THE HEADLESS CHICKEN RUNS AWHILE, BUT REALITY CATCHES UP

A doomsday scenario for Europe's economy: French research group projects gloom (John Vinocur, May 13, 2003, International Herald Tribune)

For a doomsday scenario, this one paints Europe heading for the dungeons of history as an economic force.

"The enlargement of the European Union won't suffice to guarantee parity with the United States," it says. "The EU will weigh less heavily on the process of globalization and a slow but inexorable movement onto 'history's exit ramp' is foreseeable."

By 2050, under this scenario, Europe's share of the world economy is only 12 percent, against 22 percent today, while the euro is a second class currency. North America maintains its "technological hegemony," Greater China, which includes Taiwan, grows to represent almost a quarter of the world's economy, and the Japan-Korea region's share of trade, along with the yen, declines sharply in importance.

Roughly a half century from now, goes the scenario, an EU of 30 member states will have a growth rate of 1.1 percent, the North American free trade grouping, 2.3 percent, and Greater China, 2.6 percent.

This vision of Europe's misery-to-come is projected in a new report called "World Trade in the 21st Century" by the Institut Francais des Relations Internationales (Ifri). [...]

For Ifri, Europe has two basic problems. The first is its dwindling population. From 2000 to 2050, the institute projects a decline in the EU's active population from 331 million to 243 million. Over the same period, the active populations of Greater China and South Asia move ahead, while the North American grouping rises from 269 million to 355 million.

The second involves technological progress and capital accumulation. In these areas, according to the reference scenario, North America "continues to suck in a good part of the world's savings," while Europe depends on "savings and domestic investment" for capital. North America remains "the locus of innovative activity," the projection says, even though Europe will make gains in productivity, cutting the size of its lag behind the leaders.What can Europe do? If things go along as at present, according to the reference scenario, "the decline of Europe is confirmed and the EU with 30 members becomes a second rank economic power."

The report is far too optimistic about China which faces a future of dwindling population, bride shortages, Balkanization, and continued misrule.

MORE:
A Struggling Economy? It Depends on Your Perspective: Most nations would be only too grateful to have America's current set of economic problems. (Clive Crook, Atlantic Monthly)

Bouncing back from the shallow recession of 2001, American output grew by 2.4 percent last year; it is projected to rise by 2.5 percent this year, and by a strapping 4 percent in 2004. Employment failed to grow in 2001 and fell by 1 percent in 2002; but the forecasts say it will rise by 0.6 percent this year and by nearly 2 percent in 2004. That would be enough, first, to stabilize the unemployment rate, at just under 5.8 percent, and then to put it on a gently falling trend.

Compare this with Germany. Output there grew by just 0.2 percent last year and is expected to rise by only another 0.3 percent this year. In 2004, when America is expected to be growing at 4 percent, Germany will be growing at less than 2 percent, according to the OECD's forecasters. German employment fell by 0.6 percent in 2002, not as bad a drop as America's 1 percent decline. But employment in Germany is expected to fall another 1 percent this year, compared with the expected rise of 0.6 percent in the United States?and then to be static in 2004, compared with America's rise of nearly 2 percent. As a result, Germany's unemployment will stay stuck at well over 8 percent of the labor force.

If that does not work for you, try Japan. After years of stagnation, its output rose only 0.3 percent last year, fully 2 percentage points less than growth in America. The OECD expects Japan's growth to be 1 percent this year and about the same next year. In other words, the gap between America and Japan will widen further. Employment in Japan continues to trend downward. It fell by 0.2 percent in 2000, 0.5 percent in 2001, and 1.3 percent last year. It is predicted to fall another 0.6 percent this year and another 0.2 percent in 2004. The unemployment rate is now 6 percent?extraordinarily high by Japanese standards, and greatly understated as well, because much of Japanese unemployment is disguised?with no sign yet of topping out.In some ways, this divergence in the post-bubble global recovery is even more startling than were the gaps of the late 1990s. America raced ahead back then, but one expects America to race ahead from time to time. The other countries should now be catching up. Instead, they are falling further behind.

This is not to say that all is well with the American economy. People and firms are financially overextended. Over the next year or two, consumption needs to grow moderately?but in an orderly way, not too abruptly. Business investment then needs to pick up. The data show signs that this is happening, but it is best to take nothing for granted.

Until the mix of output and demand has completed that necessary transition, the American economy is also vulnerable to other risks. The current-account deficit, which must be financed by borrowing from abroad, remains massive. This exposes the dollar to the danger of a further sharp devaluation; if that went too far, it could spur inflation and oblige the Federal Reserve to start raising interest rates again. The administration, in addition, has embarked on a dangerous course of heavy borrowing: Projected deficits will stay large even after the economy has fully recovered from its slowdown. That will keep long-term interest rates higher than they should be.

So the United States is not free of economic risk or errors in economic policy. What is remarkable is that, bubble or no bubble, the downside risks?not to mention the mistakes in economic policy?are so much larger in the world's other big economies. Where is the justice?

The trade-off between risk and return that one associates with investment projects or stock market gambles is nowhere to be seen. America has faster and steadier growth. The key to both, evidently, is economic flexibility. For that is what America so conspicuously has?and what Germany, the rest of Europe, and Japan so conspicuously lack. [...]

The bottom line for all of the world's economies is long-term growth in productivity. Combined with projections for labor-force growth, this yields predictions for growth in potential output. In presenting their new forecasts, the OECD's economists take a stab at estimating such growth for all the major economies.

They reckon that growth in potential output will be 3.1 percent for the United States between 2005 and 2008, down just a shade from the 3.3 percent estimated for 1996-2004. All except the most fervent new-economy types ought to find that impressive. But see just how impressive: OECD expects Germany's potential output to grow by just 1.5 percent in both periods; Japan's by 1.3 percent in 1996-2004, and 1.1 percent in 2005-08. And Americans think their economy is in trouble.

Posted by Orrin Judd at May 13, 2003 1:42 PM