Role Models in 'New Europe'

Posted: 16 June 2008

by Ondrej Schneider

The U.S. economy has probably entered a prolonged period of slow growth. Gross domestic product (GDP) grew by a paltry 0.6 percent in early 2008 and may not pick up by much for the rest of the year. While America’s economic woes are mostly home-grown, many policymakers are rightly frustrated by the lackluster performance of America’s chief trade partner, the European Union (EU). If only the EU would grow faster, its appetite for U.S. products would be higher, increasing exports from, and jobs in, the United States. In this context, post-communist “New Europe” could hold the recipe for a successful European takeoff and a boost to U.S. exports.

It’s easy to see why exports are so important for the U.S. economy. The “fiscal stimulus” bill passed by Congress last February amounts to about $168 billion. Many economists question the efficiency of such high fiscal transfers, which often fail to stimulate the economy over the short term, while, over the long term, producing the opposite of the desired effect when taxes have to be raised or expenditures lowered to compensate for the budgetary largesse.

To put this in perspective, last year the U.S. economy exported some $1.2 trillion in goods and $500 billion in services. Higher foreign demand for U.S. exports is almost a silver bullet: it increases domestic income, lowers unemployment and increases tax revenue. It is estimated that fifty percent of the fiscal stimulus finds its way into increased U.S. demand. The same effect, without the unpleasant burden of fiscal debt, could be achieved by increasing U.S. exports by 5 percent.

Obviously however, the federal government cannot simply order foreign consumers to buy more American stuff. What increases U.S. exports most is when key trading partners get richer, as richer consumers are more likely to switch to goods that the U.S. economy is competitive at – like pharmaceuticals, advanced electronics, aircraft and services of just about any kind, from finance and tourism to marketing.

Nowhere is this effect stronger than in Europe. While the EU as a whole grows at about 1-2 percent annually, its newest members in Central Europe have achieved higher rates – some at a tigerish 8-10 percent. High growth in these countries has translated into a growing appetite for U.S. goods and services. In the four years since they joined the EU, American exports to Central European countries exploded: in Slovakia, by more than 400 percent, in Poland by almost 250 percent, and in Latvia by 215 percent. Meanwhile, U.S. exports to Western Europe have grown by 41 percent.

A critic might counter that Central European countries are small and insignificant. And indeed, in absolute numbers, they represent less than 1 percent of total U.S. exports. But reviewing their experiences, one can’t help but wonder how much U.S. exports might grow if the EU as a whole were performing like the Central Europeans. If Western Europeans imitated their neighbors’ pro-growth reforms, demand for U.S. products would likely surge. Indeed, if U.S. exports to the EU as a whole had been growing at the same rate in the period since 2004 as they have been to Central Europe, they would be about $100 billion higher than they currently are. And unlike under the stimulus plan, there would be no future tax bills to pay!

The whole EU will not be able to grow by 10 percent a year, but there is ample room for improving its economic performance and thus stimulating the U.S. (and global) economy. Most politicians in Europe already pay lip service to the pro-growth formula: less government, more markets, lower taxes and lighter regulation. However, actually implementing these policies is another matter. As Luxembourg’s Prime Minister, Jean-Claude Juncker, famously put it: “We all know what has to be done…We just don’t know how to get re-elected after we do it.”

Well, Central Europe may be able to show the way. In recent years, the region has played host to an array of bold free market reforms – some of which were so successful that the governments implementing them not only got re-elected, but actually increased their power base. Most countries in the region now have private pension systems, liberalized financial sectors and simplified tax codes.

If the EU is looking for a role model, it needs look no further than within its own ranks. Perhaps it will take a leader from Central Europe to steer the EU down the path of dynamic reform. Tiny Luxembourg supplied two presidents of the European Commission, the EU’s highest office. Maybe the time has come to turn to one of Luxembourg’s Lilliputian cousins to the East – Latvia, Estonia or Slovakia – for the next president. Doing so might give the EU the impetus it needs to implement real reform. It would also, eventually, benefit the United States.

Dr. Ondrej Schneider is a resident scholar at the Center for European Policy Analysis (CEPA).

The views expressed in this article are those of the author and do not necessarily reflect the opinions of the Center for European Policy Analysis.