A front-page article in yesterday's edition of The Wall Street Journal addresses this interesting fact:
Residents of the 12 countries using the euro save 10.5% of their disposable income compared with 0.8% for Americans, according to the Organization for Economic Cooperation and Development...In the past three years, the gap has widened. U.S. consumers have increased their spending more than three times as fast as euro-zone residents. This year, overall eurozone consumption is set to grow at only around 1.2% the OECD says, compared with 3.6% in the U.S.
The article suggests that all this saving is bad for economic growth.
While American consumers devour goods from around the world and fuel global economic expansion, thrifty Europeans are contributing far less to growth.
... low consumer spending is impeding Europe's already slow growth -- the region's economy will likely have expanded an annual average of just 1.1% from 2002 to 2004, compared with more than 3% expected for the U.S.
I suppose this old-timey Keynesian notion of demand-driven growth is okay in the very short-run, but eventually more saving means more investment and capital, and higher, not lower, growth (at least until the European economy settles in at permanently higher levels of per capita income). Yet there is no celebration of this possibility in the article, maybe for good reason.
... in the Belgian capital, as in much of Europe, retail laws require that shops close early to save staff from long hours. And tax laws require that [retailers make] a comfortable profit on each item, to limit price competition and protect small stores.
... rules designed to save citizens from harm have conspired with economic consciousness to close wallets in continental Europe. A thicket of laws to protect employees ensnare, keeping prices high and store hours short. Among other regulations, Greece bars non-Greek store names, and Italian supermarkets cannot have gas pumps. Limits on consumer finance protect borrowers from indebtedness -- and stifle the use of credit cards.
Perhaps this is all just a matter of cultural preference.
Europeans tend to see themselves as workers first and consumers second, and they tend to elect governments that protect them from long, irregular hours.
But, of course, there is Ed Prescott's counter.
According to Prescott, the reason for these large differences in labor supply is not culture. “French, Japanese, and U.S. workers all have similar preferences,” he writes. “The French are not better at enjoying leisure. The Japanese are not compulsive savers.” The reason for the wide range in working hours is, in a word, taxes. Europeans supply less labor because there's a much larger wedge in most European countries between what a worker is paid and what that worker actually gets to keep after taxes are taken out. This tax wedge,argues Prescott, distorts the trade-off people make between consumption and leisure by making consumption more expensive. And since people work, ultimately, to earn money to pay for consumption goods, they'll supply less labor if consumption goods become relatively more expensive. The cheaper alternative: leisure. Hello, Riviera.
I have a hard time walking away from the WSJ article without concluding that it supports Prescott's basic position: It's the policy, dummy.
(Here's a suggestion for the next article: What policies make U.S. saving rates so low?)
UPDATE: The cultural explanation for European behavior is the topic of the book The European Dream, by Jeremy Rifkin. This is from Rifkin's website:
Europe has become a giant laboratory for rethinking humanity’s future. In many respects, the European Dream is the mirror opposite of the American Dream. While the American Dream emphasizes unrestrained economic growth, personal wealth, and the pursuit of individual self-interest, the European Dream focuses more on sustainable development, quality of life, and the nurturing of community.
Rifkin clearly has an affinity for his version of the European dream, as indicated in this from the Utne Reader:
While the American spirit languishes in the past, a compelling new dream is coming of age, driven by the rise of the world's other great superpower, the European Union (EU)... Although it is still in its adolescence, the European Dream is the first transnational vision, one far better suited to the next stage in the human journey. Europeans are beginning to adopt a new global consciousness that extends beyond, and below, the borders of their nation-states, deeply embedding them in an increasingly interconnected world.
Ok, here is a really good giant laboratory experiment. Remove all those regulatory restrictions described in the WSJ article and see what choices Europeans make when they are truly free to choose.