Why is Europe Recovering More Quickly?

The somewhat shocking news that Europe and particularly those two mixed-economy giants, France and Germany, appear to be emerging from their recession more swiftly than we are, has some free market types asking some atypical questions.

First, if you haven’t seen it here from the WSJ is a quick look at what’s going on:

Germany and France have escaped from recession surprisingly quickly, outpacing the U.S. in returning to growth thanks in part to government stimulus efforts and consumer spending.

Germany, Europe’s biggest economy, grew at an annualized pace of 1.3% in the second quarter, while France, the region’s second-biggest economy, expanded at an annualized rate of 1.4%. Both countries recorded contractions for the previous four quarters, and bounced back earlier than other advanced economies including the U.S. and the U.K.

The news that Europe’s economic engine is rebounding suggests the region is joining the recovery under way in China and increasingly elsewhere in Asia, exemplified by India’s announcement Wednesday that industrial production in June rose nearly 8% from a year earlier.

That contrasts with uneven consumer spending in the U.S., where retail sales unexpectedly fell 0.1% in July, as American households are hurting from job losses, a weak housing market and tight credit.

This week, Federal Reserve officials said U.S. “economic activity is leveling out,” but cautioned that it is likely to remain “weak for a time.”

Of course, this wasn’t supposed to happen. Conventional wisdom was that Europe would languish in recession far longer than the US because it wasn’t engaging in enough fiscal stimulus, quantitative easing and, you know it’s economies were just too old and sclerotic to recover very quickly. So much for conventional wisdom.

Now, before we get too far into this, let’s remember that one quarter does not a recovery make but at the same time, you do have to admit that so far they’re eating our lunch. So what gives?

A couple of bloggers that I wouldn’t exactly describe as socialists, Yves Smith and Henry Blodget, raised the question of who has it right in posts this morning. Neither delivered an indictment of the US economic system but at the same time their writings suggest that maybe we need to think about the road we’ve been following lately.

Smith notes that on a trip to Europe this summer she was struck by the lack of signs of economic distress she witnessed. Here are her thoughts:

Turns out my sample may not have been so unrepresentative. The Wall Street Journal reports that Europe appears on the cusp of a bona fide recovery, with France and Germany both showing decent second quarter growth, while the US is trying to pretend that “things are getting worse less quickly” is tantamount to recovery.

Now are any of the Euro bashers about to give the EU authorities some credit? I doubt it.

And this disparity, if it persists, points to a much deeper issue. The US chose to deregulate across a wide range of activities and let the devil take the hindmost. Europe cares more about institutional frameworks and collective outcomes. US commentators regularly describe Europe a sclerotic. But if the EU winds up delivering better growth, what justification do we have for a system that seems best at redistributing income to the top.

Blodget asks a few questions:

And yet look who’s recovering first?

And look who didn’t even bother with a stimulus (Germany). And look whose citizens enjoy basic services that many Americans can only dream of (Europe). And look whose income inequality just hit an all-time high (U.S.)

Our free market is tuned to encourage maximum growth, maximum competitiveness, and maximum wealth for corporate owners. Europe’s economy is tuned to balance growth with employment, services, and wealth distribution.

Over the long haul, the performance of Europe’s stock markets hasn’t been much worse than ours. Plenty of Europeans have plenty of money, and most of those who don’t have any money still have decent healthcare and other social services. The heavy government spending (and taxation) provides a natural counter-balance to the cyclical private sector (when markets crash, government spending keeps cranking right along).

So is Europe’s economy really that much of a disaster? Is ours really so great?

Now, I will freely admit that I have been a Euro-basher. I worked for a European (French) bank for over a decade, spent a considerable amount of time in Europe and, for an outsider, had a fairly good feel for the social compact under which they operate. I thought that it was suboptimal and the US system superior and one that they would over time be forced to migrate towards, and, in fact, I think a reasonable argument can be made that they have over time adopted more free market concepts.

Having said that, they never abandoned their sense of collectivism nor did they make the sorts of changes that would expose their citizens to the economic risks that Americans tolerate. The social safety nets stayed in place and may be a key reason that they’re now seeing recovery sooner.

When I saw the news about Europe yesterday, I have to admit that it took me back. The pain of this recession has for me, at least, seemed to have been spread somehow too unevenly throughout the country. Maybe it’s the banks getting back to business as usual just a bit too quickly or maybe it’s the lack of any plan from Washington other than reestablishing the economic status quo ante but too much has been loaded on the backs of those least able to bear the burden.

Expect to hear and read a lot more about this, particularly if Europe and for that matter the more centrally controlled economies of Asia continue to outpace us in recovery. Those on the Left will no doubt seek to use it to advance many of their social programs and their arguments are going to find a will audience among the citizenry.

As for me, I need to rethink a few things. It may be that we don’t have it right and need to do a bit of adjusting. Expect to see more on this over the weekend.

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