Europe Slips Further Behind

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Registered: 06-17-2004
Europe Slips Further Behind
Sun, 08-29-2004 - 11:46pm



Europe Slips Further Behind U.S. in Economic Competitiveness http://quote.bloomberg.com/apps/news?pid=10000085&sid=a2a2H84mLhIw&refer=europe

Aug. 30 (Bloomberg) -- 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.


After lagging U.S. growth through the 1990s, European Union leaders embarked in Lisbon in 2000 on a plan to turn the bloc into what they called in a joint statement ``the world's most competitive knowledge-based economy'' by 2010. Europe has outgrown the U.S. only once since then, in 2001. The EU predicts growth of 1.7 percent for 2004, compared with an expected 4.2 percent for the U.S. For 2005, the EU expects the economy to grow 2.3 percent, lagging the expected 3.2 percent growth rate in the U.S.


President George W. Bush, who is set to win nomination for a second term at this week's Republican National Convention in New York, is campaigning on an economy that has added 1.24 million jobs so far this year and a jobless rate that fell to 5.5 percent in July. European unemployment was unchanged at a 3 1/2-year high of 9 percent in June, the latest available figure.


``Unless EU governments start doing their homework, we will never be able to compete with the U.S.,'' said Reinhard Kudiss, an economist at the BDI association of German industry in Berlin, which represents 107,000 companies including Siemens AG and DaimlerChrysler AG. ``Foreign investors will judge us by the pace of change and we can't afford any more years of standstill.''


German Chancellor Gerhard Schroeder's plans for cuts in jobless benefits to curb spending are meeting weekly street protests. France's employers are hamstrung by a 35-hour workweek. Italy, Europe's most indebted nation, has promised tax cuts without saying how it will pay for them.


`Gap Won't Narrow'


``If we keep going forward like this, the gap won't narrow: it will grow,'' Rocco Buttiglione, Italy's European Affairs Minister who will become EU Justice Commissioner in November, said in a telephone interview in Rome. ``There has to be a strong political will to make reforms and invest in the future.''


Since the beginning of 1999, when the euro was introduced, the Dow Jones Average has risen 11 percent. Europe's Dow Jones Stoxx 50 Index has lost 20 percent in the period.


Europe's economic growth unexpectedly slowed to 0.5 percent in the second quarter, as a pickup in exports failed to stoke job creation and consumer spending.


``Governments simply have no choice but to move ahead with economic changes if they are serious about growth,'' said Thomas Mayer, chief European economist at Deutsche Bank AG in London, in a telephone interview. ``In the meantime, companies remain focused on export dealings. That's what you do when economic conditions at home aren't good enough.''


Election Losses


The parties of Schroeder, 60, French President Jacques Chirac, 71, and Italian Prime Minister Silvio Berlusconi, 67, lost support in European elections on June 13. Schroeder's Social Democrats scored their worst result in a nationwide election since World War II, polling 23.2 percent, as voters protested the jobless rate and the cuts in benefits.


In France, Chirac's allies won 37.4 percent, lagging the Socialist-led opposition with 41.6 percent. Support for Berlusconi's Forza Italia fell to 21 percent, eight percentage points lower than in the 2001 general elections, weakening his grip on power as coalition partners demanded more say over policies including a pensions law and plans to cut taxes.


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.


Labor Costs


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.


For German corporate standard-bearers such as Siemens and DaimlerChrysler, the only expansion is abroad. With German unemployment at 10.6 percent, the most workers can hope for is to keep their jobs. Munich-based Siemens won an extension of the work week at two phone factories to 40 hours from 35 hours at no extra pay after threatening to cut 2,000 jobs there.


Schroeder's law reducing jobless benefits from January 2005, the first cuts in unemployment welfare since World War II, prompted thousands to take part in Monday demonstrations throughout August in east German cities including Leipzig and Berlin. Protesters threw eggs at the chancellor during an Aug. 24 visit to the eastern city of Wittenberge.


Support for Schroeder's Social Democrats was 24 percent in a survey by polling company Infratest-Dimap published August 29, compared with 38.5 percent in elections two years ago. The poll of 2,500 voters carried a margin of error of 2.5 percentage points.


`Overdue' Welfare Cuts


The cuts in unemployment benefits ``are highly overdue,'' Norbert Quinkert, the head of Motorola Inc.'s German unit, said in an interview. ``They will raise the pressure on the jobless to take up work. The government must not let up in those efforts.''


``Lobby groups, especially labor unions, still exert too much influence, so that companies' investment plans often get clouded by unnecessary haggling,'' said Quinkert, whose company employs 3,500 people in Germany. He said he gets frustrated with the slowness of decision-making in Europe: ``In the U.S. decisions are simply taken more quickly,'' he said.


Schroeder said on July 10 that he will focus on putting into practice laws already passed, rather than trying to win support for more cuts in welfare or an overhaul of labor restrictions.


German industry says that's not good enough.


``Schroeder's welfare cuts can only mark the beginning of more far-reaching changes,'' said Kudiss at the BDI. ``New laws on other burning issues -- for instance health, pensions and even taxes are just as important.''


Domestic Demand


As the government puts off further action, there is little to breathe life into domestic demand, which contracted in the second quarter as exports drove economic growth. German business confidence dropped for a third month in four in August as record oil prices threaten to further hurt consumer spending.


``The economic outlook for Germany, then, is pretty grim,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. ``German companies producing goods and services for the domestic market will remain in trouble.''


In France, unemployment rose to 9.9 percent in June. Chirac's government says a law reducing the statutory work week to 35 hours from 39 hours has curbed households' purchasing power, hurt government finances and driven some companies to relocate abroad.


France's Work Week


Even so, Chirac said last month he won't revoke the legislation introduced by the Socialist government that preceded his. Instead, he plans to encourage labor unions and business federations to come to their own arrangements as he seeks to prevent companies from moving jobs abroad.


``We need less taxes and more freedom for employers so that they can negotiate labor rules with their employees,'' said Jean- Francois Roubaud, head of France's largest federation for small and medium-size companies, in a telephone interview in Paris. ``We have too many taxes, too many labor restrictions and France is over- regulated.''


Finance Minister Nicolas Sarkozy has called for changes to the law and plans steps to narrow a budget deficit that the government predicts will exceed the EU's limit of 3 percent of gross domestic product for a third year in 2004, after reaching a seven-year high of 4.1 percent of GDP last year. He may leave his post to run Chirac's party in November.


``Sarkozy's departure would slow down reforms, because he's tenacious, popular, and has strongly spoken in favor of freezing spending and trimming the deficit,'' said Maryse Pogodzinski, an economist at JPMorgan Chase & Co. in Paris.


Tax Disadvantage


France's corporate tax rate is 35 percent, compared with a median rate of 19 percent among the eight Eastern European countries that joined the EU on May 1.


``The tax pressure on companies and individuals who make money is so heavy that there is no incentive to invest,'' said Yves Bouget, founder and chairman of HF Company, France's No. 1 maker of automated appliances including interphones and remote control devices for television sets.


``The government needs to reduce taxes on profit,'' said Bouget, whose company is based south of Paris in Esvres sur Indre and has units in Spain, Italy, Belgium and Poland. ``One shouldn't be surprised if the French economy doesn't create value or growth.''


Berlusconi's Pledge


In Italy, Berlusconi has resorted to more confidence votes this year than in any other since coming to power in 2001 in order to get laws through parliament. In July, he called a confidence vote to pass a bill aimed at curbing the most expensive state-run pension system in the EU. He has so far failed to deliver on a three-year-old campaign pledge to cut income taxes.


His government is also stalling on a new corporate governance law promised after the bankruptcy of Parmalat Finanziaria SpA, the country's biggest food company. Threats by his coalition partners to pull out of the government led to the July 3 resignation of Berlusconi's finance minister and ally, Giulio Tremonti.


``Berlusconi's in a very weak position at the moment and is struggling to hold his government together, never mind passing any important legislation,'' said Alessandro Truppia, chief economist at Aletti Gestielle Sgr in Milan.


``All he cares about now is getting tax cuts through because he knows that if he doesn't he's killed his chances at re- election,'' Truppia said. ``The problem is that it's going to be a huge strain on the treasury's purse-strings. With the economy still weak and the debt being what it is, cutting taxes now seems very, very difficult.''




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