Wednesday, January 9, 2013

The Euro-model scare tactics

Regularly The Wall Street Journal writes an opinion article about the failure of the European economic model. A bloated welfare state, high taxes, heavily-regulated labor markets have led to a disappointing economic performance. The predictions are generally dire and after reading the article it seems that the only remaining question is how long the European countries and the Euro project will survive.

The latest of these articles was published yesterday under the title "Europe's Bankrupt Welfare State".

The article reminds us that despite the recent optimism, the Euro economies are doomed and that this has to do with all the structural problems that these countries face. Quoting from the article:

"Some observers will blame the joblessness and lack of growth in the euro zone on the austerity supposedly being imposed on the Continent by Berlin. But the real story is more ominous. (...) Europe's vaunted social model has struggled to generate growth or jobs for decades. (...) The euro zone may be enjoying a respite. But the economic evidence shows how little has been fixed. Mr. Draghi's blank check addressed the symptom, but not the cause, of the euro zone's economic woes. And unless those are addressed—with more flexible labor markets, a smaller state and lower taxes—the crisis will be back in the form of social unrest, political populism and a generation of young Europeans who don't know what it is to be able to find a good job."

I have no trouble with the statement that Europe needs structural reforms. But the notion that "economic evidence shows how little has been fixed", that "Europe's model has struggled to generate growth or jobs for decades" and how the European model is "bankrupt"seem to be overstated. Even worse, these articles seem to be written as a way to scare those in the US economic policy debate that argue in favor of anything that resembles the European model (higher taxes, more regulation, a universal healthcare system). But is the evidence as clear as the Wall Street Journal suggests? Has the Euro failed so badly in terms of generating employment and growth? Below is the employment to population ratio (for those over 15 years of age) for the Euro area compared to the US during the years where the Euro has been in existence. The series are rebased so that their value is equal to 100 in 1999.

Since the Euro was launched, its members have seen a small increase in this ratio, but the performance has certainly been better than that of the US labor market. Just to be clear, the level of the employment to population ratio in the Euro area still remains below that of the US today, mainly because of historically low female participation rates in Southern Europe. But given that claim in the WSJ article is about growth and creation of jobs since the Euro has been in place, using the year 1999 as a reference seems the right thing to do.

Antonio Fatás

on January 09, 2013 |   Edit