Ever the optimist, Schroder still talks of economic growth between 1.5 and 2.0 percent for the year. We’ll know for sure with the release of next week’s official GDP figures–but most banks and private-sector economists have cut their forecasts to 1 percent or less. The chancellor has returned from vacation pledging a “steady hand” in dealing with the downturn. (He’s understandably reluctant to use the word crisis.) But to many this sounds disturbingly like his predecessor Helmut Kohl’s penchant for “sitting out” problems.
The ironies are resounding. Schroder eagerly took credit for Germany’s healthy 3 percent growth rate last year. Fittingly, he has now become the scapegoat. It’s “his economy,” say opposition Christian Democrats, labeling him the “do-nothing” chancellor. With the next election little more than a year away, Schroder clearly faces a serious challenge. But that’s almost beside the point. Germany’s sputtering economy has far more broad-reaching consequences than the chancellor’s personal political fortunes. It currently ranks dead last among the euro zone’s 12 in terms of economic growth. Since Germany accounts for a whopping 31 percent of Europe’s output, that’s a painful sign of hard times to come. As Germany goes, so goes Europe.
It gets worse. With Germany on the skids, Europeans find their ultimate dream receding–that is, to become an equal to the United States, if not militarily or politically, then at least economically. Consider some numbers compiled by TheGlobalist.com:
Between 1992 and 2000, U.S. GDP grew from $7.3 trillion to $10 trillion, an increase of 36 percent. (That’s in 2000 prices.) The EU, by contrast, grew from a combined GDP of $7.6 trillion to $9.1 trillion, a rise of just 19 percent. This growth differential may not seem significant, but it has important implications for Europe. Here’s why. In 1992, the combined GDP of the 15 member countries of the European Union was still $300 billion (or 3.5 percent) greater than that of the United States. By 2000, it was some $900 billion (or 9 percent) smaller.
Look at this another way. If Europe’s output had grown at the same rate as that of the United States, its GDP would have totaled $10.4 trillion in 2000. That missing “difference” of $1.3 trillion is huge–roughly equal to adding another Italy, the world’s eighth largest economy, to today’s Europe. America’s gain is not Europe’s loss, of course; economics is not a zero-sum game. Still, the EU has missed a huge opportunity to increase living standards–and reduce unemployment–in line with the economic performance of the United States.
Now extrapolate these trends. How long would it take Europe to regain the ground it lost to America since the early 1990s? Assume that, from now on, the EU grows 0.5 percentage points faster annually than the United States. At that rate, it would take a boggling 27 years–until 2028–for Europe to get where it was vis-a-vis the United States in 1992. (It’s probably no consolation, but Europe would beat Japan, which under similar assumptions would not catch up until 2047.) There are bright spots in this picture. Britain, for instance, would close the gap more quickly, by about 2016. But France would catch up just a bit later than the entire EU, in 2032. Italy and Germany wouldn’t be there until 2036 and 2039, respectively.
To be fair, Germany’s lackluster performance owes much to the burdens of reunification. Nonetheless, it does not bode well for Europe that its largest economy has become such a laggard. Europe is still poised to outperform the United States this year. But will it? The Bush administration’s tax cut, coupled with aggressive interest-rate cuts by the U.S. Federal Reserve, could yet spur the U.S. economy into new growth. This could ensure that the United States emerges from the global doldrums sooner than Europe–and pull Europe along, as in the past. But that very dependency runs counter to Europe’s ambitions for itself. If the European Union is ever to rival the United States, let alone become an equal partner, it has to get its act together. Germany, especially, must break free from its malaise and once again become an engine for growth. An interest-rate cut by the European Central Bank would help. But more important, Germany must tackle its backlog of “structural reforms.” Instead of placating labor unions, as Schroder has done, it must liberalize its hidebound labor laws. In the age of globalization, there is no going it alone–particularly with one eye on domestic politics. “Steady” as she goes simply won’t do–not when steering Germany’s, and therefore Europe’s, economic ship of state.
