Europe has been suffering from high unemployment for years. Not just official unemployment figures in the double digits, but real unemployment including those who have given up on finding a job as high as 40% in some countries. Now there’s more bad news coming for European workers – massive layoffs and business relocations.
With most countries like France and Germany having basically stagnant economies with no prospects for growth in sight, the way to increase or maintain profits is to reduce overhead. European GDP growth last year averaged under 2% compared with 4.4% in the US after adjusting for inflation and other factors. Growth in GDP was worst in the continental countries with the largest economies and marginally better in the smaller countries and in Eastern Europe. The really scary thing is that 2004 was the best year so far this decade, an improvement over 2003 which had two quarters at zero or negative growth and overall growth under 2%. Estimates suggest that next year will be like 2003, with zero growth or close to it. When your economy isn’t growing, new jobs aren’t being created and companies begin to look for ways to economize and one of the biggest budget items for most businesses is payroll – hence layoffs.
With stagnant economies European businesses are finding it hard to attract investors, consumers are spending less, and even modest inflation wipes out any increases in purchasing. Consumer inactivity is a particularly bad problem for Europe where manufacturers are finding they have to send products overseas to find markets for them, unlike the United States where companies can count on robust domestic consumption as a baseline for reliable profits.
Americans complain about outsourcing, but our situation is nothing compared to Europe. European companies face the same pressures to economize, and they find it’s just easier to do business in countries with governments which are more business-friendly than the EU, which includes most of the rest of the world. Some European businesses are even finding it profitable to outsource or relocate operations to the US, not because wages are lower, but because there’s so much less overhead from taxes, utilities, inflated union wages, short work weeks, transportation and other basic expenses. The cost of doing business is just lower if you’re not in a major western European nation.
There are two basic types of job loss going on in Europe, layoffs to increase general company efficiency and relocation or outsourcing to other places where it’s easier to do business.
One way to do this is to lay people off if you can find a way to make the business work without them. This is what companies like BASF and Bayer are doing in Germany and IBM is doing at all it’s European locations, laying off as many as 13,000 people throughout the EU.
Outsourcing or relocation is another big issue. Companies like Dell and software giant SAP are moving operations out of Europe to India and some are moving factories from the high cost countries like Germany to more business friendly societies to the east, as Siemens is doing with a move of one of its plants from Germany to the Czech Republic.
Another factor is the desirability of having your production facilities located in places where they can have substantial local sales – especially desirable with the current high gas prices. This makes it attractive to build new facilities outside the EU if you are planning on expanding your business. Building in the US which has more consumers than any other nation makes a lot of sense and more and more European businesses are starting plants here. Poland is also a very attractive destination for relocation or new operations, with a very business friendly government and the most robust consumer economy in the EU.
European governments are making an effort to respond. The most pronounced trend is to cut business tax rates. For some countries – Ireland being a great example – this has worked very well, but most European countries have not beein willing to cut tax rates as low as Ireland’s 12.5%. Even though by early this year most European countries had lowered corporate taxes to below the US, the weak dollar and high price of other basic expenses in Europe still put them at a disadvantage, despite the fact that the 40% average rate of tax on business in the US is much too high.
All of this may be bad for Europe, but it’s good for the US. Despite criticism of President Bush’s deflated dollar, lowering the value of the dollar relative to the Euro makes investment and business relocation to the US very attractive to European and multinational businesses, so to some extent the booming US economy with high GDP growth, vanishing unemployment and even slightly increasing wages, all comes at the expense of Europe. If the process of federal tax reform were to get some legs and result in some lowering of tax rates for businesses this would do even more to strengthen the US position in the world economy and compensate for Europe’s efforts to use lower taxes to slow their rate of economic decline.
For more information on trends in the European economy there’s a very useful report from PriceWaterhouseCoopers with lots of statistical information.
For information on European tax rates see this article from the Progressforamerica.com
NB: The title of this piece was recently changed to suit the content better, and in the second paragraph several changes were made. A reference to 2003 having negative GDP growth in Europe was changed to specify that the negative growth only applied to two quarters of that year, and an erroneous figure for US GDP growth in 2004 was corrected.