November 10th, 2011
03:30 PM ET

Europe's real problem: Lack of growth

By Fareed Zakaria, CNN

I was in Germany this week and the mood there is pretty grim: Europe is facing its most severe challenge since 1945. If the Greek crisis morphs into an Italian crisis - Italy being too large to bail out - the entire structure of post-World War II Europe could unravel.

Finally, European leaders seem to recognize that their strategy of kicking the can down the road has not worked. The result will not be a dramatic solution - that is not how Europe works - but, more likely, a series of steps that together will be more comprehensive than anything done before. But they will not address Europe's core problem: a lack of growth.

The Europeans - by which I mean the Germans - are trying to find some solution to this crisis that will not let countries like Greece and Italy off the hook. Germans feel these countries need to feel the pressure - only then will they reform their budgets and their habits. So the solutions will be complex - trying to stop a crisis while not bailing out these countries entirely.

The real problem - however - is not so much that Greece has been unwilling to make sacrifices. It has made many. But Greece's budget numbers look bleak because its growth forecast looks bleak. It needs to address a much larger question of competitiveness. What can the Greek economy do to attract capital and investment? And at what wage levels? These are questions most European countries will need to answer to fully solve their problems.

Italy's economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade. Even Germany is not immune, with an average growth rate of only 1.5%. German officials know that with a declining population, in five to seven years the country is likely to grow at an annual rate of just 1%. That's not much of an engine for Europe.

Europe needs a crisis agenda to get out of its bind, but beyond that it needs a growth agenda, which involves radical reform. The fact is that Western economies - with high wages, generous middle-class subsidies and complex regulations and taxes - have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world).

If Europe - and, for that matter, the United States - cannot adjust to this new landscape, it might escape this storm only to enter another.

For more on this, read my column in The Washington Post. For more of my thoughts throughout the week, I invite you to follow me on Facebook and Twitter and to bookmark the Global Public Square. Also, for more of my takes, click here.


soundoff (366 Responses)
  1. Roland

    The birth rate is a real long term obstacle to growth there are no babies being born.Germans,Spanish,Italians will not even be around in a couple of decades if this low birth rate trend continues.We need at a minimum 2.0 child per woman just to naturally replace the people already present.And migration for Europe has turned into a huge disaster of epic proportions.Europe's problem is that it only attracts low educated Muslims or Africans as migrants.Otherwise migration could help but we know that the migration of the past few decades has actually been a drag on European countries costing more then migrants put back into the system.And Europe is unlkely to attract other migrants.So Europeans will start to have babies again.We can solve everything else but not if we simply go extinct.

    November 12, 2011 at 4:34 pm | Reply
  2. World Debt

    Growth cannot happen unless capital is available. Capital cannot be available as long as enormous debts are in play. Solve the debt problem and provide capital formation and we will see growth. Only thing that can do this is global debt realignment. http://www.debtrealignment.com

    November 12, 2011 at 4:43 pm | Reply
  3. Bernard

    Time to start the cloning program

    November 12, 2011 at 4:49 pm | Reply
  4. J

    Ya know, u ppl can be down on Obama allday but in the end, he tried his best and this economy just isnt fixable you people need to quit demanding things from the guy he tridd his best OK!

    November 12, 2011 at 5:15 pm | Reply
  5. david

    Maybe if Germany would share some of the manufacturing output around the EU. But unfortunately, an unhealthy Germany is a dangerous Germany.....so we will always let them be wealthiest kid on the block.

    November 12, 2011 at 5:25 pm | Reply
  6. Pitdownman

    In life there is birth, growth and death. In civilizations there is birth, growth and collapse. Welcome to the collapse.

    November 12, 2011 at 5:29 pm | Reply
  7. Cassandra Chu

    No offense, Fareed. But Europe's real problem is Israel. Hate to break it to you.

    November 12, 2011 at 5:58 pm | Reply
  8. peterr54

    The problem with Europe is like the elephant in the room.
    Governmental ineffectiveness and bureaucracy.

    The procrastination demonstrated by the ludicrous handling of the bankers (debt) crisis should make Europeans wonder if they are better off without any government than those they elect into office.

    Why can't industry, finance, life sciences and commerce deal directly with strongly organized labour?

    Cut out these bungling middle men and their "civil service" who merely tax those contributing to real GDP, while failing to protect private pensions and accrued welfare rights. They debate and pass bills which secure their own jobs with index linked pensions with an array of (tax exempt) perks and benefits?

    As Oliver Cromwell famously said:

    "YOU HAVE BEEN SAT TO LONG HERE FOR ANY GOOD YOU HAVE BEEN DOING. DEPART, I SAY, AND LET US HAVE DONE WITH YOU. IN THE NAME OF GOD, GO!."

    Addressing the Rump Parliament. April 1653.

    November 12, 2011 at 6:13 pm | Reply
  9. Paul

    So what are you saying Mr. Zakaria? If Europe's problems are 1/3rd demographic and 1/3rd growth – I know you and many like you would suggest Europe should open its doors to a floodgate of useless, poor, lazy, unskilled Africans and Middle-easterners (and Turks). There are already way too many such people on state welfare schemes. The problem of debt is not limited to regions and countries with poor demographics. The real tsunami will soon come from the US – a country with favorable demographics and growth (as soon as the politics gets sorted out). That's one of the problems of European countries – politicians have over-promised and over-delivered on all kinds of benefits. This crisis is the only way for some countries to 'wake up' and radically restructure their social bargains, work cultures and economies. The European project is a fantastic success already but they did miscalculate the currency union – at least they are trying to fix it. it's not easy to calibrate a dozen soverign countries. In America, we can't even get two parties in ONE country to agree on anything. Yes, Europe does need to grow – the central and eastern countries can be that engine. The European project can only get stronger and better – and as standards of living rise in growth markets, the per capita wealth indicators for Europe will get better. Assuming the PIIGS can deliver on their austerity promises, I predict Europe will emerge a stronger, more unified, and more financially secure union in three years. I am not saying the debt will vanish but three years is the inflection point at which the achievements will start paying dividends – and the Europeans must be careful not to allow each other to slide into complacency. Keep demography out of this – it suggests a rationale for a pyramid scheme – like the one we have in the US.

    November 12, 2011 at 6:23 pm | Reply
  10. Ken

    Yes lack of growth is a big problem But the question is WHY aren't the economies growing. And he mentions some items related to slow growth such as an aging population, stagnent or declining population growth, wage rates versys globalization, and lack of competiveness. But he fails to point to one of the biggest drains on every country. And that is the massive social progams and the taxes and fees taken from the populace to pour into those programs. Ever dollar they take out of the hands of wage earners to support health care and pensions and a whole slew of other items is a dollar never spent on consumer goods. And that lack of consumer spending destroys growth prospects. Look at the US where 2/3 of the economy comes from consumer spending. And compare that to Greece where, due to all the programs and overly generous benefits, 2/3 of the economy is driven by Government spending. THAT is the biggest issue in Europe. Socialist agendas and programs have failed, and no one wants to admit it. But until they do, the problems will simply continue to pile up and grow year by year until every single country on the continent fails. And as a warning for the US, remember Obama has based his policies on what Europe has done. And you can see how well Europe is working out. Think it through, and you will have to realized if you have even a couple working brain cells that Obama's programs are doomed to the same long term failure as in Europe.

    November 12, 2011 at 6:24 pm | Reply
    • nigel

      This argument is a non-starter because the "socialist" policies have been in place for most of the 20th century, and continue to work well in most of Europe. And if socialism is to blame, why did Vietnam and China grow at 6+ and 10+% last year, respectively? Last time I checked, these were purely socialists countries, not social democracies as in most of Europe. I could just as well blame democracy for Europe's issues.

      November 12, 2011 at 7:28 pm | Reply
  11. Sharang

    It seems to me that most of the comments on this article have one thing in common: "Population Growth". The readers think that population growth is the major (or only) issue for all this economic crisis.
    While it maybe considered an issue to some extent, the major PROBLEM in European Union and USA is "FREE Social Security/Government benefits".. Governments spend a MAJOR amount from their budget on unemployment benefits, healthcare, social benefits (which goes to bums). Even if the govt. doesn't have enough money to provide these benefits,it take LOAN from other countries and increase their Debt. Hence, the DEBT crisis in EU and USA.

    A solution to the debt problem is to reduce all the SOCIAL BENEFITS and increase TAX on rich people. Peace.

    November 12, 2011 at 6:54 pm | Reply
  12. nigel

    Growth for the sake of growth is the ideology of the cancer cell. –Edward Abbey

    November 12, 2011 at 7:01 pm | Reply
    • Occupado

      Especially when that growth is in the public sector.

      Talk about a cancer.....

      November 12, 2011 at 8:09 pm | Reply
  13. intcamd1

    Is this any analysis? That Eu needs growth? Is there any place, which in trouble could NOT benefit from growth? What an idiotic comment?! The question is, how will the growth come about, if there are structural obstacles in EU (there are), and how to fix them; instead, Fareed thinks his great diagnosis is, they need growth. Brilliant. So, they got into this mess because they were not growing, presumably?! If so, any solutions or insights on how they can grow?

    November 12, 2011 at 7:16 pm | Reply
  14. Rick

    People are forgetting something, economic growth actually leads to population growth as well as the other way around. But It is not necessary for one to precede the other. Currently population growth in the western world is falling as a result of the recent economic problems.

    November 12, 2011 at 7:50 pm | Reply
  15. Occupado

    How do you grow an economy when all the taxes go to the public sector union juggernauts? The public sector does NOT create wealth. In fact, it's a drag on the economy because it sucks money away from the private sector.

    Are you paying attention, America?

    November 12, 2011 at 8:08 pm | Reply
    • marty rogers

      brainwashed.

      November 13, 2011 at 4:31 pm | Reply
  16. QuietStormX

    I feel that if the lowly republicans get the chance to take over, they will not lead us forward and clear of any threat from this effecting Europe.

    November 12, 2011 at 8:24 pm | Reply
  17. Mahmoud El-Darwish

    An excellent article. Is there no way that a repeat of the saving grace that partially rescued the UK from economic calamity in the 70's could help bootstrap a Eurozone recovery? I speak of the investments that oil-rich countries made in the UK, albeit, by buying assets previously thought to be too 'English' to share with the Arabs. I forsee a major release of assets and treasures previously 'untouchable'.

    November 12, 2011 at 8:30 pm | Reply
  18. gravy86

    SNOOORRREEE Zaharia. The real problem is debt currency. Banking system puts all countries into massive debt. That's why EVERYONE is in debt. Where is all the money? Google "usury."

    November 12, 2011 at 8:43 pm | Reply
  19. william gundry

    The problem is being looked at from the surface. In terms Of dynamics it fails. The new world order topologically was necessary, since the givens of the way things work were misunderstood and misapplied. They became static, worn out theories. In the new dynamic, has to be tried. Cataclysmic ones at that. Immigration, system models based on linear predictions, growth critiques, and wealth distribution assessments all fail in a new dynamic. The new dynamic is the closing of the perimeters, (they will work themselves out) since variables such as wars and their effects, major ecological disasters, and total social breakdowns have more or less been ruled out. The key to the new dynamics is certainly individual, grass roots, regional assessment-new technological transformational developments- such as replacing old worn out views of home construction. The suggestion to wipe out debt is completely irrational, the re-introduction of value transformation- especially construction of affordable housing and the production of cheaper food- will ensure that our system of laissez faire can survive. It is at a breaking point, and projecting problems to Europe is not the answer, because for 50 years Europe has looked to us for answers. Modular construction with subsidies and farm aid should complement corporate bail out, and cheaper home affordability should not pose a problem to traditional construction and real estate commerce. Wages are too high in the west? Let them float internationally, but create vast projects in conjunction with international organizations of development to sell vastly cheaper. If not, the deflation cycle may be difficult to stop even with other sets of trillion dollar bail out, and consequent inflationary pressures may not bring these deflationary pressures to ease.

    November 12, 2011 at 8:51 pm | Reply
  20. hope

    Eventually, we will run out of resources. Most people in this country already have more junk than they know what to do with. Storage units are one of the biggest growth industries recently. I don't think that makes anyone better off. Without growth of the economy, the current system will collapse. Decaying money is the only solution that I am aware of.
    http://www.realitysandwich.com/sacred_economics_ch_6_usury

    November 12, 2011 at 9:04 pm | Reply
  21. ss

    If the austerity measures implemented on Greece don't work.. not only Europe will be in trouble the problem will trickle down to US and directly affect the financial matters in the US.

    November 12, 2011 at 9:45 pm | Reply
  22. FZM

    "If only we could GROW the economy,..." Doesn't anybody at all in the media recognize this for the misdirection it is? Spend to match the economy you have, rather than bouncing checks off of MY as-of-yet unearned wages!

    November 12, 2011 at 9:46 pm | Reply
  23. MidWestern Boy

    Europe's problem and one increasingly common in the U.S., boils down to too many people taking too much out of the pockets of workers. Without free monet for virtually anyone that applies for it, people would need to WORK. Look up ther definition of the word, Maybe people would need to wash dishes or work in the farm fields, but if it came down to starving or working, they would work. Our first waves of immigrants, without the so called 'safety nets' that exist today, were OK with this reality and they worked hard and built America.

    November 12, 2011 at 9:51 pm | Reply
  24. billtomlinson

    I'm not quite sure why Zakaria thinks 1.5% growth is not adequate with a declining population. If, for instance the population is declining at a 1% rate, then that is approximately a 2.5% growth rate per person, not so bad. A 28% increase every ten years. It's not dramatic but it's not a decline.

    November 12, 2011 at 10:09 pm | Reply
  25. YounanMarketingAndManagementAssociatesInc,Int'l Intst'r

    Re: Occupado commentator – on sunday the 6th of november i was downtown to shop a bit and the army group was marching parado style it looked like not parade/u.s./canadian flags. they looked cute though.there were girls and guys and younger and older and i don't know if there were any a.c./d.c.'s in the troop group but it looked kind of cute.

    November 12, 2011 at 11:26 pm | Reply
  26. fixingstupid

    Europe's problem = Socialism.

    THEY FINALLY RAN OUT OF OTHER PEOPLE'S MONEY – warning sign for the US.

    November 12, 2011 at 11:46 pm | Reply
  27. Jack Luminous

    It's astounding that all of this grief is because several countries in a group owe monopoly money to each other. That are loans? Money created out of nothing and brought into being as per our current system. People suffer and die because of this system that doesn't even factor natural /actual resources into it's equations. Unreal.

    November 13, 2011 at 12:19 am | Reply
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