Fact & Comment
This past is no path for the future.
European economic growth rates have lagged those of the U.S. for decades. Since the crisis of 2008, for instance, the average pace for the EU has been 0.9% versus almost 2% for the U.S.—and that 2% is regarded as subpar. This EU sluggishness (along with deep concerns over uncontrolled immigration) has spurred the rise of nontraditional, “populist” political movements. And how are existing parties responding? By promoting policies that guarantee even more economic stagnation: more taxes on corporations and the “rich,” more spending for social programs and pensions and more regulations on businesses. As the Wall Street Journal headlined, “Europe’s Political Parties Promise a Return to 1970s—To fend off populists, struggling parties embrace bigger government.”
Yes, our continental friends did do some things right, thanks to the successes of Ronald Reagan and Margaret Thatcher, primarily selling off government-owned businesses and somewhat reducing their sky-high tax rates—especially in recent years—on corporations. However, compared with U.S. standards, the EU’s tax and regulatory burdens are still crushing.
Every one of these countries has fearsome value-added taxes, which are really super sales taxes. In Denmark the VAT is 25%, in beleaguered Greece 24%, in the U.K. 20% and in Germany 19%. The U.S. has no VAT; most states have levies, but none above 10%.
Far worse are European payroll taxes. The American version, dubbed FICA, is 15.3% on the first $132,900 of income and 2.9% on income above that. In contrast, the level in EU countries is, astonishingly, two to three times ours. In France, a sluggish economic performer since the 1970s, the payroll tax is 65%—45% paid by the employer, 20% by the employee.
Regulations, especially those regarding labor, have long been more onerous and severe than those in the U.S. Observers are only halfjoking when they say it’s easier to divorce a spouse than it is to shed a worker in most of Europe. These burdens have been eased only slightly since the 1970s.
Structural changes in pensions for government bureaucrats or in labor laws are fiercely resisted, as any French president can testify. Germany was able to make some reforms in the early 2000s that led to better growth. But they cost the chancellor his job and have been chipped away at since then.
Countries that have upped their economic game a bit in more recent times, such as Sweden, Denmark and Hungary, didn’t go in an anti-Reagan/Thatcher direction.
What we see unfolding in the EU is a form of insanity: Keep applying what doesn’t work, and when that fails, do it some more. It reminds one of medicine a few centuries ago, when doctors would bleed patients: The worse they got, the more they were bled.
This is all the more reason to clear away the trade/tariff uncertainties that are holding back corporate investment. Businesspeople need to know what the rules are before they will commit. Provide those, and the U.S. economy will really roar—and that big success may provide a teachable moment to our floundering friends overseas.