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BW Businessworld

Hopelessness In The Euro Zone

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I went to attend meetings at a small town called Mechelen, halfway between Brussels and Antwerp in Belgium, a country that a wicked Italian friend once said one should be mindful of because you can fly over it between two quick sneezes. After spending two days there, I can’t help but think that continental Western Europe seems to be doing everything it possibly can to bring about another recession and perhaps even recreate a Japanese decade of systematic, policy induced stagnation.
Basking in the new optimism of Prime Minister Narendra Modi’s acchey din aane waley hain, the minds of most Indians are far removed from how Western Europe is again sinking into another self-created morass. Yet, it is useful for us to know why this is happening — if only to understand how a large number of European policy makers just can’t get the basics right.
Let me share with you some basic economic data of the euro area. The sequential, annualised GDP growth for Italy in the second quarter (April-June) of 2014 was -0.7 per cent. That’s expected, some would say, and they would mostly be right. At a pinch, one could have even dealt with France tanking — as the second quarter (Q2) 2014 growth was -0.1 per cent. But with Germany’s GDP growth turning negative at -0.6 per cent for Q2 2014, the euro area now runs a serious risk of getting into its second recessionary period in six years. It hasn’t happened yet, with growth at a pathetic 0.3 per cent for Q2. But everything suggests that it very well could.
To put things in perspective compared to other major countries, the sequential, annualised growth of the US was 4.6 per cent in Q2 2014. For Canada, it was 3.1 per cent. Even a relatively tiny nation such as Great Britain posted a growth of 3.7 per cent in Q2 of this calendar year. And China, despite its obvious slowdown, grew 7.8 per cent in the third quarter of this year.
Why can’t the euro zone grow? The European Central Bank is certainly not the villain of the piece. The interest rate on the 10-year euro bonds is at 0.86 per cent. You can’t get much lower than that, unless you are in Japan. The problems lie with the nuts and bolts of the real economy.
Consider France. Despite relatively high productivity in selected areas, it has a 35-hour work week, and six weeks of paid holidays plus more if anyone worked more than 35 but only up to 39 hours per week. Add to that a crippling tax regime where the maximum marginal rate of income tax is 45 per cent which, when one adds all other taxes, social security contributions and local levies, rises to over 65 per cent. Yet, thanks to its continuing love for unwarranted public spending, France’s fiscal deficit is at 4.4 per cent of GDP — well above what is permitted by single currency stability pact. Its industrial production shrank by 0.3 per cent in September 2014; and unemployment is at 10.5 per cent.
Italy is another disaster. Negative GDP growth; negative growth of industrial output; budget deficit of 3.3 per cent of GDP; and over 12 per cent unemployment. And while Spain shows positive growth over a very low base, it has negative industrial growth, and a fiscal deficit amounting to 5.6 per cent of GDP. Worse still, one out of four employable people in Spain are unemployed.
Barring Germany, the Netherlands and Scandinavia, Western Europe is rapidly sinking yet again. As it must with its sclerotic labour laws and employment rules, lack of competitiveness and the pervasive bureaucracy that emanates from Brussels. Instead of leveraging the powers of a large and relatively cheap labour force that came into play with the eastern expansion of the European Union, everything has been done to maintain the unaffordable comfortable lives of citizens. One day the leaders of Western Europe will have to wear their thinking caps. Today they haven’t a clue where these are.  
(This story was published in BW | Businessworld Issue Dated 01-12-2014)