What’s Stopping Europe?

After five years of decline in living standards in much of Europe, voters oppose more austerity and further retrenchment without growth. Restoring a sound euro requires policies that revive growth, rein in government spending, and reform heavily regulated labor and product markets.

PITTSBURGH – On a recent visit to Greece, French President François Hollande declared that Europe’s decline was over, and urged French companies to invest in Greece. Bad advice. French production costs are high, but Greek costs are higher. Despite the considerable decline in Greek (and Italian and Spanish) real GDP since 2007, adjustment is far from complete.

In fact, one would be hard pressed to find broad agreement with Hollande’s assessment anywhere in Europe. Before the recent Italian election, financial markets showed signs of optimism, encouraged by the European Central Bank’s policy of guaranteeing eurozone members’ sovereign debt, expanding its balance sheet, and lowering interest rates. Bondholders gain when interest rates fall. But unemployment continues to rise in the heavily indebted southern countries, and output continues to lag behind Germany and other northern European countries.

The main reason for the lag is not simply low demand or large debts. There is a vast difference between unit labor costs – real wages adjusted for productivity – in Germany and in the heavily indebted southern countries. When the crisis began, production costs in Greece were about 30% higher than in Germany, so Greece exported very little and imported very much. Production costs in other heavily indebted countries were 20-25% higher than in Germany.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/x8MHwEH;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.