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The Growth Canard in Europe

Everyone has ganged up on the Germans for demanding austerity in the southern European economies that they are called upon to bail out, and President Obama enjoined the Group of Eight summit this weekend to focus on growth and jobs instead of austerity. Obama lined up with the new French Socialist President Francois Hollande to beat up Germany's Chancellor Angela Merkel.

Germans aren't too popular in Greece at the moment. Two thugs beat up a Dutch tourist in Greece last week. He protested that he wasn't German, but Dutch, and the thugs said, "Close enough."  A joke has a German getting off the plane in Athens; when the immigration officer asks "Occupation?," he answers, "Nein, vacation." It's quite unfair. I'm with Chancellor Merkel on this one.

The problem with Greece, Spain, Italy, and so forth is not that they lack fiscal stimulus (more government spending), but that stealing from the public till is their principal occupation. Germans are asking why they should reduce spending at home in order to spend more on their feckless southern neighbors. During decade 2000 to 2010, German unit labor costs  remained unchanged. But they rose  by 37% in Greece and by 30% in Italy and Spain. Southern Europe went into debt, in effect, to overpay workers. The Germans worked cheaper and harder (which is why Germany has nearly full employment). Spanish unemployment is at 25%.

What do you with a country where a third of economic activity is off the books? According to the World Bank, the proportion varies from 60% in Zimbabwe and Peru to 6%-8% in the USA and Canada. Italy and Greece are just below 30%.