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%.

INFORMAL ECONOMY AS % OF GDP (World Bank)

Everyone cheats the government in southern Europe, and everyone arranges their lives so as not to pay taxes. Wonder why you can't buy shares in all those wonderful Italian brands you know? Italy has hundreds of excellent companies, but they are all family owned, because few Italian businessmen will trust their books with anyone but a blood relative. Tax evasion? Never heard of it. Good Italian companies stay small and family-controlled rather than go public to allow predatory families to evade the depredations of a predatory state.

Greece is worse. The country lives on tourism, and rents properties for cash or bank wire to Liechtenstein. Greeks simply do not declare their income. Greek government employment is ridiculously overstaffed and overpaid.

With the exception of Germany and a couple of others, the European nations have priced themselves out of the world labor market. Germany's economy is still growing while the rest of Europe is shrinking. Throwing more subsidies at structurally inefficient and corrupt economies won't help. The people of southern Europe have to decide that guaranteed jobs might mean no jobs at all, and that excess pay might mean no pay at all. Until the Europeans are willing to accept the risk and mobility that made the American economy so strong (at least until the Obama administration got control of it), they will languish.

Chancellor Angela Merkel of Germany is magnificently right to insist that deficit reduction is a precondition for growth. It's not just deficit reduction. The southern Europeans want a nanny state, but they don't want to pay taxes.  They want Germany to pay their taxes for them. Maybe Germany will cover Obama's $1.4 trillion federal budget deficit, too.  Hey, it doesn't hurt to ask, does it?