from Follow the Money

A few things Europe does (relatively) well

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Some Europeans enjoy taking a few rhetorical pot shots at America every now and then. More and more Americans enjoy reciprocating.

I suspect that US criticism of Europe will step up a gear in the near future, in part because of "European" criticism of "Europe" is probably on an upswing. The French may vote down Europe’s proposed "constitution" in late May. Moreover, US policy makers tend to blame Europe (who grows too slowly) as much as China (who grows quite fast, but resists exchange rate movement) for the US trade deficit -- forgetting that the trade deficit largely reflects the fact that the US has "outsourced" saving.

Dan Gross is right: faster growth abroad might make it harder for the US to attract the foreign capital needed to sustain an acceptable level of investment in an economy that does not save. Faster growth abroad is a double-edged sword in the short-term: it would help the export sector, but potentially hurts interest-rate sensitive sectors. Global rebalancing is necessary, but not everyone will do well out of the process.

But rather than join John Snow and others inclined to highlight what Europe has done wrong -- I want to take the other side of the trade, and highlight some things Europe has done right.1) France and Germany -- along with the rest of Europe -- seem quite happy NOT to refight World War 2, or World War 1 for that matter. Japan and China do not seem to have reached quite the same conclusions.

2) At least within Europe, the flow of capital makes sense: it flows from wealthy, already developed countries (Germany, Switzerland) to "emerging" Europe (Spain as well as Eastern Europe). Germany finances Poland, not vice versa. The same cannot be said globally.

3) The desire to be part of the "club" (i.e. the European Union) has prompted Eastern European countries to remake many of their own domestic institutions in Europe’s image. Joining the European Union usually requires a wholesale (and entirely voluntary) rewriting of the laws on a country’s books. That is soft power. No doubt, "Europe’s" broad appeal to countries on its periphery creates real problems for its founding members. But it is also hard not to be impressed by the lengths to which countries like Turkey are willing to go to try to get in.

4) As Kevin Drum, Kash and Paul Krugman all have noted, many European countries provide health care, without long waiting lists, to all their citizens, for less than the US spends providing health care to some of its citizens. I lived in France for a while, and my own experience with French health care was quite good -- better, alas, than my recent experience with US health care. Suffice to say that there is nothing like having your doctor to put in the wrong "authorization" code in an insurance form to see first hand how bureaucratic the private US health care system can be ...

5) Europe has contributed to global rebalancing. True, European domestic demand has been a bit sluggish recently. But that is only half the equation. Europe also has let its exchange rate adjust. As a result, even though the Eurozone’s demand growth last year was only 1.5%, import volumes were up 6% (according to the IMF). Nothing like the US -- where domestic demand grew 4.4%, and import volumes increased 9.9%. But not all that bad either. Because of the euro’s appreciation, every percentage point of demand growth in Europe produced a larger percentage increase in import volumes. This has had an impact: US exports to Europe grew at a healthy clip in 2004, despite Europe’s sluggish overall growth.

All in all, in a world where there is plenty to worry about, I am more worried about Asia than Europe. Asia’s growth model -- premised on producing to meet the seemingly insatiable demand of the US consumer -- is likely to run into real limits, notably the fact that the US trade deficit cannot expand forever. And Asia’s underdeveloped political institutions will be severely tested by a shifting regional balance of power, and unresolved tensions between Asia’s biggest countries.

Don’t get me wrong, Europe has its share of problems. Above all, it takes people too long to get into the labor force in Europe, and too many Europeans leave the labor force at too early an age.

It certainly would help global rebalancing if European consumption was more responsive to low interest rates. The world does need more domestic demand growth outside the US. It would be nice, for example, if low rates in Europe started to say push German housing prices, and Germany went on something like a US style spending spree. That is not totally implausible: in 2004, a surge in housing prices supported relatively strong consumption growth in France ...

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