Macroeconomic Performance Since 1997: United Term Paper

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Americans receive two to three weeks of paid vacation per year, while Europeans receive between 5 and 7 weeks. In addition, the U.S. has generally 8 paid holidays per year; the comparable figure for Europe is 12 to 18 days (holidays such as Easter and Christmas, plus national days and even the Queen's Birthday in the Netherlands). As a result, Americans average only 10.2 vacation days per year (Zuckerman). Americans work on average nearly 2,000 hours a year, while Germans work about 1,500 hours. This significant difference in hours worked may help to account for a significant portion of the 43% difference in per capita GDP for the two countries.

Retirement Age and Associated Pension Costs third reason are the retirement ages and associated pension costs. Europeans retire at an earlier age than Americans: generally between 57 and 62, while Americans tend to retire between 62 and 65. This difference in retirement age places a double burden on Europeans relative to Americans: with fewer years worked and more in the retirement class, each working European must support more retired workers than their American counterparts. This problem is exacerbated by the fact that Europeans are growing older faster than Americans. The birthrates in Germany, France and Italy are amongst the lowest in the world; with low death rates, the result is an aging population. The figures compare as follows:

Country

Fertility Rate

Germany

France

Italy

United Kingdom

United States

This age pattern will be exacerbated by population trends related to the above differences in primary birth rates between the two areas. The following comparative graph demonstrates that the U.S. is more youthful than Europe, and that this difference will widen, despite the expected continuing aging of the U.S. population:

Nations)

This looming problem of the demographic 'bulge' forces countries of Western Europe to look for alternatives to their current pension and retirement plans. While it is clear in the U.S. that social security and retirement plans must also be addressed, the problem is more urgent in Europe. It is estimated that in Germany, for example, by 2025, each working adult will need to support two retirees on their "pay as you go" system.

Another way to combine income and aging is in the following analysis, which demonstrates that Europe is growing older while income is flattening -- a combination which will make it hard for Europe to maintain, much less advance, its standard of living:

Percentage of the Population aged 65+ versus GDP per Capita (Eberstadt)

Labor Freedom of Movement

There is a significant cultural difference between Europeans and Americans in their willingness to move in order to find better employment. In short, Americans are willing to move, and move much more often than Europeans. Part of the U.S.' advantage is cultural: all Americans speak the same primary language, and a move from, say, the East Coast to the West Coast is much less of a culture shock than moving from Berlin to Madrid.

Another key difference is cultural: Europeans tend to be wedded to a particular region in their country. Generous social welfare programs for 'disadvantaged' areas, such as Wallonia in Belgium or Northern France, tend to provide incentives to underemployed people to remain. This lack of will to move was put in particularly stark contrast in recent years by the reunion of Western with Eastern Germany. Although 2,000,000 East Germans moved to West Germany, 15,000,000 stayed behind, despite considerably higher unemployment and lower levels of income.

European countries are not only split by nationality, but also by regional identity. Spain is a combination of Basques, Catalans and Castilians. France is a combination of Bretons, Alsatians, Normans, Basques, Corsicans and many other regional variations, each of which is more varied than their counterparts in the United States. The Catalans, Basques, Corsicans and Bretons each have their own history, culture, and a distinctively different language (not just a regional dialet) which differentiate them from their putative fellow-citizens.

If anything, the political union of the EU has made these regional differences more stark. An Alsatian's dialect, for example, is closer to Baseler Switzerdeutsch or Luxemburgisch than it is to German or French. A French Basque speaks the same language as a Spanish Basque, even though they belong to linguistically-different countries.

While the dismantling of inner-European borders came with the Schengen accords of 1992, the cultural and linguistic differences make it more difficult for a European to consider a job in another region.

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Resisting New Labor Entrants

Despite the above trends, which demonstrate a decrease in the number of workers in Western Europe, politicians are loathe to allow new members of the EU to send their citizens into their job markets. Germany, for example, has 3.8 million unemployed (2006). Franz Muenterfering, the head of the Socialist Democratic partner of the current coalition government, opposes any easing of Germany's tough immigration policies, even for new entrants to the EU, such as Poland, Bulgaria and Hungary. He and others in his party are calling for "foreigner quotas," which should limit immigration (Expatica). In France, where over 23% of youths under 25 are unemployed, immigrants are particularly frowned-upon. The current level of strikes and violence is primarily targeted against immigrants who, in the minds of many French citizens, take jobs away from natives. Jean-Marie le Pen's support of 15-20% of the voters is due primarily to this wish to prevent immigrants from entering France.

The low birth rate in Germany is leading to the need to increase immigration simply to replace the number of workers it is losing to retirement. It is estimated that Germany needs 300,000 new workers per year in order to maintain a constant workforce. While this is lower than the comparable figure for Japan, at 800,000 per year, the concern is that Germany's politicians will not allow such an inflammatory number of immigrants while unemployment remains so high.

Eastern Europe: France and Germany's NAFTA and Mexico

The European Union has grown in recent years from 15 to 27 members. Nearly all these members have come from Eastern Europe. Many of these nations have average wage and income levels that are significantly below those of Western Europe. The comparison with NAFTA (1992) and Europe (2000) is interesting. The average Mexican per capita income today is $7,180, as compared to $41,000 for the United States. The average Pole today earns $7,880, versus the average German, who earns $33,800. The ratio of income is as follows:

Relative GDP per Person

US - Mexico $7,180/$41,640 15%

Germany-Poland $7,880/$33,800 23%

Population Comparison

US -- Mexico 297M/103M 35%

Germany -- Poland 82M/40M 40%

The U.S. And Mexico have formed a close relationship, with Maquiladoras and joint ventures enriching citizens on both sides of the border. Although there are strict immigration laws between the U.S. And Mexico, the border is nevertheless porous: it is estimated that there are 12 million illegal aliens in the United States, many of them from Mexico.

With this American perspective, one could take a look at Germany and Poland and pose the question: since Germany is short of qualified employees and Poland has a ready supply of workers who would benefit from the higher incomes that they could earn in Germany. As with the U.S. And Mexico, Germany and Poland would also benefit from a European version of the Maquiladora. The rules of the European Union, negotiated at the time of Poland's accession to the Union, preclude many of these free-trade benefits. German and French farmers, concerned about the lower-cost factors of production, pushed to keep out Polish imports of everything from agricultural products to labor-intensive auto parts. Despite the fact that both countries are in the same European Union, tariffs, non-tariff barriers and restrictions on immigration prevent the two countries from coming closer together for mutual economic benefit (Nulle).

This problem has grown worse as poorer and poorer countries have been added to the mix. At the beginning of 2007, Bulgaria and Rumania joined the European Union. While the EU was willing to send considerable "solidarity payments" to those two countries to help them increase their industrial, cultural and legal standing, they proved less willing to allow free movement of goods and workers from those countries to other parts of Europe.

Differences in Budgeting and Monetary Policy

Prior to the introduction of the Euro in 2001, each country could, in theory, change its monetary policy to be able to respond to specific needs in their economy. Those countries which were growing fairly quickly, like Spain, Portugal and Ireland, for example, could run higher deficits and a fairly 'loose' monetary policy, recognizing the need to attract foreign capital (and due to the higher return on capital provided in a faster-growing economy). Those countries which grew more slowly, and/or were concerned about inflation, could run a tighter monetary policy. Germany, for example,.....

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