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The mainstream economics view of what's wrong with the European economy and labor market probably goes something like this, courtesy of Brad DeLong:

The European Dilemma

  • Some of slow European growth should be attributed to slow population growth. Not all . . .

  • A failure to take advantage of opportunities opened by I[nformation] T[echnology].

  • Central banks believe that macroeconomic stimulus without structural reform will lead to inflation.

  • National governments believe that structural reform without macroeconomic stimulus will worsen the plight of the unemployed

  • Without macroeconomic stimulus, the demand will not exist to justify heavy investments in IT

  • Without structural reform, investments in IT will not be followed by the reconfigurations of the workforce needed to turn IT investment into a productivity booster.

So we have three interrelated problems:

  1. Slow population and labor force growth;
  2. Labor market overregulation that dulls firm incentives to hire and invest;
  3. Excessively tight monetary policy.

The first point is pretty obvious; the second and third are subject to some debate.

For example, the ECB cut short-term interest rates in 2001 and 2002-03, but they are still about the same as those in the US (in an economy that is growing more slowly), and if you also include long-term rates and the appreciating (until recently) Euro, monetary conditions are tighter in Europe now than they were 5 or 6 years ago, and tighter than in the U.S. (PDF link):

The other point, about overregulated labor markets, probably has some validity, although the evidence for it is not necessarily all that strong (PDF link), so I think it is also overemphasized. Certainly Europe does not have to abandon its' social model or the welfare state, Thatcher-style, to set things right, as many Anglo-American and/or business commentators would have us believe.

by TGeraghty on Tue Jun 21st, 2005 at 02:31:01 PM EST
Your comments flag an important issue: the political leadership and the central bank must trust each other. In Europe, they obviously don't, the result of German mistrust of the "Club Med" countries, and Bundesbank taking its revenge on Kohl's (erroneous, with hindsight) decision to peg the ost mark to the Deutschemark after reunification.

Clinton/Rubin is a great example of an executive and a central bank working together to create favorable economic conditions. Chirac/Trichet is the exact opposite, leading to the chicken and egg pointed out by De Long.

That said, I don't really see how Europe's interest rates, at 2% with 2% inflation, can be seen in any way as tight. The ECB has been subject to an unimaginable amount of criticism, often contradictory (coming from the anglo-saxon business press and the London traders on one side and the unreconstructed French marxists and other assorted lefties and populists on the other), which in my view shows that they have been mostly right.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jun 21st, 2005 at 02:44:17 PM EST
[ Parent ]
Rubin actually spent his years in the Clinton Administration as the Deputy Secretary (#2) and then as the Secretary of the Treasury Department.  In that role, he was the executive's interface with the Central Bank.

IMHO, the reason why Rubin was effective is that he came from Wall Street and could explain U.S. policy to the financial and trading communities.  Since that's the community that the Federal Reserve tries to send its messages to with its rate changes, there was good balance.

It's been bizarre watching the tail wag the dog in the Bush Administration.  Greenspan has been twisting himself into a pretzel to justify the executive's irresponsible macroeconomic policies (huge tax cuts with huge deficits), while Bush's Treasury people have no understanding of how to talk traderspeak.
by Hoya90 (hoya90jmk-at-yahoo-dot-com) on Tue Jun 21st, 2005 at 03:09:27 PM EST
[ Parent ]
On the one hand, zero real short-term interest rates is pretty loose monetary policy, as you say.

But, if you compare Europe to the US, monetary conditions are much tighter in Europe, even though economic growth is slower there. Of course monetary conditions are extraordinarily loose over here in the US for any number of reasons -- low long-term rates, dollar depreciation, capital inflows from the rest of the world.

So it's not clear that's the right standard.

Notice though, that the ECB refi rate is still about 1/4 point above the "Taylor Rule" level:

Taylor's rule is a formula developed by Stanford economist John Taylor. It was designed to provide "recommendations" for how a central bank like the Federal Reserve should set short-term interest rates as economic conditions change to achieve both its short-run goal for stabilizing the economy and its long-run goal for inflation.

Specifically, the rule states that the "real" short-term interest rate (that is, the interest rate adjusted for inflation) should be determined according to three factors: (1) where actual inflation is relative to the targeted level that the Fed wishes to achieve, (2) how far economic activity is above or below its "full employment" level, and (3) what the level of the short-term interest rate is that would be consistent with full employment.

The rule "recommends" a relatively high interest rate (that is, a "tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) in the opposite situations.

So perhaps there is a bit more room for the ECB to reduce short-term rates, but they are not far from where we should expect them to be.

If you want to stimulate European growth to get the economy closer to full employment, however, maybe you have to be more aggressive than normal.

You could say the same thing with respect to fiscal policy: the big continental economies are all running pretty large budget deficits, but only half as large as the current US deficit, so you could argue either that it would be imprudent to increase deficits further, or that if you are really interested in spurring growth you may need to be more aggressive with tax cuts and spending increases than you might otherwise be.

It really is a dilemma, though, any way you look at it.

by TGeraghty on Tue Jun 21st, 2005 at 04:28:14 PM EST
[ Parent ]
Certainly Europe does not have to abandon its' social model or the welfare state, Thatcher-style, to set things right, as many Anglo-American and/or business commentators would have us believe.

I agree. I've worked with EU firms that export to the US... from what I saw there were very few 'social burdens'... but a number of the firms didn't have all the systems in place they should have (IT being only one and not the most important in my opinion)... to take full advantage of the typically better educated and experienced workforce you have in the western part of the EU... Eastern Europe might be a bit different...

If there is a 'structural flaw' in the European macro-model it might be the distrust between labor & management (probably earned over the years)... From what I saw it was much more adversarial than I see in most US work forces.

Now having said that - I didn't get to tour the European factories... just met a number of folks who came over to the states to work with me... and of course hundreds of conversations on the phone. But I doubt my impressions are that far off base... You could sense it in conversations with the higher ups & the lower downs... there was a lot of tension.

Another thing about the 'propaganda'... managers run the plants & offices, 'workers' do not... if the plants & offices don't 'perform'... managers get their heads whacked... that is unless they can find a suitable scape goat... Now, they can't blame their superiors (the Directors & stockholders)... and they can't blame the customers... they can't even blame the suppliers, though that is often given a try (hard to make that stick since mgmt selects the suppliers)... So who to blame?

Government & labor... the two groups that can't or won't bark back. Fat easy targets...

I think Coleman will find A LOT of evidence that this kind of blame game is going on in Europe... and that there aren't as many problems with labor as there are problems with ineffective & incompetent management just like over here in the NAFTA Zone...

JMHO...

"On the Internet, nobody knows you're a dog." - Peter Steiner

by dryfly (jjwhodat at hotmail dot com) on Tue Jun 21st, 2005 at 03:02:09 PM EST
[ Parent ]
not knowing anything about macro-economics, just wanted to chime in and rehash a lingustic prejudice.  Germans f.e are considered rude in their normal conversations, while Americans are always considered to be more friendly. In Germany, in my experience, that has nothing to do with how you view your superior on a personal level. These two levels can be quite seperate.

Next linguistic prejudice: Germans are famed for voicing negative aspects (critical voicing) and an extensive moan-culture.

It would be interesting to compare levels of mobbing - to get a grip on worker satisfaction. Also, the retention of employement is much greater, at least in Germany as the first poster states, that would at least anecdotally contradict your assumption, that being critical or moany automatically means not wanting to be in that place, quite the contrary.

Where you able to speak with your European collegues in their language?  

by PeWi on Wed Jun 22nd, 2005 at 05:49:45 AM EST
[ Parent ]
Language... interesting, I should have thought of that... might be.

One of the companies was British with operations on the continent as well... The Brits ran it and I spoke with them in English.

The other company I had a lot of conversations with  had multiple plants in Europe sprinkled about... both West & East... But my contact was almost entirely with Germans and I do not speak German at all... a little French but no German. So we spoke English.

The funny thing is the Brits were the ones that whined the most to me about their superiors & underlings... there was a lot of tension. But they mostly did what our customers asked after a lot of complaining about how it will raise hell in the factory.

The Germans didn't complain to me much... they held their cards pretty close. When asked to do something difficult they just bluntly said my request couldn't be done a certain way due to 'internal resistance' and wouldn't comment further. I learned later that my requests were the equivalent of the handgrenade in the board room... but I didn't learn that until later.

I am not saying that the US doesn't have similar issues - just not as pronounced... at least not here in the Midwestern & Western part of the US where I call on accounts... Maybe in the Eastern US where things are more 'formal' and more 'socially structured'... but it is so hard to say based on my limited anacdotal evidence.

Good point PeWi...

"On the Internet, nobody knows you're a dog." - Peter Steiner

by dryfly (jjwhodat at hotmail dot com) on Wed Jun 22nd, 2005 at 08:28:49 AM EST
[ Parent ]
Thanks dryfly.

bluntly, very good. hehe. {Beavis sound effect}

One of my favorite German words is: Betriebsklimaforschung. That was the field Theodore Wiesengrund Adorno was working in as a sociologist the States before returning to Germany. Not that I ever read anything by him from that time. I just like the word.

It is certainly an interesting world. The rigidity of the German personal sphere can also be seen in Du and Sie. It can sometimes be years before you call someone by his/her first name and even then, you might still call them with the more formal Sie. That has nothing to do with class or even familiarity, but with social distance. It is more a sign of respect for the other person personal life.
My father knew people for over thirty years. He married their daughters, baptized their children, buried their fathers, visited for birthdays; in other words knew them intimately and still, it would be the furthest on his mind to call them by their first names.

There are even ceremonies, that celebrate the shedding of the Sie. Auf Bruderschaft/ Schwesternschaft trinken. (involves Alcohol and the inter-twining of arms)

by PeWi on Wed Jun 22nd, 2005 at 12:06:49 PM EST
[ Parent ]

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