EUROPE'S CHOICE: GROWTH OR SAFETY NET

March 29, 2010

The economic turmoil the European Union is facing is a world away from the vision that accompanied the euro's launch in 1999.  Then, champions of the common currency forecast a European Renaissance prompted by efforts to modernize inefficient welfare states and loosen overregulated markets.

A decade later, the euro zone is struggling to join the global economic recovery, says the Wall Street Journal.

Its 16 member nations face a stark choice: 

  • They can spur economic growth across the region by following through on long-overdue pledges to trim benefits and free up labor markets.
  • Or, many economists say, they can face a decade of economic stagnation.

Countries across the zone lost dynamism during the common currency's first decade, with annualized growth of 1.7 percent from 2000 to 2008, down from 2 percent growth in the 1990s.  The next decade could be worse:  Higher public debts and a surge of retirees will push up taxes and weigh on companies and consumers.

But the appetite for structural overhaul is low among Europeans, who have long believed that capitalism should be tempered by generous state benefits and strong labor protections.  Structural changes, however, are the last great hope in part because euro zone members have few other levers for lifting their economies:

  • Individual members can't tweak interest rates to encourage lending, because those policies are set by the zone's central bank.
  • The shared euro means countries don't have a sovereign currency to devalue, a move that would make exports cheaper and boost receipts abroad.

The remaining prescription, many economists say: chip away at the cherished "social model."  That means limiting pensions and benefits to those who really need them, ensuring the able-bodied are working rather than living off the state, and eliminating business and labor laws that deter entrepreneurship and job creation.

Source: Marcus Walker and Alessandra Galloni, "Europe's Choice: Growth or Safety Net," Wall Street Journal, March 25, 2010.

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