What’s wrong with Europe?

During 1990 I travelled all over Germany, and was impressed by its urban areas.  For some reason I expected cities in the industrial heartland such as Dusseldorf and Cologne to have a grimy appearance.  Instead they were very attractive and convenient.  So I see why people are impressed with Germany.  Even so, I was perplexed by this Tyler Cowen post, which suggested the German economy was doing well.

The [German] economy is continuing to grow, unemployment has been falling for twelve months, and the long-term fiscal picture is improving.  Plenty of vacations are being postponed.  You don’t have to think that real shocks caused the downturn to believe that real factors provide the way out.  The full story is here.

Beggar thy neighbor?  Don’t blame the productive.  Besides, a lot of what the Germans are producing and selling is inputs for other people’s production:

“Ulrich Reifenhäuser, managing director and owner of plastics machinery maker Reifenhäuser, said his company was struggling to cope with an order increase of more than 100 per cent in some months this year.”

You may recall that Alex — a prophet of the MarginalRevolution — has long predicted Germany as an economically undervalued country.  Now that events have caught up with him, he needs a new pick…

I agree that people shouldn’t be bashing German fiscal policy (although they should be bashing German (aka ECB) monetary policy.)  But in what sense is Germany doing well?  I looked for the most recent RGDP figures I could find, including estimates for 2010 and 2011, and found this useful IMF link.  As you can see from Table 1, Germany had a far more severe recession that the US, and is having a far slower recovery.  Indeed the same is true of the entire eurozone.  Between 2008 and 2011, the IMF expects 3.8% growth in the US, and negative 1.8% growth in the eurozone.  Even accounting for the difference in population growth rates, that’s roughly 4% higher RGDP growth in the US between 2008 and 2011.

When the crisis hit in 2007-08 we were told that it was all caused by deregulation implemented by the evil Republicans, and that this was why Europe was doing better.  Indeed RGDP growth in 2008 was a tiny bit higher in the eurozone than in the US.  But wasn’t the implication of that explanation that Europe should do better than the US over the next few years?  Even if they got hit by spillover from the US subprime/banking crisis, you’d still have expected them to have a milder recession than we had, wouldn’t you?  Of course there is one area where they have done better; unemployment has risen much less sharply than in the US, as their governments use various techniques to discourage layoffs.  And that’s a good thing.  But it still doesn’t explain why output has done so poorly in the eurozone.

Don’t think I am saying “I told you so;” I did not predict this, nor do I have any explanation.  A few weeks back I did a post arguing that the European countries had stopped gaining on the US after 1980.  My default model is that once countries are fully developed, they should all grow at about the same rate.  Those with less efficient (i.e. less neoliberal) models should plateau at a level slightly below the most efficient countries (US, Switzerland, Singapore, etc.)  But at that point they should grow at about the same rate, as long as their model doesn’t get even less efficient relative to the US economic model.  And it doesn’t look like Europe’s model has regressed relative to the US.  Indeed, if anything it has been the US that has been regressing in recent years (even before the Obama election.)  It is the US that has slipping in the Heritage Foundation Economic Freedom rankings.  So I am just as puzzled as anyone else by the fact that the eurozone, which was already about 20% to 30% behind the US using the 2008 data in my earlier post, now seems set to slip another 4% further behind the US in per capita GDP.  And even a relatively efficient eurozone country such as Germany, which avoided the real estate bubble and benefits hugely from a complementary relationship vis-a-vis China, seems set to slip even further behind the US.

Does anyone know what I am missing?  I suppose it might have been monetary policy, but the euro has been considerably weaker than the $1.60 levels it hit prior to the crisis.  So I am genuinely perplexed by the European situation.  I’m not a huge fan of their high tax model, but I don’t see how it explains this sort of dismal economic performance.


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42 Responses to “What’s wrong with Europe?”

  1. Gravatar of John Salvatier John Salvatier
    10. July 2010 at 14:14

    Perhaps some feature of european countries or the euro makes the eurozone more sensitive to monetary disequilibrium?

  2. Gravatar of Doc Merlin Doc Merlin
    10. July 2010 at 15:27

    Are the projections are probably taking an IS-LM approach to the german stimulus, or are they doing some sort of VAR fit? Either way, I am currently bullish on Germany despite the tight money.

  3. Gravatar of Doc Merlin Doc Merlin
    10. July 2010 at 15:37

    As to the question “what’s wrong with Europe?” I will say, “excessive spending on social programs and excessive regulation of labor and manufacturing.”

  4. Gravatar of Chris Chris
    10. July 2010 at 17:46

    Does labor rigidity explain a lot of it? Sure, they have lower unemployment – but doesn’t it make adjustments slow as we are able to reallocate much more quickly?

  5. Gravatar of Mikko Mikko
    10. July 2010 at 21:59

    I’m wondering: how large a factor would the ECB actions be? First, they raised rates in the early stages of the recession and second, they never had monetary policy even as accommodating as Fed.

    Thirdly, most of the countries that are not in eurozone are poor and had been growing rapidly. Many of them have large foreign denominated loans (both public and private).

    The exceptions: Britain and Sweden.

    Lastly, Germany just as Finland, has specialized in production of infrastructure type of goods instead of consumer goods. Basically, demand for building factories, etc. is a derivative of how well the economy is doing. Hence, you get bigger swings downwards.

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. July 2010 at 22:49

    The big change in Australian economic performance since the reforms of the 1980s is that we cope with external shocks a lot better than we used to. Our financial, product and labour markets are all much less regulated than they used to be (though our labour market has seen the least reform: on the other hand, structural changes in the labour market means the shock absorbing capacities have increased) and we are much more free trade than we used to be.

    But the biggest single improvement is the floating exchange rate. Regarding Europe, yes, the euro has been weaker but it is still trying to cover wildly divergent economies. So I would look to monetary policy and to inappropriate currency boundaries to explain the worse downturn and slower recovery: it is, after all, economic shocks which are most going to show the problems of the latter. So, I am agreeing with Krugman who has made this point a lot.

    But let us also take Jeffrey Friedman’s argument (pdf) (via) for the cognitive superiority of markets over politics seriously, particularly his nice elaboration of Hayek’s analysis of markets as incorporating discovery mechanisms (i.e. the role of markets as conveyors of information and mechanisms for dealing with information), and note that Europe has highly regulated labour markets (remembering that welfare systems also regulate labour markets: by setting effective minimum wages, for example) and so many European economies will suffer from blocked information flows and blocked reaction possibilities (that is, after all, what “economic rigidities” are). Exacerbated if there is significant regulation in other product markets.

    There may, as has been suggested, some issues about the profile of goods and services produced but, even there, exchange rates matter too.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. July 2010 at 22:52

    The big change in Australian economic performance since the reforms of the 1980s is that we cope with external shocks a lot better than we used to. Our financial, product and labour markets are all much less regulated than they used to be (though our labour market has seen the least reform: on the other hand, structural changes in the labour market means the shock absorbing capacities have increased) and we are much more free trade than we used to be.

    But the biggest single improvement is the floating exchange rate. Regarding Europe, yes, the euro has been weaker but it is still trying to cover wildly divergent economies. So I would look to monetary policy and to inappropriate currency boundaries to explain the worse downturn and slower recovery: it is, after all, economic shocks which are most going to show the problems of the latter. So, I am agreeing with Krugman who has made this point a lot.

    But let us also take Jeffrey Friedman’s argument (pdf) (via) for the cognitive superiority of markets over politics seriously, particularly his nice elaboration of Hayek’s analysis of markets as incorporating discovery mechanisms (i.e. the role of markets as conveyors of information and mechanisms for dealing with information), and note that Europe has highly regulated labour markets (remembering that welfare systems also regulate labour markets: by setting effective minimum wages, for example) and so many European economies will suffer from blocked information flows and blocked reaction possibilities (that is, after all, what “economic rigidities” are). Exacerbated if there is significant regulation in other product markets.

    There may, as has been suggested, some issues about the profile of goods and services produced but, even there, exchange rates matter too.

    (Sorry for double posting, but I missed a link closure.)

  8. Gravatar of MR MR
    11. July 2010 at 03:09

    Scott – you underestimate exactly how well Germany has done on the unemployment front. Unemployment is almost below pre-crisis levels http://www.oecd.org/dataoecd/14/51/45603327.pdf . This is the biggest reason why as far as the man on the street in Frankfurt is concerned, these are the “good times”. They’ve seen worse unemployment in the last decade, let alone since the 70s or the Great Depression! It’s hard for commentators in the United States to understand that for the man on the street in Germany or France, the pain from this “crisis” has been nowhere near as extraordinary as it has been for the man on the street in the United States.

    And the IMF is amongst the pessimists regarding expected growth in 2010 – the Bundesbank and pretty much everyone else inside Germany expects closer to 2% growth in 2010 http://www.ft.com/cms/s/0/c49698c0-8922-11df-8ecd-00144feab49a.html . Of course the export boom may stall but its worth noting that a lot of the incremental growth in manufacturing exports right now is coming from EM, not from the United States http://www.ft.com/cms/s/0/8283fbc2-8a6b-11df-bd2e-00144feab49a.html .

    Lastly, can i just say that looking at Eurozone stats right now is pointless. Europe is essentially split into two – the core which is growing very nicely right now and the periphery which is collapsing. Germany and Greece need radically different monetary policies and currency levels right now and nothing the ECB is doing can change that. If you want an indicator of just how optimistic core Europe feels, the SNB has gone as far as saying that there is no risk of deflation despite having a small open economy and a currency that has appreciated dramatically against its main trading partner (EURCHF is at all time lows).

  9. Gravatar of Arash Arash
    11. July 2010 at 03:41

    Scott,

    I’m surprised that you relate inefficiency to equilibrium levels only, not to the dynamics of accumulation, the speed of innovation, etc. Inefficient regulitary frameworks may of course negatively impact on growth rates as well. Why do you think that rich countries should grow at the same rate?

  10. Gravatar of Igor Igor
    11. July 2010 at 05:33

    It makes sense to look at average exchange rates. Since the start of recession in December 2007 average €/$ rate has been around 1,41. In the same period before recession it was 1,28. That is 10% difference, and it suggests that monetary policy has been tighter in the Eurozone.

  11. Gravatar of scott sumner scott sumner
    11. July 2010 at 06:21

    John, OK, But then why the slower recovery? Greater sensitivity should imply greater volatility during both downturns and recoveries. And employment has been more stable there, so if anything it looks like that have less nominal wage rigidity.

    Doc Merlin, Yes, but I’d expect those problems to result in lower steady state GDP relative to the US, but not continued regression. If this keeps up they’d end up like Argentina. And somehow that just doesn’t see plausible to me.

    Chris, But if they have lower unemployment, then why did eurozone output fall so sharply in 2009? Surely those extra workers don’t have negative marginal productivity?

    Mikko, Actually I think German capital goods exports are doing well, because of countries like China. It still seems to me that all these explanations of the deeper recession should imply a faster recovery. But the eurozone recovery is forecast to be much slower than in the US. So presumably when they get back to full employment, they will have fallen in RGDP/person relative to the US. It is the secular change that I find most puzzling, not the cyclical.

    Lorenzo, I agree about Australia. You said;

    “But the biggest single improvement is the floating exchange rate. Regarding Europe, yes, the euro has been weaker but it is still trying to cover wildly divergent economies. So I would look to monetary policy and to inappropriate currency boundaries to explain the worse downturn and slower recovery: it is, after all, economic shocks which are most going to show the problems of the latter. So, I am agreeing with Krugman who has made this point a lot.”

    That would explain the slow growth in the PIIGS, but it should also imply that places like Germany should be doing considerably better than the US. But they are also doing much worse. Given the German trade surplus, the euro is certainly not a problem for German trade. I’m not saying the euro doesn’t play a role, but it seems like a pretty big and pretty persistent growth deficit. And non-euro Britain is also doing worse than the US.

    Regarding rigidities, I agree they would result in lower steady state output, but I don’t see why that would reduce eurozone growth. If I am wrong, then the eurozone will eventually have 10% of US GDP, like Bangladesh. That just doesn’t seem plausible to me.

    MR, You said;

    “Scott – you underestimate exactly how well Germany has done on the unemployment front. Unemployment is almost below pre-crisis levels http://www.oecd.org/dataoecd/14/51/45603327.pdf . This is the biggest reason why as far as the man on the street in Frankfurt is concerned, these are the “good times”. They’ve seen worse unemployment in the last decade, let alone since the 70s or the Great Depression! It’s hard for commentators in the United States to understand that for the man on the street in Germany or France, the pain from this “crisis” has been nowhere near as extraordinary as it has been for the man on the street in the United States.”

    Actually, I did mention that they had done well in employment, but that just makes the GDP numbers even more perplexing. It implies eurozone (and German) productivity is falling rapidly. In the US it is rising rapidly. It wouldn’t bother me if it was expected to catch up during the recovery, but the forecast is that the eurozone won’t recover. Even 2% growth (i.e trend) would be poor, indicating no recovery after a 4.9% drop in RGDP. I do understand that unemployment is no worse than in the 1980s and 1990s (or course that is pretty bad in absolute terms) but the trends in Europe are bad, they are falling further and further behind the US in RGDP/Person, even if we assume your numbers are correct. In the long run that can’t be good.

    I also don’t see why you’d want to exclude the worse performing areas of the eurozone in a comparison with the US. If I excluded Detroit, Phoenix, Miami, Vegas, Tampa, Inland Empire, etc, US growth would also look much better. Michigan also lacks the ability to devalue, and while it is easier for Americans to move, there are just as big unemployment rate differences between states as between European countries.

    You said;

    “Germany and Greece need radically different monetary policies and currency levels right now and nothing the ECB is doing can change that.”

    Germany and Greece both need a more expansionary monetary policy, and there is something the ECB can do to change that.

    Arash, If I am wrong then Europe will end up as poor as Bangladesh. Does that seem likely? It has also been the norm ever since Europe and Japan recovered from WWII they have been growing at about the same speed as the US. Indeed this is true of most developed countries.

    Igor, The recession began later in Europe. They were doing OK with 1.58 rates in the first half of 2008, but when they went into recession in late 2008 the euro fell sharply.

  12. Gravatar of Indy Indy
    11. July 2010 at 07:40

    Of course, the story I’d like to tell is, “In the last 20 years, there has been a decade of boom and then another of bust in terms of domestic energy reserve depletion. This has led to lower domestic production (and lower tax collection), higher imports (from Russia), higher overall real energy prices (gas and electricity are both up significantly) which puts a small overall drag on the economy. But those prices are especially higher when compared to those available for energy-intensive industry abroad (China) – which has led to dramatically lower competitiveness and decline in those industries.”

    Alas, that story is true, but does not account for nearly the percent-of-GDP-sized magnitude needed for a full explanation.

    Still, take Britain as an example. The UK produced $35 Billion of oil, and $13 Billion in gas in 2009. That’s over 2% of their GDP (of course, it’s the gross, not the net, so actual income was maybe 1% of GDP).

    In 2005 (and similarly estimated for 2010), it collected about 10 Billion pounds in taxes from this production, which is, I think, about 1.5% of total government revenues. Ten years ago, the UK produced twice as much (in quantity terms) oil and gas, as they do today, and in a decade they are expected to be all but exhausted in both.

    So, if you took the underlying trend of UK GDP growth, and then put a little 0-to-2-to-0-percent-of-gdp oil-and-gas bubble on top of it from 1990 to 2020, you would see in the sum curve an early period of above-average growth followed by a period of stagnation or slight decline, and eventually a return to trend.

    But, again, it’s not enough, on its own, to explain what’s been going on in the UK, or Europe as a whole. Add in demographics, anti-liberal policies, and growing-size-of-welfare-state-government, and you may have enough in combination to make a full accounting.

  13. Gravatar of Arash Arash
    11. July 2010 at 08:59

    For Bangladesh income levels we’ll need negative growth rates (or extremely long stagnation until they catch up). I talked about diverging positive growth rates. What you suggest is that initial income levels of rich countries determine the final or rather long-run differences or that convergence clubs are somehow eternal. Further, modern Germany and modern Japan are not that similiar: Japan had a lost decade (or two) for whatever reason (bad monetary policy is my guess) and we, Germans, had the Reunification! Without such a big tail effect West Germany would have outpaced Japan and socialist France. Convergence clubs are not forever … BTW, productivity in Germany indeed has come down dramatically because our federal government bribes firms to keep employment high in times of low output by taking over their costs and thereby increases deficit spending (kurzarbeit is the name for it). Finally, since I grew up in Düsseldorf I’m happy that you like it. Düsseldorf has zero net debt, did you know that?

  14. Gravatar of Doc Merlin Doc Merlin
    11. July 2010 at 09:53

    ‘Doc Merlin, Yes, but I’d expect those problems to result in lower steady state GDP relative to the US, but not continued regression. If this keeps up they’d end up like Argentina. And somehow that just doesn’t see plausible to me.’

    A better question to ask is “how did Argentina end up like Argentina?”

  15. Gravatar of Luis H Arroyo Luis H Arroyo
    11. July 2010 at 10:08

    I think that one thing is Germany and other is the rest of Euro. For the rest of euro, the monetary union is a problem.
    from what I know,
    The lack of adjustment via exchange rate has slowed growth (that is not a problem for Germany). And the lack of an optimal monetary policy for each country has impeded the clean of the bank system -apart its effect in growth. The US has reformed, more or less, its banks; the EU has not. The interbank market is collapsed, except in core countries. In spite of that, The ECB has sterilized its euro 60 billion of buying debt. All these factors, not very well known in their magnitude, cast a shadow of incertitude that, I think has been extended toward US.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. July 2010 at 11:04

    Scott,
    You wrote:
    “Does anyone know what I am missing? I suppose it might have been monetary policy, but the euro has been considerably weaker than the $1.60 levels it hit prior to the crisis. So I am genuinely perplexed by the European situation. I’m not a huge fan of their high tax model, but I don’t see how it explains this sort of dismal economic performance.”

    IMO the European economic performance is simply a symptom of bad monetary policy.

    As you yourself have argued ad nauseum the best indicator of monetary stance is NGDP. Exchange rates are subject to many factors which are often hard to disentangle. NGDP is further below trend in the eurozone than in the US and it is forecast to get worse in the years ahead. This excessive tightness in monetary policy is having a much more pronounced effect on those parts or extensions of the eurozone (Ireland and the Baltic states) which can be rightly qualified as their developmental “frontier” than anything being experienced in the equivalent “frontiers” of the dollarzone. There’s your sign of radically tight money.

    As for Europe’s high tax model that has to be qualified by their different tax structure. The EU is much more dependent on consumption taxes for revenue and somewhat less dependent on taxes on capital income than the US. Recent research (e.g. Jens Arnold, 2008) suggests that taxes on capital income are detrimental to growth and that taxes on consumption are actually positively correlated with growth. Thus, although the EU may have a higher overall tax burden relative to output, they also have a tax structure that is actually more growth friendly than in the US.

    Lastly, although European policies like Germany’s kurzarbeit may have induced a decline in labor productivity during the contractionary phase of this recession, such policies are likely to have the opposite effect if there should ever be a real recovery (monetary policy permitting). Work will be “deshared”, average hours will rise, and economies of scale will be realized. Unlike the US there will be no hysteresis from labor force inactivity. Workers will still have recent and up to date work experience despite the shortened work weeks.

    In short, I suggest European tax and labor policies may actually deserve commendation. It is their monetary policy that should be condemned.

  17. Gravatar of Patrik Z. Patrik Z.
    11. July 2010 at 11:34

    Scott, I don’t know about the Eurozone as a whole, but German average working hours have dropped. Without this, unemployment figures would not look as good as they do. One reason for this is, as you mention, the massive use of Kurzarbeit (short-time work), another that credit hours on working-time accounts were reduced substantially.

    As to the decline of GDP in Germany, the projection of some German economic research institutes in their “Gemeinschaftsdiagnose” (spring 2010) suggests an overall GDP growth of 1.5 percent in 2010, and 1.4 percent in 2011. There was a huge drop in 2009 (-5%) and before, largely caused by the Germany’s heavy dependence on the export sector (exports declined by 14 % between 2008 and 2009). Just look at their share of (N)GDP: Exports accounted for 39.8 % of GDP in 2007, 39.4 in 2008 and only 33.3 in 2009).

  18. Gravatar of David p David p
    11. July 2010 at 19:13

    they have lower unemployment – but doesn’t it make adjustments slow as we are able to reallocate much more quickly

  19. Gravatar of jean jean
    12. July 2010 at 03:02

    Maybe this:
    http://www.voxeu.org/index.php?q=node/5289

  20. Gravatar of MR MR
    12. July 2010 at 04:44

    Scott – you said “Germany and Greece both need a more expansionary monetary policy, and there is something the ECB can do to change that.”

    My only point is that the German public does not think that it needs stimulus of any kind because they think they’re doing well. We can debate the strength and resilience of this recovery and you may be right that Germany needs easy money but the Germans don’t agree with you – and the reason for this is the unemployment situation which is for the first time in my recollection even below the OECD average. My point is just this – the US seems to be doing better in terms of GDP and worse in unemployment and Germany the opposite. As a “common man” I’d probably prefer the German situation to that of the United States.

  21. Gravatar of JimP JimP
    12. July 2010 at 06:23

    Krugman demands better from the Fed.

    http://www.nytimes.com/2010/07/12/opinion/12krugman.html?_r=1&ref=opinion

  22. Gravatar of johnleemk johnleemk
    12. July 2010 at 06:29

    Hear, hear for Krugman. What a fantastic piece.

  23. Gravatar of JimP JimP
    12. July 2010 at 06:55

    Beckwith agrees

    http://www.google.com/reader/view/#stream/user%2F15470056746793432676%2Flabel%2FFinance

  24. Gravatar of JimP JimP
    12. July 2010 at 06:57

    sorry – wrong link

    http://www.google.com/reader/view/#stream/user%2F15470056746793432676%2Flabel%2FFinance

  25. Gravatar of JimP JimP
    12. July 2010 at 06:58

    sorry again

    http://macromarketmusings.blogspot.com/2010/07/krugman-is-finally-beating-right-drum.html

  26. Gravatar of Bogdan Bogdan
    12. July 2010 at 07:27

    Mainly structural problems, low productivity, inefficiencies, demographic decline, particularly in the Southern countries, but also cyclical banking problems (there are many banks, private but also sort of the reverse of the China bank model, privately own, but indirectly government managed that don’t want to write off losses and clean the balance sheets).

  27. Gravatar of JimP JimP
    12. July 2010 at 08:15

    The same as before –

    the deflationists respond.

    http://www.ritholtz.com/blog/2010/07/qe2-remains-in-dock-for-now/

    If Obama remains unwilling to fight these people he does not deserve to be President – and he won’t be for long.

  28. Gravatar of scott sumner scott sumner
    12. July 2010 at 08:28

    Indy, That’s a good point about Britain, but as you say doesn’t explain the eurozone. Any thoughts on how Norway’s GDP recently passed Sweden (which has almost twice the population)? I thought oil was only about 25% of Norway’s economy.

    Aresh, You said;

    “For Bangladesh income levels we’ll need negative growth rates (or extremely long stagnation until they catch up).”

    No, just growth rates lower than the US. You’d eventually end up at 10% of US GDP per capita. Perhaps Bangladesh wasn’t the best example. Argentina went from being a rich country in 1900 to being a developing country with only 30% of US GDP/person, and it grew fairly consistently throughout that period.

    Reunification may have hurt Germany’s growth, but only because it was associated with bad policies. Normally annexing a poor region should allow you to grow faster. If America annexed Latin America, our RGDP growth rate would rise.

    Doc Merlin, You asked;

    “A better question to ask is “how did Argentina end up like Argentina?””

    I don’t think it was European welfare state policies, rather it was statist and autarchic policies.

    Luis, Those seem like reasonable conjectures.

    Mark, That’s a good argument. It might be monetary policy, but then you’d expected faster growth in the recovery period. Monetary policy has no long run effect on growth. So is the IMF forecasting fast Eurozone growth in 2012-2020? Maybe, but I doubt it.

    Patrik, Yes, that sounds right.

    David P. Yes, that’s right.

    Jean, Yes, dual labor markets are a problem. But they should lower RGDP levels, not growth rates.

    MR, You said;

    “My only point is that the German public does not think that it needs stimulus of any kind because they think they’re doing well.”

    Can I assume Merkel’s government is popular? How can a country be doing well if its RGDP just fell 5%, and there is no sign of any recovery (relative to trend) as far as the eye can see? And keep in mind that Germany had no real estate bubble, which was claimed to be the cause of the US recession.

    You might be right, but it all seems odd to me.

    JimP. That’s a great editorial.

    Bogdan, I can see how those would reduce the level of RGDP, but not the growth rate.

  29. Gravatar of JimP JimP
    12. July 2010 at 09:12

    Scott

    I agree. Its a great editorial theme – and some paper should write one.

  30. Gravatar of Benjamin Cole Benjamin Cole
    12. July 2010 at 10:36

    Krugman and Sumner are on the same page. Let’s hope the Fed gets a clue.

  31. Gravatar of Patrik Z. Patrik Z.
    12. July 2010 at 11:02

    “Can I assume Merkel’s government is popular? How can a country be doing well if its RGDP just fell 5%, and there is no sign of any recovery (relative to trend) as far as the eye can see? And keep in mind that Germany had no real estate bubble, which was claimed to be the cause of the US recession.”

    No, unlike Merkel herself, the government as such isn’t particularly popular (but that’s mainly owing to Merkel’s coalition partner).

    Btw, business confidence today is relatively high and has been improving significantly already since January 2009 (!), as suggested by this http://www.cesifo-group.de/portal/page/portal/ifoContent/N/data/Indices/GSK2006/GSK2006Container/GSKKTDLCHARTSGERADE/GSK_220610_Klima_Dtl.gif graph (the most-cited business confidence index for Germany, based on a survey among 7,000 companies; red: business climate index, orange: business outlook, blue: assessment of current situation).

  32. Gravatar of Indy Indy
    12. July 2010 at 16:25

    I traveled in Norway and hiked to its northernmost point, well above the arctic circle, in the summer of 2001. It was like perpetual springtime 3PM, with the sun just going in circles overhead. I didn’t feel sleepy for days and was mildly euphoric, and the locals seemed to be largely the same. On the other hand, I hear it’s dismal in the winter.

    Anyway, the IMF estimates the following for 2009:

    Nominal GDP: Norway: $383 Billion, Sweden: $405 Billion (+6%)

    Population: Norway: 4.89 Million, Sweden: 9.37 Million (+92%)

    Per Capita: Sweden: $43,200, Norway: $78,300 (+81%)

    If they had equal productivity with the Swedes, there would seem to be about $170 Billion “extra” in Norway’s economy.

    In 2009 Norway exported 98.6 MTOE of oil(Approx. $50 Billion in last year’s prices) and 99.4 bcm of gas (Approx. $30 Billion), for a total of about $80 Billion in fossil exports. So, yeah, that’s about 25% of the total economy and that alone would explain half the gap.

    The other half is probably other energy-intensive-industry related. Norway is the most electricity-intense large country in the world, producing just as much as Sweden does with it’s larger population, about 135 Terrawatt-Hours per year. At $60/MwH (cheap-priced industrial electricity, slightly more expensive than in China), that juice would be worth $81 Billion. That might have something to do with it.

    So Norway really is like an OPEC country of the North. Well, except for the fact that they are, like the UK (and Mexico), quickly running out of oil. Production is down a third in the last seven years. They have depleted 80% of all oil ever discovered, their discovery trend is down 80% in the last 15 years, and they are quickly producing all they have remaining, with only 8 years left as RP ratio.

    On the other hand, they have 20 years of gas left and production has been steadily increasing in the last decade.

    But Norway’s wealth is very much short-term natural-resource extraction related. It is more like capital depletion than real income production. And in short order (maybe a decade or two) they will likely return to a more Sweden-like wealth level.

    Maybe they’re putting all that oil-and-gas cash away in some high-performance sovereign wealth trust fund that will help pay the taxes for the generous welfare state when the wells eventually run dry. They probably can’t increase the alcohol taxes anymore – they were crazy-high when I was there.

  33. Gravatar of johnleemk johnleemk
    12. July 2010 at 21:27

    Indy,

    “Maybe they’re putting all that oil-and-gas cash away in some high-performance sovereign wealth trust fund that will help pay the taxes for the generous welfare state when the wells eventually run dry.”

    Yup: http://en.wikipedia.org/wiki/The_Government_Pension_Fund_of_Norway

    I have heard some criticism of this fund but I am not sure what the specific critiques are. I know that in Malaysia it is vogue to criticise the government for not putting away our oil wealth into such a fund, so Norway comes up pretty frequently.

  34. Gravatar of Lorenzo from Oz Lorenzo from Oz
    13. July 2010 at 02:12

    Looking at Australian GDP per capita as a share of US GDP per capita, we can see Australia generally worsened during period of rapid, variable change. Some of that was small, resource-based economy. But Australia also handled both World Wars, the 1920s boom and the first shock of the Depression comparatively poorly (compared to the US: we handled 1932-1935 notably better). For the period of stable growth post-1949, we kept about 75% of US pc GDP with steady improvement in recent years.

    My point is that surely rigidities in an economy will tend to make negative shocks more intense in their effect. Reactions will be blocked, so instead of getting a mass of smaller adjustments, you get bigger, “jerkier” adjustments.

    (It is also worth noting that Japan has also performed poorly.)

  35. Gravatar of scott sumner scott sumner
    13. July 2010 at 08:15

    JimP, Yes, but non-economist journalists seem to have trouble grasping this (excluding my blog readers of course.)

    Thanks Benjamin.

    Patrik, Z. I’m not disputing what you say. But Germans must have low expectations if a 5% drop in GDP from an already low level (lower than Ireland in per capita terms) is considered a good performance. Germany should be as rich as the US, with all their engineering talent and their well educated, orderly and disciplined culture. Instead it is at about the level of Mississippi (in PPP terms.)

    Indy, Thanks for all that info. I agree with most of what you say, except I am surprised you think hydro could explain the non-oil gap. But then you know the data better than me, and I have no other explanation. As an aside, Norway may also have a higher cost of living, so in PPP terms the gap may be a bit smaller.

    Johnleemk, Yes, I know about that fund. I’m sure there are criticisms, but when you look at all the other oil rich countries, Norway looks pretty responsible.

    Lorenzo, You may be right. The interesting question is whether this recent 4% slippage in Europe (vis-a-vis the US) will be reversed, stay the same, or lead to even more slippage. Once we find that out we will be able to better sort through the various explanations. I have been treating this like a demand shock from which we should eventually recover, but they may be some permanent productivity shocks mixed in.

  36. Gravatar of D. Watson D. Watson
    14. July 2010 at 07:53

    The thing that surprises me is that after saying Germany shouldn’t be doing that well, the only statistics you cite are for Eurozone, including the PIGS and Germany isn’t the G. It’s like someone being surprised that house prices are going up in *pick a random state* Kansas when they’ve been going down in the US in general.

    On top of that, TC’s point isn’t even that Germany is great, but that it’s improving and people aren’t appreciating that fact.

  37. Gravatar of Sailing Insurance : : Linkism – Insurance Today Sailing Insurance : : Linkism - Insurance Today
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    […] wrong with the European […]

  38. Gravatar of ssumner ssumner
    15. July 2010 at 09:34

    D. Watson, I don’t follow your argument. I said RGDP was doing poorly in Germany, and provided a link that had the specific numbers. I don’t even see much evidence that Germany is recovering. After GDP falls by almost 5%, I don’t consider 1.5%/year growth to be a recovery. That’s not even trend growth.

  39. Gravatar of Patrik Z. Patrik Z.
    17. July 2010 at 12:12

    Scott, you write that “Germany should be as rich as the US, with all their engineering talent and their well educated, orderly and disciplined culture.” – That’s not particularly crisis-related, is it? Productivity is nearly identical (47.55 vs. 48.2 $/hour worked), but Germans work significantly less (1,443 hours/year in Germany, 1,819 in the U.S.) (thus the large differences in GDP per capita levels).

  40. Gravatar of ssumner ssumner
    18. July 2010 at 05:37

    Patrik, Good point, but ask yourself why they work so much less. Perhaps high taxes reduce work effort.

    Perhaps comparing Germany to the US is apples and oranges. Then ask yourself why Germany is poorer than German-speaking Austria and Switzerland.

  41. Gravatar of TheMoneyIllusion » The real “long and variable lags” problem TheMoneyIllusion » The real “long and variable lags” problem
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