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Editorials, Thursday, 02/10/2000

The Grass Isn't Always Greener
By S.P. Brown

Is the US economic expansion getting a little long in the tooth? According to some market pundits it is. In fact, a growing number of investment advisors suggest cutting back on U.S. equities and putting that money to work in other asset classes, including foreign markets. The European equity market, in particular, has caught the fancy of a few of these nervous Nellies.

The reasons to head across the Atlantic appear logical. The US economy has been hitting on all cylinders for nearly nine years now. It doesn't seem unreasonable to suspect a valve will blow sooner rather than later. There's also all those wonderful economic reforms taking place in Europe, such as the adoption of one currency and the removal of trade tariffs between countries. These seemingly marvelous macroeconomics machinations have convinced many American Europhiles that the "Old World" is destined to become the next economic powerhouse.

Unfortunately, the facts bear otherwise. If you pay attention to the numbers, there's nothing the Europeans are doing to suggest the balance of power is shifting across the pond. In fact, despite all the economic reforms implemented over the past decade, Europe still trails the US in nearly all measures of economic performance.

To begin with, from 1992 through 1999, annual GDP growth in Germany, Europe's most robust economy, has averaged a feeble 1.7 percent compared to an average 3.2 percent in the U.S.

In another measure of economic performance, productivity, the Yanks again take it to the Euros. For most of the decade, the U.S. has posted higher productivity numbers than Europe. Furthermore, in recent years the rate of increase has quickened, as witnessed by last quarter's near record productivity increase of 5 percent.

The reason the U.S. is more productive than Europe is our willingness to embrace new technologies. Total IT spending amounts to roughly 5 percent of GDP in the European Community compared to 8 percent of GDP in the US. What's more, the Euros have been pathetically slow to embrace the Internet economy, which is already saving US businesses billions of dollars annually.

Another measure of economic health is employment. Here again, the Euros can't compete. In December, overall unemployment in Europe stood at 9.6 percent, down from a peak of 11.7 percent in 1997. However, that's still more than twice the US level of 4 percent. In fact, two of Europe's largest economies, France and Germany, still suffer from double digit unemployment. That translates into only 60 percent of working age folks in Europe plying their trade compared to 74 percent in America.

So why are so few Europeans gainfully employed? To me, it's simple: Chronic pro-labor governments, which means rigid labor and product markets, high labor costs, high taxes and scant new investment. France, in particular, is emblematic of the power labor wields in Europe. Things have gotten so out of hand in France that the country's socialist government is working to pass a law cutting the work week from 39 hours to 35, without, may I add, cutting pay. The dopey logic behind the move is that if businesses can only get 35 hours of labor out of each worker, they'll be forced to hire more workers to get the job done. This, in turn, will reduce France's high unemployment rate (Yeah, I thought it was a joke too).

Fortunately, there is one European economy that is bucking the stagnation trend - that's the Irish economy. Since 1994, the land of the leprechaun has been averaging 8 to 9 percent annual GDP growth, outperforming even the venerable US economy. And if you're listening Mr. Greenspan, the Irish economy has been growing at that robust rate with just 1.3 percent annual inflation.

So what's the Irish's secret - low tax rates, flexible labor laws, open markets and an educated workforce. This pro- business stance draws close to $1 billion in direct investment from the U.S. alone.

You would think that Ireland's common-sensical economic policies would be adopted by the rest of the European community. No such luck. In fact, the European community has pressured the Emerald Isle to raise corporate taxes beginning 2002, if it wishes to remain part of the European Union.

Despite the recent successes of Nokia (NOK) and Vodafone (VOD), Europe is still not the place to invest. Those companies are Anomalies, not the norm. If European stocks really were the hot ticket, the continental currency, the Euro, wouldn't have dropped from $1.20 a pop down to $0.97.

So ignore any pro-European hype. The balance of power isn't shifting across the Atlantic anytime soon. European politicians are making sure of that.

 


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