The European Union member states and, more specifically, the eurozone, are faced with a number of economic imbalances. The most notable ones are fiscal imbalances and external imbalances. However, the imbalance which I am referring to in the title of this week’s contribution is of another type and I get to it further on.
I start off with last week’s contribution which focused on the existence of a strong dose of immobility in the eurozone. Somehow, it would seem that the eurozone economy is incapable of moving forward.
Developments this week seem to confirm this view. German data shows a drop in business confidence while French President François Hollande has fired his Cabinet following criticism from the outgoing finance minister that France has allowed Germany to dictate matters in the eurozone for far too long.
Hollande has since then appointed a new Cabinet which includes a new Finance Minister. However, the rift between Germany on one side and France and Italy on the other side has not gone away. Germany is still demanding that countries adopt austerity measures to address their fiscal deficit, while France and Italy believe that priority should be given to growth policies and not to fiscal consolidation policies. A long-term economic strategy is not yet in sight.
The EU economy (and more so the eurozone economy) could become the only leading economy on earth that does not demonstrate signs of growth
The German data on business confidence is even more worrying. The drop registered in August is the fourth consecutive one. Moreover, it is being estimated that, following the drop in the gross domestic product in the second quarter of this year, Germany will register zero growth in the third quarter.
The European Central Bank continues to call for structural reforms, even if it now recognises there must be some flexibility in the way rules of the Growth and Stability Pact are to be applied. However, introducing such reforms would mean that certain sectors of the economy would need to give up rights or benefits that they have enjoyed for years. This will make the reforms more difficult to manage. However, countries may postpone these reforms but they will not be able to postpone them forever.
There are three bits of data which may explain the difficulties which the eurozone is facing in moving forward and which may also explain where the main focus of the reforms should be. Gossip says that German Chancellor Angela Merkel keeps these three bits of data in her handbag and quotes them to people whenever she has the chance to do so. So what are these numbers?
1. The population in the EU’s member states is seven per cent of the world total.
2. The countries forming part of the EU produce 25 per cent of the world’s gross domestic product.
3. Welfare expenditure in the EU represents 50 per cent of the total global expenditure on welfare.
This is the imbalance which is referred to in the title of this week’s contribution. That seven per cent of the world’s population absorbs 50 per cent of the expenditure on welfare evidences an imbalance which cannot be sustained for much longer.
This imbalance is further accentuated by the fact there is no relationship between what this seven per cent produce and what they spend on welfare. The EU welfare system is too generous and/or too inefficient and cannot be left as it is today.
It must be understood that addressing this imbalance does not necessarily mean dismantling the welfare system. One can take the example of Sweden which reduced the ratio between public expenditure and the gross domestic product by 20 percentage points, without dismantling their famous welfare system. It simply made public expenditure more productive, which enabled it to reduce taxation and grow the economy.
Not addressing this imbalance means that the EU economy (and more so the eurozone economy) could become the only leading economy on earth that does not demonstrate signs of growth. At that stage the dismantling of the welfare system could become a necessity for survival.