Debunking the European productivity myth

I had a bit of a ding-dong with an old mate the other day.

He's French and by his reckoning, the British shouldn't be quite so smug about their recent economic achievements.

"Look at your government", he said.

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"It's on course to produce a deficit of 6% of GDP this year. Even though Europe is in virtual depression, we're only running a 3% deficit!"

Then he asked me what I thought of the growing productivity gap between the UK and the eurozone. It's hard to argue that one. According to the Office for National Statistics, both French and German workers now produce 24% more per hour than a UK worker. That's some statistic!

But, as I pointed out to my old French mucker, there's a very good reason why productivity is so much higher in France.

And it's really not a good thing at all

It was my article last week that got him rattled.

I suggested the eurozone was "obscene" or, at least, that the growing level of youth unemployment was.

So, let's get down to brass tacks... why exactly is youth unemployment becoming such a problem in the euro area? And does it have anything to do with the productivity gap?

Well, just have a look at the chart below. It all comes down to wages.

Europe: who's getting paid what?

Source: Eurostat

What you can see above are three distinct groups (well, apart from Norway but let's forget about them for now. They're a special case one we won't tackle today).

Sloping off towards the right side of the chart, there's the former Eastern bloc countries and a select few peripheral nations, where wages remain low (by our standards).

Then on the left-hand side of the chart there's the rump of Europe where, once you add in taxes, labour costs are getting pretty spicy.

Last, there's the UK, where you can lop off about a third on labour costs compared to the rump of Europe.

So, what does this tell us?

Some countries haveto be more productive

Well, just look at some of the more expensive countries.

When you've got sky-high labour costs, is it really surprising that business owners need to find ways of making the workforce more productive?

Owners will do anything to avoid paying workers these wages. How? By investing heavily in plants and machinery exactly the sorts of things that boost productivity.

In nations like Germany, that's no problem. In fact, it's great. As an exporting country, there are plenty of jobs for both German robots and young people.

But that's not the case in many other nations of Europe. There, expensive labour costs simply mean fewer jobs and any jobs that do remain have to be very productive in order to make the employers' costs stack up!

The fact that the UK can claim lower labour costs (on average) means it's often just as cost-effective to employ people as machines. The result? More jobs for the people, young and old.

Actually, now that we're on the topic of European problems, there's something else that's been bugging me.

I'm getting sick of the eurozone

As you might be able to tell, I'm growing increasingly Eurosceptic.

Not because I'm some sort of little Englander far from it.

It's because I just can't stand to look at an economic system that so clearly doesn't work a system that looks increasingly like the awful centralised Soviet system that took so long to collapse.

A political system that edges out free markets not only feels like a bad idea, it's increasingly proving itself to be a bad idea too.

As I pointed out last week, the single currency idea is fundamentally flawed. There's no mechanism to repatriate money that flows into stronger nations back to the weaker ones. Only by having political unity can such a thing work, and that's exactly why the central planners in Brussels are surreptitiously pushing ever closer towards that goal!

My Euroscepticism has nothing at all to do with immigration, either... something that is generally a very positive thing.

For me, it comes down to one thing: each European nation already has its own government and already, these institutions are overbearing.

Why on earth would you want another one on top?

We should be thankful for the productivity gap

Here in the UK, many people are becoming agitated and disgruntled about Europe.

But in reality, we have far less to complain about than those in the southern states of Europe who are really enduring the pain. At least we don't labour under the flawed currency system.

We should celebrate the productivity gap. We should celebrate low and competitive wages.

Sure, these jobs may not be producing enough taxation to balance government spending

But hey that's a problem caused by too much government! And also by the fact that we're doubling-up on bureaucrats by forking out for the guys in Brussels too.

We don't need Europe. And Europe doesn't need Europe either. As Matthew Lynn pointed out in a fine article in this week's MoneyWeek magazine (subscribe to MoneyWeek magazine):

"Despite all the heat the issue generates, in reality whether we are in or out of the EU probably doesn't make much difference to the economy. Free trade within Europe, as in the rest of the world, is regulated by the World Trade Organisation (WTO)... Germany is unlikely to want to pull out of that, there won't be any trade barriers if we do leave."

There's bound to be a heated debate about Europe as we run up to the general election. And whatever happens, there will be implications for our investments.

I'll look at that in greater detail next week. Until then, share your thoughts with me and other readers by leaving a comment below.