Europe under double pressure

Katalin Botos

Public Finance Quarterly, 2008, vol. 53, issue 1, 43-54

Abstract: In the recent few years the per capita GDP level of the old continent has been lagging behind the GDP level of the USA by 25 per cent. Economic growth in the western half of Europe is significantly lower than in the United States and European growth rate stays far behind that of China. If we are looking for the possible causes it is clear to see that the high redistribution level of the European welfare states puts a heavy burden on the European business sector, a burden which harms its competitiveness. Attempts to introduce austerity measures understandably lead to political difficulties. It is quite certain that in the long run the international environment will undergo changes. The United States has taken a budgetary debt path which is considered unsustainable even by Alan Greenspan, the former chairman of FED. The reason: the population ageing of the United States. Even in the United States the burden of social contributions – which is relatively low in international comparison – is likely to grow in the future. The budget deficit in the United States does not represent an operative problem today, because the huge currency reserves of China are invested in US government bonds which are able to finance the above deficit. The widely admired growth rate of China will have its own limitations in the long run. First of all, China will have to spend enormous amounts to solve its environmental pollution problems. China will not be able to do without an institutional social security system as its market development is advancing. In addition, China is also witnessing a rapid ageing. This may necessitate the use of currency reserves for public consump tion, a step which is likely to have consequences on the financing position of the United States. Based on the above, we can state that a careful monitoring of the international financial system and the ageing trend in the developed and fast developing Asian countries will be of fundamental importance for the future of the world and the future of Europe.

Date: 2008
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