World Economy

Europe Still a 2-Rate Power

Europe Still a 2-Rate PowerEurope Still a 2-Rate Power

In the years after the Cold War, much was written about Europe’s emergence as the third great force in the global political economy, alongside Asia and the United States. Some, such as former French President Francois Mitterand’s eminence grise Jacques Attali, went even further: in his 1991 book Millenium Attali predicted that in the 21st century, “Japan and Europe may supplant the United States as the chief superpowers.”

This notion of a fading America has been embraced among some here as well, by authors such as Jeremy Rifkin who has written extensively about a “European dream” supplanting the American one on a global scale, Joel Kotkin* wrote for The Daily Beast.

The continent’s economy is flagging, its population is declining, and issues like immigration and high taxes are stalling meaningful progress, even as neighboring nations cosy up to Russia and China.

  European Dream Fades

Fifty years ago, when Europe’s economy was growing faster than America’s on a consistent basis, and Asia was just emerging, the case for the continent’s ascendency seemed much stronger. But for the past 30 years Europe’s economy has been generally performing worse than that of the US, not to mention rising Asian powers, including China and India.

The Great Recession hit all economies, but recently American growth rates have consistently outperformed those on the continent. By 2013 Europe was still experiencing 12 percent unemployment — a rate that exceeds ours at the height of the US recession. European household debt, notes analyst Morgan Housel, has been increasing while that of American households has dropped.

The roots of Europe’s poor economy lies in large part in the very welfare state so admired by some progressives. To be sure, generous benefits have helped make Europe somewhat less unequal than the United States. But in the process Europe has become a very expensive place to do business. High taxes and welfare costs, tolerable in an efficient economy like Germany’s, have caught up with weaker, less productive countries such as Italy, Greece, and even France.

This weakness is most evident in two critical sectors — energy and technology — critical to modern economies. Europe’s much ballyhooed attempt to “go green” has raised energy costs throughout the continent.

Europe is also vastly underrepresented among the rising players in the tech world. The continent still possesses some influential industrial companies — Siemens, BMW, Volkswagen, Bayer, Royal Dutch Shell, Daimler — but it has created no European equivalent to Google, Facebook, Apple, Amazon, Microsoft, Intel, or even IBM. Not one of the world’s 14 largest tech companies by revenue is based in Europe. Five are in Asia, nine in the United States.

  The Demographic Disaster

Europe’s biggest problem, however, happens inside the boudoir. Along with Japan, Europe has pioneered low fertility. European countries average a fertility rate of 1.5, well below the 2.1 children per family needed to replace their population.

The problem is most acute in Italy, Spain, and, most important, Germany. The number of German babies born annually has dropped below the levels at the turn of the last century. Not surprisingly the UN expects Germany’s population to drop 9 percent by 2050.

To maintain their workforces and create new consumers, European countries have by necessity made a priority of bringing in more immigrants. By 2025 Germany’s economy will need six million additional workers; this means 200,000 new migrants every year to keep its economic engine humming, according to government estimates. The situation gets worse from there, and by 2050 Germany’s overall workforce (PDF) is expected to drop 30 percent below 2010 levels, reducing it from 54 to 38 million. In the same time period the American workforce is expected grow by an additional 35 million workers.

Then there is Europe’s rapidly aging population, a natural product of low birth rates, which also imposes enormous burdens on the region’s economy.

  Political Chaos

Europe’s current political crisis has spawned a new level of political uncertainty most clearly seen in the rise of radical new parties — such as Greece’s Syriza — on both right and left. Two forces driving this shift in political balance have been immigration and a growing grassroots rebellion, such as has emerged in Greece, over EU budget and regulatory policies. In Spain, for example, the fastest rising party, Podemos, borrows directly from Syriza’s brand of quasi-Marxist radicalism.

In France the long-standing fear of losing control of national destiny has combined with growing fear over immigration, stoked by the recent terrorist incidents there.

*Joel Kotkin is the RC Hobbs Fellow in Urban Studies at Chapman University and executive director of the Center for Opportunity Urbanism in Houston, Texas.