The European economy continues to make subtle moves in the direction of more unified and impressive economic growth. Improving economic performance is tied, in part, to strong global economic growth. It is also tied to greater labor flexibility across the Continent than was the case a few years ago. The recent political shift to the right in France suggests that even the French economy might show more signs of growth in coming years than was the broad expectation a year ago.
European economic growth in 2006 was the strongest of the past six years. The more broadly defined 27-nation European Union recorded real (inflation adjusted) economic growth in 2006 of 3.0%. The 13 nations that share the euro currency saw real growth last year of 2.7%.
Growth forecasts for 2007 adopted by the European Commission–the executive arm of the European Union–see real growth near 2.9% for the larger Europe, with the euro currency nations seeing growth of 2.6%. In both cases, growth rates would likely exceed that found in the U.S.
Broad European unemployment was 7.2% in March 2007, the lowest in 14 years of recordkeeping. By comparison, U.S. unemployment is currently 4.5%.
European growth forecasts for 2008 are slightly weaker than expectations for this year. In contrast, most U.S. forecasts for 2008 see real growth returning to near 3.0%.
Various export-dependent European nations, particularly the Germans, are benefiting from strong global economic growth and rising demand for exports. While the stronger euro currency could, in theory, depress European exports, such a development has yet to occur.
Deja Vu
By certain measures, the European economy is similar to where the U.S. economy was 2-3 years ago. Beginning in June 2004, the Federal Reserve–America's central bank–began a lengthy process of monetary tightening in order to minimize inflation pressures tied to solid U.S. economic growth. Such a program is now underway in Europe.
The European Central Bank (ECB) has boosted its key short-term interest rate seven times since December 2005. The ECB announced recently that another 0.25% tightening move would occur in June, pushing the rate to 4.00%. In addition, the Bank of England…yes, that nation's central bank…boosted its key rate to 5.50% recently, a six-year high. The Bank noted strong U.K. economic growth and high levels of business investment as its rationale.
Many economists see an additional move or two before the end of the year. In contrast, America's key short-term interest rate has been at 5.25% since late June 2006 following 17 tightening moves, with many forecasters, including yours truly, seeing a chance for slight Fed ease late in 2007.
Labor Flexibility
So what are the Europeans finally doing right? Besides a boost from strong global growth, the Germans, the Spaniards, and others have introduced greater labor flexibility into their economies. As a result, various European companies are more willing to hire at home, versus shifting current jobs and new hiring to Eastern Europe.
The recent French election also bodes well for French economic competitiveness, although it will be a rocky road. The election of pro-America, pro-free market President Nicolas Sarkozy suggests the French are finally bending to the realities of 21st Century global competition.
Such was not the case over the past quarter century as French leadership saw the French “entitled” to do things their way. Double-digit unemployment and limited job opportunities for millions of young people of recent years finally got the electorate's attention.
Economic futurist Jeff Thredgold is President of Thredgold Economic Associates, a professional speaking and economic consulting company.
Since 1976, Jeff's weekly economic and financial newsletter, Tea Leaf, has been helping people make sense of the tangled maze of the U.S. and global economy and financial markets in a light, approachable style. Sign up to receive the free Tea Leaf email newsletter.
Jeff is the author of econAmerica: Why the American Economy is Alive and Well…and What That Means to Your Wallet (Wiley, 2007), and On the One Hand…The Economist's Joke Book.
His career includes 23 years with $96 billion banking giant KeyCorp, where he served as Senior VP and Chief Economist. He now serves as economic consultant to $50 billion Zions Bancorporation, which has banks in 10 states.
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