Europe is slipping further behind the U.S. in competitiveness as the leaders of Germany, France and Italy, weakened by election setbacks, fail to take advantage of the economic recovery to reduce taxes and over-regulation.Now, the weird thing is that this nonsense is believed not only by corporate executives, for whom it's welcome propaganda against the welfare state, but also by anti-globalizers. The article says that increased trade leads to increased competitiveness which leads to falling living standards. The anti-globalizers draw the natural conclusion that increased trade is a bad thing.
Germany, the continent's largest economy, abounds with reasons why Western Europe is losing the competition for investment and jobs to the U.S., China and India -- and the low-tax Eastern European countries that, after entering the European Union in May, are competing right on Germany's doorstep.
German labor costs are six times the Eastern European level, according to a report published on August 24 by the Cologne-based IW research institute. A corporate tax rate of 37 percent is almost twice that of neighboring Slovakia, which now makes more cars per person than any other Eastern country.
France and Germany have the same nominal interest rate, set by the European Central Bank. It stands at 2 per cent, having been gradually reduced from 4.75 per cent since May 2001.
It is widely appreciated that rates haven't been cut far or fast enough for Germany. High inflation elsewhere in the euro zone has discouraged the ECB from taking more radical action.
What is less well understood is that economic divergence makes these pressures of policy mismatch much worse. Faster growth in France, for instance, brings higher French inflation - an average of 2.5 per cent this year, compared with 1.5 per cent in Germany.
So Germany's inflation-adjusted interest rate (its real interest rate) is actually above that of France. Perversely, then, struggling euro members are landed with interest rates that are not only too high for their own purposes (given that the ECB sets rates with reference to all members) but slow-growth economies end up with real costs of capital that are even higher than other members who are already growing quite well.