes.   If you have global ambitions without the resources to follow through, then it sets up failure.    On the other hand, what exactly does Europe need to defend itself from?   War with Russia or China is virtually unthinkable, terrorism can’t be stopped by a large military force, and despite Mideast turmoil it’s not like the Arab world is going to launch an invasion of southern Europe.   Moreover, European armies are very well equipped and trained — they are far behind the US, but ahead of the rest of the world.  If a threat started to rise, they could respond and rebuild their armed forces quickly.   The danger of having too big a military is that one gets tempted to use it in cases where its not necessary.  That can be costly.

Meanwhile, despite the recession, southern Italy shows signs of economic life as they seek to shift towards new technologies and undo decades of stagnation.  East European economies have recovered from Communism and show real productive potential — a few are even in the Eurozone already.    Europe’s emphasis on alternatives to fossil fuel is making them less vulnerable to oil shocks, and deals with Russia and China connect them to new global markets.

So while Euro-bashing may be popular in some circles (often with wildly absurd claims like ‘the Muslims are taking over!’), an economic shift of power from the US back to Europe may be undereway.  While the US still maintains a kind of rivalry with China and Russia, the EU is promoting deeper connections.    Like us, they have problems to over come.   They need to reform their social welfare systems to reflect demographic change as well as find a way to help problem countries over come difficult economic conditions.   They have to cut budgets and continue to balance common EU policies with decentralization of power in terms of local affairs.

Finally, contrary to what US pundits often say, Europe isn’t dominated by leftists.   Great Britain, France, Germany and Italy all have conservative governments.   Rather, both left and right in Europe have taken pragmatic turns since the ideological clashes of the Cold War era.    This pragmatism yields public debate in Europe that is refreshingly common sensical in comparison to the ideological bombs hurled by the left and right in the US.    I think what makes me most bullish on Europe is the sense of realism that both the left and right show.    For the most part they agree about what the problems are, and want evidence based solutions.

Don’t get me wrong — I think the US can bounce back, I don’t think our best days are yet over.   But don’t buy it when the pundits dismiss or belittle Europe.

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  1. #1 by Jeff Lees on June 14, 2011 - 02:48

    Considering that only 10% of Americans even have a Passport, and having travelled to Europe several times, I’m convinced most Americans know nothing about Europe….

  2. #2 by modestypress on June 14, 2011 - 03:34

    I would not underestimate the capacity of human beings, even the most enlightened ones-which the Europeans may or may not be–to snatch defeat from the kind hands of victory.

  3. #3 by Black Flag® on June 14, 2011 - 15:46

    Scott,

    Europe is screwed. You ignore the financial cesspool of the Euro, the PIGS who will all default, and the Keynesian boom/crack-up scenario’s that are as regular as day and night.

    You merely put your blinders up to watch the Keynesian credit push create illusions of economic growth – and I am sure when the crack-up comes, you’ll have a wholly different excuse to push another round of Keynesian medicine.

    Europe is in very serious trouble – and probably will devastate the US economy. US insurance companies are on the hook for over $120 billion for derivatives securitizing government debt.

    But don’t worry, the insurance companies cannot pay out, they will beg Congress and the Treasury who will compel the FED to bail them out.

    • #4 by Scott Erb on June 14, 2011 - 15:53

      Black Flag, do have anything but opinions with no support? I mean, seriously — my area of expertise is European affairs and political economy. You’ve got really strong opinions and you like to assert them as reality even if there is nothing to back them up. Germany is doing extremely well, and working on stabilizing economies in Greece and Ireland. In a worst case scenario Greece will simply leave the Eurozone. As a whole the southern European countries do not constitute that much of the EU economy and the problem is not at all ‘devastating.” Moreover, reforms are taking place throughout Europe which are both needed and effective. I have no idea what “Keynesian credit push” you’re talking about, you have a tendency to throw labels out there and act as if by labeling something you make it so. Your approach seems to be to argue by subjective assertion.

      $120 billion in derivatives? That’s nothing compared to what the private sector did with derivatives during the housing boom!

  4. #5 by Black Flag® on June 14, 2011 - 15:58

    http://www.johnmauldin.com/images/uploads/pdf/mwo061011.pdf

    Observation #1. Default Insurance Matters.

    “First, the BIS data very helpfully breaks exposures into two pieces: direct exposures,
    which basically means creditors who own bonds issued by one of the PIGs; and indirect
    exposures, which for the most part means agents who sold default insurance to creditors,
    primarily through credit default swaps. As summarized in the following table, it seems that
    approximately 30% of total potential exposures to debt from the PIGs are covered by default
    insurance (see the figures in red). Put another way, if one of the PIGs defaults, creditors who
    actually hold bonds from that country will absorb about 70% of the losses, while agents
    (primarily banks and insurance companies) that sold insurance against the possibility of default
    will have to cover the remaining 30%. That’s not a trivial amount. (All figures below are in
    billions of USD, as of the end of 2010.)

    “Observation #2. Direct Exposure in Europe, Indirect in the US.

    “The table above also hints at striking differences between how European and US creditors
    would be hit in the case of default by one of the PIGs. If Greece were to default, for example,
    approximately 94% of the direct losses would fall on European creditors, and only 5% would fall
    on US creditors. However, US banks and insurance companies would have to make about 56%
    of the default insurance payouts triggered by such an event, while European agents would make
    only 43% of those payouts.
    “The next table illustrates this difference even more starkly. In the case of Greece and Portugal,
    the vast majority of the losses that would be borne by creditors in Europe would be direct losses.
    In fact, French and German creditors would almost certainly be substantial net recipients of
    default insurance payments. (That’s less clear in the case of Ireland.) Meanwhile, US financial
    institutions would have to make substantial net default insurance payments, which would
    account for between 80% and 90% of all losses borne by the US in the case of default (see the
    figures in red below).

    “Observation #3. Similar Overall Exposures in Europe and the US.

    “Finally, it’s worth noting that once you account for the substantial payouts that US
    agents will have to make to European creditors in the case of a default by one of the PIGs,
    financial institutions in the US have roughly as much to lose from default as those in France and
    Germany. (See the figures in blue in the table above.) The apparent eagerness of US banks and
    insurance companies to sell default insurance to European creditors means that they will now
    have to substantially share in the pain inflicted by a PIG default.

    “Implications

    “This has some important implications. First, US and European financial institutions are
    likely to have very different incentives as negotiations regarding debt restructuring and
    reprofiling proceed. US banks and insurance companies are surely delighted with the “soft
    restructuring” that is currently being discussed. Such a partial default would probably not trigger
    default insurance payments, and so the pain would be borne almost exclusively by European
    institutions. On the other hand, some time soon it seems likely that European creditors will begin
    to prefer a “hard restructuring” that would require default insurance payouts from the US
    institutions that sold such insurance. Given how strikingly one-sided the net default insurance
    payments will be (from the US to Europe), it’s easy to imagine how that could shape future
    negotiations over debt relief for the PIGs.

  5. #6 by Black Flag® on June 14, 2011 - 16:01

    “Keynesian credit push”

    Bailouts of government by central banks is a Keynesian prescription. Agree or disagree?

    These bailouts come in the form of new credit. Agree or disagree?

  6. #7 by Black Flag® on June 14, 2011 - 16:02

    Scott,

    $120 billion in derivatives? That’s nothing compared to what the private sector did with derivatives during the housing boom!

    So, to you, it’s ok to lose your nose, because losing your legs is so much worse!

  7. #8 by Scott Erb on June 14, 2011 - 16:50

    Thanks for posting some information and an argument! One of the big issues in Europe in dealing with bailout packages for southern European countries (I find calling them PIGS rather offensive so I won’t use that term, but you can — though note the S is for Spain) is how much risk the bond holders should have. The reason the German and French governments want to manage this to avoid default is to protect their own banks. Great Britain is very vulnerable to an Irish default. The goal is to show that the EU has the will to keep bond rates stable, thereby giving states time to engage in austerity cuts and get their budget in better shape. You are assuming this will fail. It can fail, but given the stakes it’s certainly possible that it will work. That’s one reason why the Euro remains strong vis-a-vis the dollar — there is at this point more faith in the Euro! Greece is the most unstable economy right now. Their credit was downgraded, and Germany is pushing for some bond swaps (a restructuring of Greek debt that the ECB opposes — it’ll be interesting to see how they settle that), but Greece did just pass new austerity measures.

    The thing about Europe now is divergence — you have the problem countries with high debt, then there are the rest who are doing better than the US. Where you see collapse and devastation, I see a policy problem — how do you handle this divergence in a way that doesn’t bring instability. It is possible for a worst case scenario: EU efforts fail, the Eurozone kicks Greece and Ireland out, and there is a financial crisis in Europe. In that case I suspect you’re right that government bailouts would be used to keep the financial system viable. But I’m not convinced that’s the most likely result.

    I don’t think Keynes would support a bailout by central banks. Keynes was skeptical of too much government intervention in the economy. Recall what brought Keynes his first real attention, his 1924 book “The Economic Consequences of the Peace,” where he argued that the treatment of Germany at the Versailles Treaty would not bring peace but could cause another war because it made Germany unable to develop a solid market economy. His analysis of the Great Depression is still accepted by most — too much credit and speculation in the late 20s led to a sustained down turn that had no natural halt — the decrease in demand could keep spiraling downward and get stuck. He argued that government spending could start a reverse trend and end the depression. However, once the economy was doing well Keynes believed states should have budget surpluses to give them the capacity to fight the next downturn. He would never have supported debt to GDP ratios that we see now in the US and Europe.

  8. #9 by Black Flag® on June 14, 2011 - 19:40

    Scott,

    Greece did just pass new austerity measures

    What makes you believe – this time, unlike all the times past – they will actually cut back something?

    They have repeatedly been rewarded for doing the wrong thing – what makes them think this time is different?
    Answer: Nothing.

    You are assuming this will fail.

    I know it will fail.
    No government can stand the cutting of any its programs.

    The recipients of government loot from any program, though per individual program is a small minority, is too concentrated in its focus, and will create unpalatable political crises.

    The program’s population minority are economically committed to the government loot – thus will fight like tigers to keep it, but the huge majority who have to pay for it, the pain is relatively small, and have no real skin in the game. The minority of tigers will win. This will occur for every government program.

    Therefore, the politicians will not cut any program as there is no program they can suffer the political consequences, therefore, status quo will continue. (Public Choice Doctrine) The politicians will continue to mumble about the necessity of making cuts, but they will not get around to do anything about it – so they will continue the illusion of austerity while spending as fast and as much as they can.

    Therefore, the status quo – piling up of more government debt and more Keynesian prescriptions of boom/crack-up will go on – with the boom’s getting shorter and smaller and the crack-ups deeper and ever worse, until, one day, there is no boom but one long crack-up.

    Re:Keynes
    Yes, I agree he would have been appalled at the perversion of his argument that governments should cut after the recession, but even he knew then that modern government would find that impossible to do – as those that receive the subsidy would create political turmoil unpalatable by politicians.

    I do not agree with Keynes assessment of the Depression – he seriously misunderstood supply/demand. But that is another story.

    • #10 by Scott Erb on June 14, 2011 - 23:43

      But the thing is, the EU states have been cutting programs for years now. It started with cuts to meet the Maastricht accords. Italy and others have also made cuts in their pension system, increased retirement ages, and restructured other programs. The Greek cuts are real. They know they need to make budget cuts, they know that they have to alter especially retirement pensions due to demographics. It’s not been easy, but cuts have been real. Debt to GDP ratios were declining before the 2008 recession hit, that’s done a lot of harm and is forcing further cuts.

      That’s why I respect European realism — they understand that the game has changed. They’ll have to stare down more protests and risk a public backlash, but their reform efforts are real. There have been cuts.

    • #11 by AlineFerro on December 19, 2011 - 01:38

      Keynes didnt defend credits bail-out, at least in none of his books and biography I know of, and I studied a lot in my economist lessons.

      He divided the economic cycle in parts and for example, he even tackled the political problem of putting fire for more inflation and so on when reached the full potential employment rate of a country.

      He just saw that when there is no demand and no way of bringing a coutnry up since the demand is repressed by low salaries, low employment and big crisis, he just noted that a bigger government cut in expenses can bring disastrous consequences like more negative growth. And a bigger incentive through activities directly would force economy back to better gdp growth dynamics.

      • #12 by Black Flag® on December 19, 2011 - 04:14

        Aline,

        Keynes root principle is:

        “Government deficit spending ends recessions”

        The rest of your conjuncture is irrelevant to that core of his.

        I would venture to say that he would have agreed to whatever level of government debt is necessary, he would agree – if he thought it ended a recession.

        We know now how wrong his theory actually is.

  9. #13 by Black Flag® on June 15, 2011 - 22:52

    Hey Scott,

    Some European realism 😉

    http://www.bbc.co.uk/news/world-europe-13773148

    Greek police have fired teargas at protesters outside parliament as MPs prepared to debate new austerity measures required for the EU and IMF bail-out package.

    Demonstrators who broke off from a strike rally in Athens responded by throwing yoghurt and stones.

    Prime Minister George Papandreou faces the risk of a revolt in his Pasok party over the austerity package.

    He has proposed a unity government to pass the measures, state TV reports.

    He is seeking support for a new austerity programme of 28bn euros (£24.6bn; $40.5bn) in cuts to take effect from 2012 to 2015.

    Thousands are taking part in a general strike, the third in Greece this year

    • #14 by Scott Erb on June 16, 2011 - 00:54

      The Greeks are a case in and of themselves, they should never have been made part of the Eurozone. Yet look at how the politicians are willing to risk strikes and a political backlash to do what must be done. The Europeans seem to understand the situation better than American politicians, I’m afraid.

      • #15 by Black Flag® on June 16, 2011 - 03:33

        Scott,

        I will bet you 1/100th an oz. of gold that the Greek politicians are merely making a show – political entertainment.

        They know they will never enact these cuts. They will go out into public view, knowing and wanting to be pelleted with eggs and rotten tomatoes.

        They will then retreat into their dark, evil halls, kick up their feet and laugh at the Sheeple.

        “See, they don’t want cuts – and we know they didn’t.

        They don’t care about deficits, the Sheeple just want a full belly and “Big Brother” on the TV.

        We did our show. Now we say, -we tried, but…(sigh)….-

        ahahahhahahhahaahhahhahahhaha — gives us more credit or we take down your whole stinkin’ game!!
        ahahahahhaha”

        …now add the rest of the PIGS to this game plan….

      • #16 by Black Flag® on December 19, 2011 - 04:18

        So, Scott – I know you didn’t take the bet … smart of you.

        The Euro is done.

        The EU is now nothing more than a tyranny of bureaucrats.

        Your “hope” is gone.

  10. #17 by Scott Erb on December 19, 2011 - 04:49

    The Euro is alive and well, Black Flag. Europe’s best days are ahead, this isn’t killing Europe, it’s making the EU and the Euro stronger!

    • #18 by Black Flag® on December 19, 2011 - 05:23

      The Euro will not survive past 2014, if not sooner.

      Europe is fragmenting into those that demand and those that produce.

      So, let us wager…. 1 oz of gold….

      What say you?

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