Growth Is Not an Easy Solution for Europe's Woes

More

I've seen a bunch of commentators today saying that "the fundamental problem Europe needs to solve is growth, not budget deficits."  In some sense this is true--enough growth would solve many of the problems in the periphery.  (Usual caveat: Greece is a special case.)


But while it's true, I'm not sure it's useful.  For one thing, the euro itself is a major contributor to the lack of growth.  Italy and Greece, especially, used to rely on serial devaluation to keep their relatively low-productivity tradeable sectors competitive.  Do we have a way to dramatically increase productivity in their small, family-owned farms and firms?  Keep in mind that a preponderance of such firms is not simply a historical accident; it's generally thought to be a symptom of fairly low trust levels which make it problematic to hire strangers or invest your money in them.

Greece, Italy, and Spain also have terrible demographics.  Their populations are aging extremely rapidly.  This is a problem for two reasons  First, output is basically Producitivity X Labor Input; if the labor force is not growing, then GDP growth will slow down.  And second, there's some legitimate worry that older populations simply have a much harder time innovating and improving productivity than younger populations--older people are more risk averse, and much less friendly to change.  While rates of entrepreneurship are high among recent retirees in the US, this is mostly retirees doing a little consulting on the side in their old industry (a net decrease in output), not the foundation of dynamic new growth firms that will move the production possibility frontier outwards.

You can go overboard on the "demography is destiny" stuff, but it may be literally impossible for many of the PIIGS to generate the growth they need.

I basically agree with Merkel's critics that austerity is going to be counterproductive in the short term (though I also realize that it's still necessary in the short term, because there is no way to credibly prove that they will do "austerity later" other than by doing "austerity now")  However.  There is at this point no conceivable policy scenario which somehow makes Italy and Greece grow by as much as 2% a year for the next few years.  I'm not saying that this couldn't happen, mind you--anything can happen!  But no one is proposing a policy that will assure it.  We're quibbling about how much we should try to make their economies should contract--a little, if the rest of the EU gives them some spending money; a lot, if they do deep cuts right now.

If what we really need is to solve the problem of Italian and Greek growth, then we're hosed.  Italy and Greece face some pretty large and intractable problems--one of which is the euro.  And even if that weren't true, the record of foreigners marching into a place and whipping its institutions into shape is . . . well, how's that Afghanistan thing working for us?


Jump to comments
Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Get Today's Top Stories in Your Inbox (preview)

What's the Number One Thing We Could Do to Improve City Life?

A group of journalists, professors, and non-profit leaders predict the future of livable, walkable cities


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In