Monday, July 2, 2012

Europe's Growth Sickness

Europe has too much government, too many welfare entitlements and too little private sector growth. In fact, many European economies are already in recession and the financial hole will only deepen the next couple of years, at least in countries such as Spain and Italy.

On the other hand, in the U.S. we have to choose between two alternative paths to the future: (1) continue to follow Europe down the path to economic ruin or (2) turn and run way from a government knows best approach and go toward individual choice regarding such things as (1) which schools to attend, (2) how to secure adequate and affordable medical care and (3) planning to invest in our own retirement benefits. My view is that individual choice would both reduce costs and greatly enhance quality, but first we have to help individuals wrest the reins away from government bureaucrats.

Euro-Zone Growth Still a Distant Prospect tells the story of Europe and what awaits the U.S. if we don't clean up our "collectivism" act sooner rather than later:

"After the warm glow of the euro-zone summit comes the cold water of economic reality.

Euro-zone unemployment hit a record 11.1% in May, and manufacturing purchasing managers' indexes in Europe and the U.S. showed sharp contractions in June. That puts the euro-zone leaders' agreements in context: For governments struggling with growth, self-help remains the order of the day. The accelerating downturn just makes the problem more urgent.

Financial turmoil in Europe is pushing the Continent deeper into recession. . . .

Firms are losing orders and cutting jobs. Unemployment in Spain rose to 24.6% in May; in Italy, it declined slightly, to 10.1%, but youth unemployment climbed to 36.2%.

For both Italy and Spain, it is growth ultimately that will determine whether their debts are sustainable and whether they can retain their membership in the euro. Both face deep recessions.

Deutsche Bank forecasts Italy's economy will shrink 2.3% and Spain's 1.5% in 2012, with further contraction in 2013, leaving them far below their 2007 peak. That underlines the need for these countries' governments to introduce policies to boost growth potential.

Italian Prime Minister Mario Monti has made progress, particularly on pensions and the labor code, but needs to go further in reducing collective wage bargaining and carrying out privatizations. Spanish Prime Minister Mariano Rajoy arguably has a bigger challenge in needing to find ways to help rebalance the economy away from its bubble-era reliance on construction and deal with the overhang of private-sector debt.

Last week's euro-zone deal to move toward a banking union, to recapitalize banks directly and to provide a better crisis firewall might prevent an acute deepening of the crisis but don't address the chronic underlying growth problem. Rather than relying further on deals to provide an escape hatch through pooling of debt or mechanisms to contain market pressure, Spain and Italy need to use the time the euro zone has bought to overhaul their economies."

Finally, the U.S. economic growth doesn't look all the great either right now.

It's time for a new playbook.

Stay tuned.

Thanks. Bob.

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