Publications

Copyright 2003 The Financial Times Limited (London, England)
Monday, September 8, 2003; Financial Times; USA Edition; Letters to the Editor

Sir, Ed Crooks and Tony Major (Comment & Analysis, September 1) are right to question the ability of the eurozone economy to catch up with the US economy. Indeed, they are right to argue that the eurozone economy “will struggle to improve potential growth,” and thereby “will leave the world on course for an unbalanced and potentially unstable recovery.”

It is, however, regrettable that they have not taken the argument further. For it is important to ask why this may be the case.

We suggest that the answer to this question is not difficult to gauge. It is the implementation of the wrong set of policies introduced since the inauguration of the euro in January 1999, after general deflationary policies in the preceding years.

The stability and growth pact constrains national governments in the application of their fiscal policies, while monetary policy has not been expansionary, despite recent reductions in the “repo” rate, the official European Central Bank rate of interest. Furthermore, both policies have produced serious “divergence” among the member states of the economic and monetary union in view of the “one-size-fits-all” nature of both policies.

It is, thus, the case that the institutional arrangements that govern economic policy within the eurozone economy cannot deliver higher growth (it is expected to be negative in the second quarter of 2003) and lower unemployment (at 8.9 per cent currently, as compared to a 6.2 per cent US rate, not to mention the lower 5 per cent in the U.K.).

What is more disturbing is the highly unequal growth rates in the eurozone: the periphery enjoying rather “healthy” growth rates while the “core” economies, Germany, Italy, and the Netherlands, are now in recession, having experienced two consecutive quarters of negative growth rates, and France’s second quarter of 2003 having contracted.

An interesting, and related issue, is that productivity in some eurozone countries is about the same level as in the US, once it is measured on a “per hour” basis: the evidence corroborates the view that Americans work longer hours than many Europeans.

Inflexible labour markets cannot be the reason for the poor eurozone economic performance. Germany in the past, for example during the 1950s and 1960s, despite labour markets even more “inflexible” than currently, managed to deliver healthier growth rates than the US “The US” had “much more flexible markets” then and could “lay off workers” just as easily then as now. Germany did deliver a great deal more than the US, then! More recently, and as the authors also readily acknowledge, eurozone business investment in the second half of the 1990s rose more steeply than in the US Surely the eurozone was not more flexible then.

The eurozone can catch up with America, but sensible economic policies are desperately needed to enable it to do so. The authors recognise this in the case of the US. Why not for the eurozone economy as well? Such a combination will produce more long-lasting growth and high employment, not merely for the two countries but also for the world as a whole.