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Aaron McKenna: While the Eurozone is floundering, the US is seeing growth - but why?

The EU needs to either get on with integration, proper banking and political union or separate into amicable trading partners and neighbours, writes Aaron McKenna.

Aaron McKenna

ONE OF THE theories about the decline and fall of the Roman Empire is that its government and citizens became, essentially, detached and lazy. Fed on the excess of success, citizens started to send their servants to fight in the previously Roman-only legions; the bureaucracy running the empire became a massive self-sustaining sapper of energy and its leaders focused on petty agendas. Success can defocus the mind in the way an imminent Carthaginian invasion can sharpen it, and the Roman Empire may well have folded beneath the weight of its own lackadaisical nature.

So, too, the eurozone may be slowly collapsing as our leaders faff about to and from important summits, muddling through one crisis after another with no clear sense of a solution in sight. In the past few weeks the very existence of the euro area, the second largest economy in the world with a GDP of €9.5 trillion, wobbled precariously once again on the strength of a €17 billion bailout of Cyprus, which represents a third of a single percentage point of our shared economy.

Divergence has emerged

The political gridlock surrounding debt crises’ is having an effect on the real economy. The United States and the eurozone used to have a fairly consistent growth pattern, going into recession and recovery together. Since 2010, a divergence has emerged off the back of the eurozone crisis: America is growing at around two per cent per year, with Q1 2013 figures indicating GDP growth as high as four per cent. The eurozone has been in ever-deepening recession since 2011, with data this week showing that manufacturing is slipping further into decline and unemployment has reached the highest level since records began.

Despite the March jobs report for the US yesterday showing a slowdown in hiring, with only 88,000 jobs added, the Q4 2012 real output in the US was about 2.5 per cent above the level in Q4 2007. In the eurozone it’s 2.5 per cent below the 2007 level, and falling. Cumulatively the eurozone is approaching an output gap of €1 trillion this year versus the path of growth that the US has followed.

No one thing ever causes everything, but the eurozone crisis has a lot to do with our moribund economic performance. If a couple of banks in New Hampshire got into trouble it wouldn’t risk the existence of the dollar, or even move the notch too far on the GDP of the nation. The US is a proper economic and political union where Europe is a half-prepared dog’s dinner. We either need to get on with integration, a proper banking and political union, or go our separate ways as amicable trading partners and neighbours rather than sleeping in the same bed.

Political deadlock

For all that growth, the US is a famously politically deadlocked country too, with far more visceral polarisation on display than at any European summit. Look beyond Washington DC however and the country is getting on with the business of business, with individual states trying their best to ignore the manufactured political deadlock in ways that individual eurozone countries like Ireland are failing to bypass.

Pressed to solve their budget troubles and spur growth, individual states are embarking on massive reforms of staid old systems. Forty-five US states are developing new educational curriculums and thirty-eight have reformed teachers’ pay, tying it in many cases to their students’ exam results.

Privatisation initiatives and reform of taxes are being pushed to help infrastructure spending. Louisiana and Nebraska want to abolish personal and corporate income taxes. Kansas has created a post called “the repealer” to get rid of red tape. Investment into research and development is at 2.9 per cent – a level last seen during the space race.

The IMF review of Ireland

For all that we hear positive news about the course of our bailout, Ireland is not doing nearly enough to help steady itself from eurozone shocks. The IMF completed their ninth review of the bailout and had some fairly damning official language to use concerning our failure to address debt overhangs, the unemployment situation, and what The Irish Times’ Dan O’Brien has called the “implementation deficit disorder”. One of the narrative subtexts of the report is a worry that in a moribund European economy, an Irish recovery is uncertain and a reversion to form by the Irish government once the Troika leaves town at the end of the year will hurt us even more.

Progress in dealing with the mortgage crisis is “inadequate” says the IMF. As per usual the local commentariat and politicians are talking the issue to death, but it’s clear that you can’t have a functional economy when so many owe so much they can’t pay back. We need to get on with the business of making insolvency easier. Look at how popular it has been for the former titans of the Celtic Tiger to go to the US and UK to get out of their debtor hell. These economies grow faster because of the flexibility in getting on with life if things go bad for people.

The IMF points out that Ireland stands among Portugal, Italy, Greece and Spain in having some of the highest expected timescales to complete repossessions. You might recognise that group from another band we’re in together. Countries where repossessions happen faster grow their economies faster, such as the Netherlands, US and Australia, where the average time is less than half our own. We need to bite the bullet and solve this problem.

The IMF puts the real unemployment rate, when you count in those ‘underemployed’, at 23 per cent. This is still net of those who have emigrated. Again the government comes in for criticism on its lackadaisical approach to labour market reforms, saying that the capacity of the Department of Social Protection to “deliver services to the long term unemployed is becoming the critical bottleneck” to solving our unemployment crisis.

How is Germany faring?

At home we debate the nuances of reform of the labour market just as hotly as we do insolvency regulation, and again we dither to our demise. Germany reformed its unemployment system a decade ago, introducing the Hartz reforms similar to the type the Troika wants us to implement.

The Germans introduced contracts for people receiving unemployment benefits, reducing benefits for those who would not seek or take work; limited time on benefits; made it easier to hire and fire; and actually cut the dole, to a mere €88 per week plus what we would call rent allowance and the medical card.

To hell with the recession – the Germans have gone from an unemployment rate of 11.4 per cent in 2005 to 5.4 per cent today, which is fully two per cent below where it was when the recession began. The country now has the lowest youth unemployment rate in all of Europe.

The point isn’t that we ought to cut the dole. It’s that reforms – doing something decisive – reap results. The United States is seeing that in its GDP growth where Europe is floundering. Other countries have quick insolvencies where we suffer a massive debt overhang. Germany sees it in its unemployment rate where Ireland’s is only being pinned down where it is thanks to emigration.

We need action in the eurozone, and failing that – or, hopefully, in conjunction with it – a proper zeal for growth focused reform at home. Right now, our political leaders are failing in both.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.

Read: IMF: European help, progress on mortgages crucial to exit from bailout>

Read: Merkel ally admits European authorities underestimated Cyprus ‘mess’>

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