Can America Restart the Engine of Growth and Prosperity?

March 7, 2013

Restart the Engine of Growth and Prosperity

With the relative calm in the eurozone lately, one might be led to believe that the worst is over and economic growth is about to ignite. Nothing could be further from the truth.

The latest data on the eurozone show that unemployment increased in January to a record high of 11.9%. This is the highest unemployment rate since 1995, when the 17 nations within the eurozone started to keep record. (Source: Brittain, A., “Unemployment Worsens in Euro Zone,” Wall Street Journal, March 1, 2013.)

Recent elections in Italy revealed the growing anger from the eurozone’s citizens at the country’s lack of economic growth. Italy experienced one of the largest increases in unemployment within the eurozone for January, jumping to 11.7%, an increase of 0.4% from December.

While the European Central Bank (ECB) and politicians in every country have been trying to re-ignite economic growth, the fact is that the eurozone reported a decline in its gross domestic product (GDP) of 0.6% from the third quarter to the fourth quarter 2012.

This isn’t just far from economic growth; it’s a serious contraction. This should worry Americans, because our own economic growth is stalling. If the major industrialized nations have no economic growth, who’s going to pull us out of the quagmire our economy is in?

The ECB still has some ammunition left in its arsenal, since inflation is actually receding. The latest inflation numbers for the eurozone showed an annual rate of 1.8% in February, a decrease from the two-percent level in January. With the ECB holding its main interest rate at 0.75%, there is room for additional monetary easing.

The real question is: will additional monetary policy ignite economic growth within the eurozone? I don’t believe it will, since we’ve already seen a tremendous amount of liquidity added with little effect.

Enacting easy monetary policy to try and generate economic growth is not a long-term solution. If there is a funding or liquidity crisis in the short term, providing monetary policy to ensure stability might be appropriate.

However, using monetary policy to generate economic growth has failed for the eurozone because of major structural problems in the region.

For example, while manufacturing in certain countries, such as Greece and France, has fallen significantly, Germany’s manufacturing sector is actually accelerating. This type of disparity within the eurozone cannot be fixed through monetary policy alone.

While the eurozone’s citizens are upset, voting for politicians who make big promises, yet have no way of delivering on them will only result in disappointment.

For structural reform, hard decisions will have to be made, decisions that will benefit all eurozone members and generate strong, long-term economic growth. The differences between the labor markets across the eurozone alone are quite shocking.

As an example, starting a business within many eurozone nations is extremely difficult. In fact, France’s animosity toward entrepreneurs continues to grow. Since socialist François Hollande was elected President of France, over 5,000 entrepreneurs, business owners, and senior executives have moved out of the country. (Source: Charatelection, S., “In Socialist France, Investors And Entrepreneurs Are An Endangered Species,” Forbes, January 7, 2013, last accessed March 4, 2013.)

Source: http://www.investmentcontrarians.com/recession/can-america-restart-the-engine-of-growth-and-prosperity/1638/

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