Europe the Grandmother
January 12, 2015
In a widely publicized speech in late 2014, an astute Argentinian characterized Europe as resembling a “grandmother” who is “no longer fertile or vibrant.” The “great ideas” that once inspired the continent, he asserted, have been “replaced by the bureaucratic technicalities of its institutions.”
Now, rare is the person who associates grandmothers first and foremost with infertility rather than with hugs, home-made cookies, and other heart-warming sentiments. And, last time we checked, Argentina has not exactly been a wellspring of free-market inspiration—unless you consider government fabrication of economic data to be productivity-enhancing innovation.
Was this rebuke delivered by a distant cousin of a free-market prophet such as Milton Friedman? No, but the speaker was indeed a person of great theological import: a pious septuagenarian named Jorge Mario Bergoglio. Haven’t heard of him? He is better known by another name: Pope Francis. His Holiness’s pointed observations, delivered in a speech to the European Parliament, today look quite prescient in light of the latest data coming out of the continent.
Last week Eurostat reported that Eurozone consumer prices year-over-year fell 0.2 percent in December—including prices now falling even in mighty Germany—with further declines likely thanks in part to the ongoing collapse in world oil and related energy prices (about which we recently wrote here). Overall prices falling because of sluggish aggregate demand, rather than innovation-induced expanded supply, can become dangerously self-reinforcing and thus can prolong the economic stagnation Europe already faces. Eurozone gross domestic product is widely thought to have grown very little in 2014, and the area’s official unemployment rate stands at 11.5 percent. This is nearly double the U.S. unemployment rate (reported last Friday morning to now be just 5.6 percent), and it masks an under-25 jobless rate of a sobering 23.7 percent.
As if all this were not sufficiently bracing, the new year presented Europe another challenge from that familiar source of instability: Greece. On Dec. 29 the current Greek government collapsed, forcing new parliamentary elections to be held on Jan. 25. Leading in public opinion polls is the Syriza party, which is running on a platform of renegotiating the terms of Greece’s loans with the “troika” of creditors—the International Monetary Fund, the European Central Bank, and the European Financial Stability Facility—who collectively own more than 75 percent of Greece’s debt. The Syriza party is also committed to reversing the public sector spending cuts that were a condition of the loans. The prospect of a Syriza-led government come Jan. 26 has renewed whispers about a possible exit of Greece from the Eurozone—and about the broader disruptions that a “Grexit” might trigger.
What is Europe to do? Last week’s deflation data intensified the calls for the European Central Bank to undertake aggressive quantitative easing by purchasing large amounts of Eurozone-member sovereign debt. ECB president Mario Draghi said in a recent interview with the German paper Handelsblatt that “if inflation remains low for a long time, people might expect prices to fall even further and postpone their spending … We need to tackle this risk.”
But even Mr. Draghi knows that ballooning the ECB balance sheet would accomplish only so much. Economic sluggishness across the continent reaches back decades. Consider this stunning statistic: total factor productivity (TFP)—which reflects the efficiency of capital and labor used together, and growth of which is central to long-run growth in output, jobs, and wages—is lower today in France, Italy, Spain, and Germany than it was in 1980. The U.S. TFP increase during this period has been 35 percent, according to two leading economists writing recently in The Wall Street Journal.
Mr. Draghi knows that boosting TFP tends to require long-term, wise investments in areas including education, skilled immigration, and competition—both domestic and international—in product markets, labor markets, and capital markets. In that same Handelsblatt interview Mr. Draghi acknowledged that “progress on the important structural reforms—more flexible labor markets, less bureaucracy, lower taxes—is clearly too slow.” Asked to specify which Eurozone countries need to prioritize these reforms, he didn’t mince words. “All of them.”
As exhibit A of these European troubles, last month thousands demonstrated on the streets of Paris and Toulouse. But the agitators were not the usual suspects of farmers dumping their fromage on the Champs Elysees. No, they were employers, protesting measures they claim are stifling job creation and overall recovery. “Between regulations, taxes, new laws, and razor-thin margins,” one business owner told The New York Times, “we’re being crushed little by little.”
Perhaps the ECB should advertise for a new position. “Special Adviser to the President on Structural Reforms. The ECB is an equal-opportunity employer. Popes and vibrant grandmothers are especially encouraged to apply.”
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.