Sabine, Herald of Liberty. Is the EU becoming increasingly uncompetitive?

First Published: 2005-06-18

This article first appeared in Tech Central Station and is reprinted here with their kind permission.

The European Union is becoming increasingly uncompetitive in the world economy. The average tax burden consumes almost 45 percent of GNP, and regulatory red tape makes it very difficult for the private sector to create jobs. With this track record, it is not surprising that per capita income in the EU is much lower than it is in the United States . To make matters worse, many European governments face huge unfunded liabilities for pensions, so it is likely that the burden of government will climb rather than fall. So should the European Union get an economic face lift?

That's the question asked to Sabine Herold at an American Enterprise Institute event earlier this week. Sabine is the spokeswoman for Liberte Cherie a French association founded in 2001 in reaction to unemployment rates, falling living standards, strikes, and the lack of free market ideas in the political debate in France . Two years ago, Sabine became famous for leading a demonstration in Paris against strikes by government workers. To the surprise of the organizers themselves, the event attracted more than 80,000 angry Parisians fed up with the almost daily government employees' strikes.

She explained to her Washington audience "I am here today to tell you about my experience as a French and European young woman. The problems you read about in your newspapers are my daily life. I put up with the strikes. I suffer from decreasing standards of living. So, yes, the European Union needs a face lift."

Even European politicians agree that something needs to be done. In March 2000, they committed to make Europe , "…the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion and respect for the environment." While this goal is a noble one, it clear today that there is no chance that Europe will achieve this goal by 2010. In fact, the asymmetry between Europe and the US is widening not closing.

Some of the comparative figures are startling. For instance, per capita economic output in the US in 2003 was $37,600, more than 40 percent higher than the $26,600 average for EU-15 nations. Real economic growth in the U.S. over the last 10 years has been more than 50 percent faster than EU-15 growth in the same period, 3.2 percent average growth compared to 2.1 percent average growth. The unemployment rate in the U.S. is significantly lower than the EU-15 unemployment rate — 5.2 percent in the US versus 8.1 percent in EU15, and 10 percent in France . Also, there is an important gap in the percentage of unemployed who have been without a job for more than 12 months — 11.8 percent in the U.S. versus 41.9 percent in EU-15 nations.

And according to a study by the Swedish think-tank Timbro, France ,Italy , and Germany have less per capita GDP than all but five US states. The European economies are so far behind the US that most European countries will need about 15 years of normal growth in per capita GDP to catch up to where the US is today . Also, Connecticut 's GDP per capita is almost twice as much as the GDP per capita in France and the UK . Finally if France were a US state, it would be the fifth poorest state.

The European Union will never enjoy rapid and sustainable growth — and certainly will not catch the US or stay ahead of Asia — so long as the productive sector of the economy is burdened by excessive spending, taxes and regulation. According to the OECD, the average tax burden in the EU15 — tax revenues as a percentage of GDP — is about 12 percentage points higher than the tax burden in the US . The burden of government in the EU15 — government spending as a percentage of GDP — is also about 12 percentage points higher than the burden of government in the US.

This is not surprising since the average tax burden (tax revenues as a percentage of GDP) in the EU15 rose by almost 10 percentage points from 1970 to 1999. By contrast, it rose 1.5 percentage points in the US . Also, the World Bank Index indicates that business regulation in the EU15 is almost 8 times more burdensome than in the US and labor regulation is over 11 times more burdensome.

More worrisome is that Europe 's birthrate is the lowest ever recorded during peacetime for any major part of the planet. The continent's current fertility rate only reaches two-thirds of the level necessary for long-term population replacement. Also, Europe's population is the world's "grayest", with a median age of nearly forty years and nearly one in six citizens sixty-five years of age or older. This means that on current trajectories, absent massive new influxes of immigrants, Europe 's population is set to age still further and to enter into an indefinite decline. Under the current government pension system, these facts make it very likely that Europe could face conflict between generations.

Unfortunately, European political leaders — especially in France and Germany — do not understand why the economic situation is so bad in Europe . And instead of advocating for less government, they constantly try to export their bad policies to Ireland , the United Kingdom , and the pro-market nations of Eastern Europe . This is the wrong approach. Europe needs less taxes, less regulation and less government spending if it ever wants to become a prosperous and dynamic space.

As Sabine explains, "The carbon copy equivalent of the American dream is the French nightmare." But she does not think the situation is hopeless. She states, "It would be in the interest of the American people to have a prosperous European Union. Can you imagine all the reforms that US politicians would have to put in place if EU became a real competitor? Who knows, the US might even be forced to adopt a flat tax." That would be nice indeed.

Veronique de Rugy is a Research Fellow with the American Enterprise Institute, and studies tax and budget policy and financial privacy. From 2001-2004 she was with the Cato Institute as a fiscal policy analyst.

Her research interests include health care reforms, tax competition, financial privacy, and fiscal sovereignty issues. She is the coauthor of Action ou Taxation, published in Switzerland in 1996. De Rugy is currently on the Board of Directors of the Center for Freedom and Prosperity.

She holds a Ph.D. from the University of Paris-Sorbonne and has previously taught economics at George Mason University, directed academic programs for the Institute for Humane Studies — Europe in France.

The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.

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