Sunday, November 6, 2011

American and Chinese Realistic Views of Europe

Jim O’Neill, the chairman of Goldman Sachs Asset Management, and Jin Liqun, the chairman of the supervisory board of China Investment Corporation, the country’s sovereign wealth fund, correctly diagnose, together, the two main weaknesses that plague the European economies.

O’Neill notes that members of the eurozone, in its present configuration, cannot hold together, and the more so if it were to put in place a single Treasury, as the French and German say they want to do. A eurozone finance ministry would induce Portugal, Ireland, Finland and Greece to pull out of the single currency. Anyway, only Germany, France and Benelux of the original joiners were the ones that were ideal for a monetary union (I personally doubt very much that this is true of France. But a “mark zone” makes sense, economically).

Jin Liqun on the other hand said, according to a Telegraph article , that:

“I think if you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn out welfare societies.  … I think that the labour laws are outdated – the labour laws induce sloth, indolence rather than hard working. The incentive system is totally out of wack.”

Indeed, several American economists including Edward Prescott and Alberto Alesina have explained the rather low total hours of work of the European population compared to that of the US population as the result of higher and growing taxes on labour in European countries.

These are precisely the two causes of European low growth and unemployment that I diagnosed in my 1998 book “L’erreur européenne” (Euro Error, Algora, 1999) and in several subsequent papers.

But while the “euro error” is now widely recognized, even though its solution – euro exit – is still rejected by politicians and business leaders, the problem of the labour tax is not understood at all. In particular extremely few people seem to understand that the current extensive insurance coverage of health care, and the vertical redistribution of income by which high wages employees pay for a significant part of the health insurance of low wages ones, could be maintained but at a much lower labour tax level, thus encouraging more work and a higher income growth in most European countries.

This will be the next intellectual and political major debate following the structural redefinition or the collapse of the euro. The managers of big American and Chinese financial institutions seem to be more knowledgeable of these European realities than European politicians and business people.

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