from Follow the Money

Spain, the United States of Europe.

September 23, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Growth over the past ten years (all data from the IMF)

USA:  3.3 (05 estimate: 3.5); Spain: 3.7 (05 estimate: 3.2)

Current account deficit (percent of GDP) 


US: -1.7; Spain: -0.1

2005 (estimate)

US:  -6.1  (too low, by the way -- -6.6 or -6.7 would be more realistic); Spain: -6.2 

Change:  US: -4.4 (-5.0 if you trust my numbers).  Spain: -6.1  

Growth in final domestic demand, 97-06 

USA: 3.7%; Spain: 4.0%

And for the sake of comparison -

France: 2.4%

Germany: 0.8% (and none since 2001) 

Note: The growth in domestic demand closely tracks growth in consumer spending.

Since 1997, France's current account has swung from a surplus of 2.8% of GDP to a deficit of -1.3% (a swing of 4.1% of GDP - only a bit less than the USA), while Germany swung from a small deficit (-0.4% of GDP) to a large surplus (4.3% of GDP).  As a result, in broad terms, the Euro area's overall current account surplus has fallen from 1997 - not risen.   The Eurozone is not the counterparty to the recent rise in the US current account deficit - though orderly rebalancing likely requires Eurozone deficits. 

I would note that the (substantial) differences in the performance of these Eurozone economies correlates well with swings in housing prices - up a lot in Spain, some in France and not at all in Germany - but not so well with "reform."  I think most observers would agree that German "reform" has been more aggressive than French "reform," while German growth has been slower.  For more on differences in European housing markets, see this link.
My conclusion.  Certain reforms in Europe may be worth doing for its own sake.  I am no expert, but I do suspect that some European governments have promised more to their aging populations than they can realistically deliver. The tax burden on new entrants to the labor market also may be too high.  But there is not much evidence that the standard reform package focused on liberalizing European labor markets will unleash a spurt of domestic demand led growth that will contribute positively to global rebalancing - and some evidence to the contrary.  More job market uncertainty might initially lead to higher savings, not more spending - offsetting any upturn in investment.

One last aside.  The political case for the Eurozone to adopt US-style labor market practices that might propel a surge in European productivity growth toward American levels would also be a lot stronger if there were more evidence that American workers were capturing the benefits of higher productivity, and real wages for the average worker in the US were heading up, not staying stagnant.

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