Learning from Europe

Thanks to Greg Mankiw for the true GDP per capita data.

Here is GDP per capita, adjusted for differences in price levels (PPP), from the IMF, for the United States and the five most populous countries in Western Europe:

United States 47,440
United Kingdom 36,358
Germany 35,539
France 34,205
Italy 30,631
Spain 30,589

Readers of today’s column by Paul Krugman might find these figures useful to keep in mind.

France wriggles free from Brussels bureaucracy…

Who said the Europeans don’t believe in fiscal stimulus?:

The cost of a long lunch in a French bistro should become significantly cheaper after Paris won a seven-year battle with the European Union to allow it to slash the value-added tax on meals.

But how to pay the unpalatable €3.25bn ($4.2bn) bill taxpayers are being stuck with is prompting a debate over just what price to extract from the French restaurant industry.

France savoured victory last week when it finally won German approval for President Nicolas Sarkozy’s plan to cut VAT on restaurant meals from 19.6 per cent to the EU minimum of 5.5 per cent.

The article is interesting throughout. Here are previous installments in the series.

[From The culture that is French, a continuing series]

Eurozone survival?

James Kwak at Baseline Scenario provided the above chart of Greece vs. Germany spreads on ten-year sovereign debt. Will the Eurozone common currency survive?

Back in the exciting days of October, Peter, Simon, and I wrote an op-ed in The Guardian about the potential for cracks to appear in the Eurozone, even possibly leading to one or more countries withdrawing from the euro. With so many other things to worry about, this scenario didn’t get a lot of attention. Since then, pressures have been slowly building. For example, the spread between the 10-year bonds of Greece and Germany has grown from around 30 basis points during most of the decade to over 1.5% now. (The picture below is from last week.)

Enlarging the Atlantic Alliance

An excellent op-ed by Ruppert Murdoch:

Unfortunately, far from reflecting our unity, NATO’s entry into Afghanistan has exposed its divisions. Instead of standing together as full and equal partners, a handful of alliance members are bearing the brunt of the fighting. Defense Secretary Robert Gates has said that the lack of equal burden sharing threatens the future of the alliance. He is right.

We must face up to a painful truth: Europe no longer has either the political will or social culture to support military engagements in defense of itself and its allies. However strong NATO may be on paper, this fact makes NATO weak in practice. It also means that reform will not come from within.

…Right now the U.S. has a test in its own backyard. Colombia is a nation that is fighting poverty, battling the drug lords, and taking on terrorists backed by foreign governments. Its citizens have suffered terribly from violence, and want peace and opportunity. So its brave and innovative president, Álvaro Uribe, is trying to bring the rule of law to people who have not known it.

All President Uribe asks of us is that we ratify the trade agreement we have negotiated with his nation. By ratifying this agreement, we would open an important market for American goods. We would demonstrate to millions in our hemisphere that the path to prosperity lies in freedom and democracy. And we would give strong moral support to a leader struggling to bring hope and opportunity to his people in an important part of the world.

Everyone knows this, Democrats as well as Republicans. Yet House Speaker Nancy Pelosi has effectively put off the bill by not scheduling a vote. We need to make clear to the leadership in Congress what killing this trade deal would mean.

Throughout Colombia, a defeat for the trade deal would be confirmation that the U.S. is not an ally you can count on. Throughout Latin America, a defeat for the trade deal would be exploited by thugs like Venezuela’s Hugo Chávez, who would tell the people, “See, the Americans will never accept you as equals and partners.” And throughout the world, a defeat for the trade deal would be taken as another sign that the U.S. will not stand by its friends when the going gets tough.

Arturo Sarukhan, Mexico’s ambassador to the U.S., puts it this way: “The most important geopolitical mistake the United States could do today . . . is not ratifying that treaty.”

EU on Iran: enough bomb-grade uranium by Y/E 2008?

As CONTENTIONS readers know, the American intelligence community, in an NIE released last December, stated that it had “high confidence” that Iran shelved its nuclear weapons program in fall 2003. As Director of National Intelligence Michael McConnell testified at the Senate Intelligence Committee this month, weapons design is “the least significant” portion of a nuclear weapons program. The most important is obtaining fissile material. In Iran’s case that would be enriched uranium.

The NIE talked about that issue too. It said that Tehran would probably be able to produce enough uranium for a single bomb sometime “during the 2010-2015 time frame.” Yet not everyone agrees with this view. “New simulations carried out by European Union experts come to an alarming conclusion: Iran could have enough highly enriched uranium to build an atomic bomb by the end of this year,” reports Spiegel Online.


Michael McConnell raises the point that has been obvious to all observers paying the least bit of attention to Iran’s nuke program. Isn’t it astonishing that media outlets endlessly parrot the words of the unclassified summary of the NIE — without ever thinking about what it means? One has to conclude that the reporters are rather dim bulbs, or that they have a party line to defend.

OECD report: stop biofuels subsidies

From the Summary and Discussion:

Biofuels have been championed as an energy source that can increase security of supply, reduce vehicle emissions and provide a new income stream for farmers. These claims are contested, however. Critics assert that biofuels will increase energy-price volatility, food prices and even life-cycle emissions of greenhouse gases. This paper presents salient facts and figures to shed light on these controversial issues and asks whether biofuels offer a cure that is worse than the disease they seek to heal.

The information gathered in this paper gives rise to two fundamental questions:

1. Do the technical means exist to produce biofuels in ways that enable the world to meet demand for transportation energy in more secure and less harmful ways, on a meaningful scale and without compromising the ability to feed a growing population?

2. Do current national and international policies that promote the production of biofuels represent the most cost-effective means of using biomass and the best way forward for the transport sector?

The rush to energy crops threatens to cause food shortages and damage to biodiversity with limited benefits

The OECD Round Table on Sustainable Development has just released a thorough 57-page study on the costs, efficiency and environmental impact of biofuels. The full text of the report is here: Biofuels: is the cure worse than the disease? [PDF].

I’m very pleased with the quality of the work, and the conclusions — which I’ll paraphrase as “stop the subsidies, carbon tax each fuel for its externalities, then get government out of the way and let the markets work”.

If you agree that the damaging U.S. ethanol tariffs and subsidies should be stopped, please write your representatives. Stopping the handouts will be extremely difficult due to the concentrated benefits/diffuse costs which motivates politicians to reward their corn state contributors.

I recommend section 8 “An alternative policy agenda” for a summary of the report’s reasoning and conclusions:

136. There is little doubt that current patterns of fossil fuel-based energy use are unsustainable and that a change in direction is needed. There is, however, no obvious technological fix available that will supply the world with a source of automotive fuel that is cheap, clean, flexible and easily scalable. Hydrogen has been discussed, but many problems are yet to be overcome. In such a situation, when technological change is unpredictable, a prudent policy would be to keep as many options open as possible while at the same time letting prices adequately reflect environmental and natural-resource scarcities.

137. The current push to expand the use of biofuels is creating unsustainable tensions that will disrupt markets without generating significant environmental benefits. The upward pressure first-generation biofuels create on food prices, and the increasing burden their subsidisation places on taxpayers, are likely to make policies that support them indiscriminately less and less acceptable to the public.

138. Current biofuel support policies are placing a significant bet on a single technology notwithstanding the existence of a wide variety of different fuels and power trains that have been posited as options for the future. Those policies – that support high blends of ethanol, in particular – necessitate major investments in vehicles and fuel-distribution infrastructure — investments that, once made, put pressure on policy-makers to protect them.

139. Governments should cease creating new mandates for biofuels and investigate ways to phase them out. Mandating blending ratios, market shares or volumes creates certainty for investors in biofuel production capacity, but in so doing simply transfers risk to other sectors and economic agents. Mandates do not save motorists money: biofuels still account for only a tiny fraction, perhaps 1%, of the total world market for petroleum-derived transport fuels — not enough to substantially affect prices. In any case, if prices of petroleum products were to rise above the cost of producing biofuels, the mandates would not be needed. If petroleum prices were to fall, mandating biofuels means that transport fuels containing them would cost more.

140. Mandates are blunt instruments for reducing net petroleum use and greenhouse gas emissions. Despite large differences in the contributions that particular feedstock/technology combinations can make in achieving these objectives, almost all of the mandates currently used by OECD countries make no distinction among biofuels except between ethanol and biodiesel. Some countries have started to investigate ways to differentiate biofuels according to their life-cycle GHG emissions, but it is still unclear how they can do this in a way that is compatible with WTO rules. Setting mandatory targets is risky when the potential supply of biofuel feedstocks that can be sustainably produced is unknown and the commercialisation of second-generation technologies remains uncertain.

141. To the extent that subsidisation of biofuels reduces the retail prices of transport fuels in some countries, biofuel-support policies are also insulating drivers from the true costs to society of their fuel consumption, be it reduced national security or increased emissions of CO2. A far more neutral and efficient policy tool would be to tax fuels according to the externalities they generate.

142. Attempts to quantify support provided to biofuels also point to a more disturbing problem: that governments are providing billions of dollars or euros to support an industry about which they have only scant information. Yet without good statistics, it is difficult to imagine that policy makers are obtaining the feedback they need to respond to new developments in a timely fashion. In many countries, the only statistics available on production of biofuels are those collected by producers’ associations. Statistics on consumption are even harder to obtain. And the fact that support is provided by multiple levels of government, in diverse forms, suggests that new policies are being introduced in the absence of comprehensive information on how they are affecting the marginal rate of assistance.

143. A number of other policies that governments could pursue would be less risky than those typically used by OECD countries. One would be to remove tariffs on imported biofuels. Tariffs are especially high on ethanol, and the longer they remain in place, encouraging inefficient investments in expensive productive capacity, the harder will be the adjustment needed once they are removed. Moreover, the countries most affected by import tariffs are generally developing countries with a comparative advantage in biofuel production.

144. The second would be to co-ordinate internationally on developing agreed standards for sustainable biofuels. Certification of biofuels to sustainability standards would not solve all the negative environmental consequences of expanded biofuel use, but it might help reduce some of the worst direct effects. At the least, international co-ordination would avoid an even worse situation where countries each require conformity to different standards.

145. If technology is the main barrier to the commercialisation of second-generation biofuels, supporting R&D is likely to be more cost-effective than supporting production from first-generation facilities. Koplow (2006) points to the United States Energy Policy Act of 2005 as a good policy example. The Act calls for reverse auctions for cellulosic ethanol production, where the bidder requiring the lowest amount of public money per gallon produced will get the subsidy. Such an approach keeps development risks within the private sector and it reduces the chance of overcompensation.

146. The demand side of the transport fuel problem should receive proportionally more attention than the supply side. A litre of gasoline or diesel conserved because a person walks, rides a bicycle, carpools or tunes up his or her vehicle’s engine more often is a full litre of gasoline or diesel saved at a much lower cost to the economy than subsidising inefficient new sources of supply. The IEA (2006a) points out that significant benefit can be achieved by improving vehicle efficiency. If all technical means of engine, transmission and vehicle technologies are implemented, a 40% improvement in the fuel economy of gasoline vehicles could be achieved at low costs by 2050.

147. Biofuels may well play a part in expanding the range of energy sources available in the future. The extent of their penetration will be limited by the opportunity cost of biofuel feedstocks being applied to competing end uses, and the extent to which second-generation technologies can significantly lower the costs of production. But in view of the fact that even the most optimistic studies posit no more than 13% of liquid fuel needs in 2050 being supplied by biofuels, it must be asked whether the diversion of such large amounts of public funds in support of this single technological option can be justified. Given that a much larger supply of clean transportation energy will be needed than biofuels can supply, governments need to apply their regulatory interventions and fiscal resources in ways that enable the widest array of technology options to compete.

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Climate change policy and the 'Open Frontier'

“America is, psychologically, an open-frontier society. Europe’s frontier closed a millennium ago.”

Commenting on the G-8 conference Brian Carney notes how different are the perspectives of old Europe and America. He really has a point, and not obvious… The technological optimism is reflected in the outlook of Prof. Jeffrey Sachs, a greens greenie heading the Earth Institute. We won’t know for probably 20 years whether Sachs’ optimism was appropriate. But I do think he reflects the “silicon valley” can-do perspective — in contrast to the EU instinct towards more big government, more big regulation — i.e., the command and control instinct.

…At a recent conference here hosted by the Council for the United States and Italy, an American venture capitalist and a German parliamentarian revealed just how different the outlooks are on the opposing shores of the Atlantic. The debate was not between a global warming skeptic and an alarmist, but between an American businessman and a German politician who both accept the need to address climate change and come to very different conclusions about how to do so.

The German took the floor first. His was a bold thesis: The economic transformation required to address global warming will bring huge energy efficiencies—and hence huge economic benefits—even if there is no global warming problem. But vested interests in the energy sector stand in the way of that transformation. “We cannot,” therefore, “wait for the industries that in many cases will be the losers . . . to make the necessary changes,” he told the audience of American and European industrialists.

To this American ear, this smacks of the tales about the man who invented a car that runs on water, but was bought out by Detroit to protect their market. But from a European perspective, it makes more sense.

…In other words, the characteristic American response to, say, climate change, is to believe that technologies— and even companies—that do not now exist will crop up to solve the problem, assuming there is a problem. The characteristic European response, as exemplified by the German conspiracy theorist in Venice, is to focus on how to get the businesses to behave “better.”

The open frontier view was captured by a Silicon Valley representative in the room. He stood up to announce that “clean tech” would be to this decade what high-tech was to the 1990s. The companies that would revolutionize our energy usage, he claimed, were now being funded by venture capitalists, and the Ciscos, Microsofts and Googles of the next decade would be the companies that solved the energy puzzle. We hadn’t heard of any of them now, he insisted, but they would be huge. Is he right? Maybe. Who cares? It’s his money, and the money of his colleagues in the Valley. The point is, if there’s a conspiracy to keep revolutionary clean technology down, he didn’t get the memo. The notion that this is simply a trans-Atlantic divide can easily be overstated. There are statist Americans and entrepreneurial Europeans. But the divide between the open-frontier camp and the closed-frontier camp is very real, and of the utmost importance to the global warming debate.

If you believe that the means for addressing human influence on the climate have not yet been invented, but moreover that the best chance of developing them lies with entrepreneurs whose ideas have not yet been tested in the market, then global warming is just another opportunity— and, if the doomsayers are right, a potentially huge one.

The dividing line can be seen, again, in the divergent approaches of the U.S. and Western Europe to the challenges posed by economic change. Most European employment law is focused on preserving the jobs that already exist. Policies designed to create new jobs are viewed as threatening to the status quo—and they are threatening. The question is whether the status quo is presumed to be better than an unknown future. If you believe that the economic frontier is closed, then you are wont to suspect that the future is at least as likely to be worse than the present as it is to be better. And so you fight to preserve what you have.

Berlinski: Pepperdine Univ. conference on crisis in Europe

Claire Berlinski, author of Menace in Europe: Why the Continent’s Crisis is America’s, Too:

A consensus has begun to emerge. The problems I described—Europe’s collapse of confidence, the unsustainable character of its welfare economies, its population decline, the rise of militant Islam, and the flourishing in Europe of a host of bizarre anti-Enlightenment ideologies—are now widely appreciated.

Whether or not they are appreciated, there is still no consensus at all about what do about them…

Wolfowitz: old Europe's new cold war

Paul Wolfowitz’s forced resignation from the World Bank marks the open recognition — equivalent to Churchill’s 1946 “Iron Curtain” speech — of a new kind of Cold War, this time between America and Europe’s ruling elites.

The charges that Mr. Wolfowitz improperly advanced his girlfriend’s career were always risible. Mr. Wolfowitz acted with the full knowledge and approval of World Bank officialdom. But the facts never mattered; the goal was to rid the Bank of a president making too many waves with his anticorruption agenda, and who had brought with him too many American staffers and attitudes. An honest Bank board would have ended Thursday’s statement, which cleared Mr. Wolfowitz of ethical wrongdoing and announced his resignation, with a triumphant “Yankee Go Home” — except, of course, that the Bank is actually based in the U.S., which also provides the lion’s share of its budget.

European officials, who detest Mr. Wolfowitz as one of the “neocons” who supposedly launched the Iraq war, are naturally gleeful. Witness German Development Minister Heidemarie Wieczorek-Zeul’s early call for his resignation, and her statement that he would not be welcome at today’s World Bank meeting on African aid in Berlin. Upon hearing of Mr. Wolfowitz’s resignation, “Red Heidi,” as the development minister is known in Germany for the color of her hair that matches her political views, said the Continent’s unified action against Mr. Wolfowitz “has strengthened Europe’s position in the World Bank.” Or take the European Parliament, which called for Mr. Wolfowitz’s dismissal before he even had a chance to present his defense during an internal World Bank probe. The ad hoc committee of the Bank’s board, which investigated Mr. Wolfowitz’s behavior and ultimately became the leading force for his ouster, featured four European officials out of seven members.

What is remarkable about all of this is not that Europe’s elites detest Paul Wolfowitz, George W. Bush, and their policies. That much has been clear for many years. Rather, what is striking is that — acting upon this animus — the Europeans chose to move boldly and aggressively against an American nominee running a multilateral institution on the flimsiest of pretexts. The fact that the Bush Administration was caught by surprise, believing until the last minute that the process would be fair and therefore exonerate Mr. Wolfowitz, underscores how unprecedented was Europe’s conduct.

There are, however, a few developments that Europe’s rulers might like to consider while nursing their celebratory hangovers.

As British Prime Minister Tony Blair keeps trying to explain, there is in the U.S. a strong urge toward global disengagement. …

This trend should worry Europeans. For most of the last century, American foreign policy was focused on Europe. The U.S. defended the Continent because of shared common interests and values. The modern European model of social democracy was possible only because U.S. security guarantees allowed Europe’s great powers to effectively disarm. American interests, however, are changing. Europe is no longer as important, and America is no longer as European, as when the U.S. rescued their Allies in two world wars.

Read the whole thing.

G7 National Leadership Election Scorecard

John Wixted interprets the significance of opinion polls showing strong anti-Americanism:

I know you’ve heard all about the fact that the world has turned against America because of George Bush’s imperialism, his opposition to the Kyoto Protocol, his tendency to torture terrorist detainees, his refusal to endorse “we-are-all-in-this-together” proposals like the International Criminal Court, and on and on. Because of him, Americans cannot walk around with their heads held high anymore. We know this because polls often show that people in other countries have an unfavorable image of America. And to many on the left, that’s a big problem. I always ask them why, and I have not yet heard one good answer. Not one. In fact, people are invariably surprised by my question because they’ve never really thought about it. It sounds bad at first (“everybody hates us!”), but the concern tends to vaporize once you think through it a bit. It’s just a popularity contest, after all, one that translates into nothing of importance. Nothing at all. Surprisingly, this point applies to our standing in Muslim nations as well. Popularity polls there, as elsewhere, just don’t matter.

By contrast, a different kind of poll — the kind that France just took — really is important. And that’s the kind of poll that shows America’s true standing in the world. If America’s standing really were so low, presidential candidates should be able ride anti-Americanism to victory. This should be especially true in France and Germany — the two most anti-American states in Western Europe (according to popularity polls, anyway).

With today’s election in France, the advanced industrialized democracies of the world (i.e., the G7) have all had a chance to weigh in since the 2003 invasion of Iraq. Who won those elections anyway, the anti-American hysteric, or the pro-American supporter of the war on terror? Here is the scorecard:

Pro-American supporters of the war on terror:

United States (George Bush, 2004)

Great Britain (Tony Blair, 2005)

Germany (Angela Merkel, 2005)

Japan (Junichiro Koizumi, 2005)

Canada (Stephen Harper, 2006)

France (Nicolas Sarkozy, 2007)

Anti-American opponents of the war on terror:

Italy — (Romano Brodi, 2006)

…Unlike popularity contests, which don’t matter at all, these polls reflect America’s actual standing in the major industrialized democracies of the world. Maybe Hugo Chavez of Venezuela is the one who is on the right track, while France, Germany, Great Britain, Japan and Canada have all veered off onto the wrong track, but I somehow think it might be the other way around.

John includes an interesting Angela Merkel quote from the pre-Iraq war period:

…here are some words of wisdom from Merkel before the invasion of Iraq:

Two things have been highlighted once again by the EU decision. First, the danger from Iraq is not fictitious but real. Second, working not against but jointly with the United States, Europe must take more responsibility for maintaining international pressure on Saddam Hussein. As is argued in the EU summit declaration, this means advocating military force as the last resort in implementing U.N. resolutions.

It is true that war must never become a normal way of resolving political disputes. But the history of Germany and Europe in the 20th century in particular certainly teaches us this: that while military force cannot be the normal continuation of politics by other means, it must never be ruled out, or even merely questioned — as has been done by the German federal government — as the ultimate means of dealing with dictators. Anyone who rejects military action as a last resort weakens the pressure that needs to be maintained on dictators and consequently makes a war not less but more likely.