Five Lies About the European Economy Debunked

By Steven Hill, The Washington Post. Posted October 8, 2007.

In the global economy, today's winners can become tomorrow's losers in a twinkling, and vice versa. Not so long ago, American pundits and economic analysts were snidely touting U.S. economic superiority to the "sick old man" of Europe. What a difference a few months can make. Today, with the stock market jittery over Iraq, the mortgage crisis, huge budget and trade deficits, and declining growth in productivity, investors are wringing their hands about the U.S. economy. Meanwhile, analysts point to the roaring economies of China and India as the only bright spots on the global horizon.

But what about Europe? You may be surprised to learn how our estranged transatlantic partner has been faring during these roller-coaster times -- and how successfully it has been knocking down the Europessimist myths about it.

1. The sclerotic European economy is incapable of leading the world.

Who're you calling sclerotic? The European Union's $16 trillion economy has been quietly surging for some time and has emerged as the largest trading bloc in the world, producing nearly a third of the global economy. That's more than the U.S. economy (27 percent) or Japan's (9 percent). Despite all the hype, China is still an economic dwarf, accounting for less than 6 percent of the world's economy. India is smaller still.

The European economy was never as bad as the Europessimists made it out to be. From 2000 to 2005, when the much-heralded U.S. economic recovery was being fueled by easy credit and a speculative housing market, the 15 core nations of the European Union had per capita economic growth rates equal to that of the United States. In late 2006, they surpassed us. Europe added jobs at a faster rate, had a much lower budget deficit than the United States and is now posting higher productivity gains and a $3 billion trade surplus.

2. Nobody wants to invest in European companies and economies because lack of competitiveness makes them a poor bet.

Wrong again. Between 2000 and 2005, foreign direct investment in the E.U. 15 was almost half the global total, and investment returns in Europe outperformed those in the United States. "Old Europe is an investment magnet because it is the most lucrative market in the world in which to operate," says Dan O'Brien of the Economist. In fact, corporate America is a huge investor in Europe; U.S. companies' affiliates in the E.U. 15 showed profits of $85 billion in 2005, far more than in any other region of the world and 26 times more than the $3.3 billion they made in China.

And forget that old canard about economic competitiveness. According to the World Economic Forum's measure of national competitiveness, European countries took the top four spots, seven of the top 10 spots and 12 of the top 20 spots in 2006-07. The United States ranked sixth. India ranked 43rd and mainland China 54th.

3. Europe is the land of double-digit unemployment.

Not anymore. Half of the E.U. 15 nations have experienced effective full employment during this decade, and unemployment rates have been the same as or lower than the rate in the United States. Unemployment for the entire European Union, including the still-emerging nations of Central and Eastern Europe, stands at a historic low of 6.7 percent. Even France, at 8 percent, is at its lowest rate in 25 years.

That's still higher than U.S. unemployment, which is 4.6 percent, but let's not forget that many of the jobs created here pay low wages and include no benefits. In Europe, the jobless still have access to health care, generous replacement wages, job-retraining programs, housing subsidies and other benefits. In the United States, by contrast, the unemployed can end up destitute and marginalized.

4. The European "welfare state" hamstrings businesses and hurts the economy.

Beware of stereotypes based on ideological assumptions. As Europe's economy has surged, it has maintained fairness and equality. Unlike in the United States, with its rampant inequality and lack of universal access to affordable health care and higher education, Europeans have harnessed their economic engine to create wealth that is broadly distributed.

Europeans still enjoy universal cradle-to-grave social benefits in many areas. They get quality health care, paid parental leave, affordable childcare, paid sick leave, free or nearly free higher education, generous retirement pensions and quality mass transit. They have an average of five weeks of paid vacation (compared with two for Americans) and a shorter work week. In some European countries, workers put in one full day less per week than Americans do, yet enjoy the same standard of living.

Europe is more of a "workfare state" than a welfare state. As one British political analyst said to me recently: "Europe doesn't so much have a welfare society as a comprehensive system of institutions geared toward keeping everyone healthy and working." Properly understood, Europe's economy and social system are two halves of a well-designed "social capitalism" -- an ingenious framework in which the economy finances the social system to support families and employees in an age of globalized capitalism that threatens to turn us all into internationally disposable workers. Europeans' social system contributes to their prosperity, rather than detracting from it, and even the continent's conservative political leaders agree that it is the best way.

5. Europe is likely to be held hostage to its dependence on Russia and the Middle East for most of its energy needs.

Crystal-ball gazing on this front is risky. Europe may rely on energy from Russia and the Middle East for some time, but it is also leading the world in reducing its energy dependence and in taking action to counteract global climate change. In March, the heads of all 27 E.U. nations agreed to make renewable energy sources 20 percent of the union's energy mix by 2020 and to cut carbon emissions by 20 percent.

In pursuit of these goals, the continent's landscape is slowly being transformed by high-tech windmills, massive solar arrays, tidal power stations, hydrogen fuel cells and energy-saving "green" buildings. Europe has gone high- and low-tech: It's developing not only mass public transit and fuel-efficient vehicles but also thousands of kilometers of bicycle and pedestrian paths to be used by people of all ages. Europe's ecological "footprint," the amount of the Earth's capacity that a population consumes, is about half that of the United States.

So much for the sick old man.

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Steven Hill, director of the New America Foundation's political reform program, is writing a book comparing Europe and the United States.

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