Will Europe never work?


The main question occupying financial markets and financial journalists at the moment is whether or not the next European bailout will work. Forget it. The bailouts will never work. The reason is that Europe does not work. Literally. In Europe the fundamental problem is that in most countries not enough people work, and workers do not work productively. The Europeans themselves recognised this when in 2000 they wrote the “Lisbon Agenda,” an ambitious program aiming to make Europe the most productive and prosperous region in the world. The Agenda included a lot of good ideas to kick start economies, including labour market reforms, R&D and innovation policies, and educational reform. Few countries implemented any reforms, and European economies continued to perform poorly even before the GFC. Some countries did introduce a number of reforms. In Germany the Hartz reforms have been controversial, but seem to have helped reduce long term unemployment, and kept unemployment low during and since the GFC.  To give a better idea of the lack of work consider the following numbers – of course I could carve this up by hours, or by age etc, but you get the same picture. The fraction of working age who are working in Australia was 72.6% during 2000-2009, similar to the UK or US (71.9% and 71.5% – numbers from the OECD). In Germany this number is 71.7%, while in France it is 63.0%,- in Greece 60.6%. Spain is 62.7% and Italy is 57.8%. Of course some of this reflects female participation, but that is the point. Without females, or young people (in Spain especially) or older workers actually working it is not possible to generate the GDP, living standards and tax revenue to support a modern economy. Can Europe find a way to get people to work? This should be the real issue on the table, not the issue of whether sovereigns can find funding for the next day/week/month.

6 Responses to "Will Europe never work?"
  1. Very nice points Mark. I don’t have ready access to the data but I would be interested in the proportions as they relate to the private sector.  Most European countries have burgeoning public sectors with people performing roles for which there is no genuine demand.  So in Greece where one in five workers are in the public sector, that means that only 80% of the working workforce are producing output to be shared among the masses.
    Fiscal consolidation will prove absolutely disastrous and the Poms were right to reject it.  Only with limited government can the peoples of Europe improve their lot (actually I’d go a lot further than that). Austerity measures will only further damage the situation and result in yet more wealth destruction. This is precisely the opposite of what should be being prescribed. Relying on government to provide the solution is too hit and miss, with incentives well and truly awry. 
    Once again.  Great post!

  2. its worth baring in mind that the Eu and the Eurozone are still projected by Eurostat to have real GDP growth rates of 1.5% this year. While Greece is contracting and Italy is flat-lining, Poland is zipping along, Germany and the countries close to it are fine, and even France and Spain are having some growth. At the same time, China and India are still enjoying very high growth.
    The doom and gloom rhetoric about the world economy or even Europe is hence highly exaggerated. We are talking about rich countries with rich people who, shock horror, might only be as rich at the end of next year as they are now.
    There will be no collapse of the Eu(rozone). They will muddle through, as usual. And labour market reforms will be slow.

  3. Agree on both. Public/private breakdown will differ greatly by country – and Paul agree with you. Your blog about Italy and what Monti needs to do was spot on, but they won’t take your advice. They might as well have Monty Python as Mario Monti. Related to both of your points is the very high correlation between tax revenues (negative), employment rates and latitude. Now that I live in Singapore I see that this is not global, but a peculiarly European problem.

  4. Great post and replies.
    Surely Germany must be reaping benefits from increased demand and competitiveness driven by a low Euro?
    I wonder how motivated they really are to help those dragging the Euro down.

  5. Hello Mark,

    I’m a long term follower of your writings, since my Google Alert goes off every time a post is made in your name (our names being the same).

    I live in the UK and run a small business fixing computers and providing technical support.  Work seems to be returning to normal.

    What I am worried about is the double dip recession which almost certainly will happen soon.  I’ve seen a few worrying messages from financial experts saying that a lot of retail will fail in the UK over the next month, and a lot of retail is just “hanging on” to see how Christmas and January sales go.

    I can’t say for the rest of Europe, but I feel as so the UK is currently experiencing the “quiet before the storm”, with the storm being the next recession.

    I would be interested in hearing your thoughts. 

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