Europe Expands Big Government

 "FRANKFURT -- Europe's answer to its latest economic crisis: even bigger government.

Faced with soaring inflation and an energy crisis caused by recent sanctions on Russia, European politicians are adding hundreds of thousands of public-sector jobs, guaranteeing business loans, subsidizing energy bills and splurging on infrastructure, defense and key industries.

Spending by eurozone governments is expected to reach 51% of the region's economic output this year, about 4 percentage points higher than in 2019, the International Monetary Fund said. In Germany, France and Italy, government spending as a share of economic output is the highest in decades, excluding the pandemic years of 2020 and 2021.

In the U.S., state spending surged to 45% of gross domestic product in 2020, at the height of the pandemic, but has since declined to 37% of GDP, close to its precrisis level.

State intervention is one reason Europe's economy has held up relatively well this year. The eurozone economy grew at an annualized rate of 0.7% in the three months through September, showing resilience to the historic shocks rocking its energy markets. Even Germany, whose energy-hungry industrial businesses are particularly vulnerable to the recent surge in gas prices, recorded modest growth. While government spending dragged down growth this year in the U.S., it supported growth in the eurozone, data from JPMorgan show.

One area where government spending has been felt most directly is the labor market. Public-sector employment across the eurozone has risen 4% since 2019, compared with a 1% increase in market-services jobs and a 1% decline in manufacturing jobs, according to European Central Bank data.

One in four eurozone workers was employed by the state last year.

In Spain, the public sector added about 52,000 jobs in the three months through September, more than double the number of new private-sector hires in that period, the national statistics agency said.

In the U.S., the number of government jobs has dropped more than 2% since early 2020, while private-sector jobs have grown 1%, data from the Bureau of Labor Statistics show.

In the U.S., "there is a countering logic [that the government] spent so much money during the pandemic that now we need to save," said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics, a Washington think tank.

After the financial crisis of the late 2000s and the ensuing eurozone debt crisis, Europe also tightened its belt, he said, but not this time around, even though rising interest rates and market turmoil are making it harder for governments to deepen public debt.

For now, Europe's state-driven splurge is helping to delay and alleviate the economic downturn and might even help control inflation in the short term. But economists worry that this approach carries risks.

Unlike during the financial crisis, the eurozone crisis and the pandemic, free-spending governments are on a collision course with the ECB, which has raised interest rates at its fastest-ever pace to cool inflation. The eurozone's inflation rate rose to 10.7% in October, a fresh high, while price growth in the U.S. slowed to 8.2% in September.

The IMF last month urged Europe to cut state spending to support central banks in the fight against inflation and to replenish empty treasuries. "Clearly, there is room to provide support for vulnerable people at lower cost," Alfred Kammer, director of the IMF's European department, told a news conference in Washington.

Across Europe, governments have revived large-scale loan-guarantee programs to support companies hurt by the fallout of recent sanctions on Russia, show data from Bruegel, a Brussels-based think tank. In Italy, one-third of all outstanding business loans by value are backed by the government, according to an August IMF report.

While such sweeping support for business made sense during the pandemic, the case is less clear now because changes to energy supplies are here to stay, said Nicolas Veron, a senior fellow at Bruegel and at the Peterson Institute.

Europe's recovery has been slower than that of the U.S., with weaker investment. The eurozone economy likely is about 4% bigger this year than it was in 2019, when measured in dollars, while the U.S. economy is about 17% bigger, according to IMF data. Capital investment in the eurozone increased about 4% last year and 3% this year, while in the U.S., equipment investment surged 10% last year and 5% this year, according to JPMorgan.

Still, government intervention is proving popular in Europe. From Berlin to Paris to Rome, voters recently have elected governments that promised more support. During his re-election campaign, French President Emmanuel Macron pledged to build 100% French supply chains in the next five years for electric cars, offshore wind farms and solar panels.

The European Union normally requires governments to keep the deficit below 3% of GDP. But it has suspended those rules for four years in a row through at least the end of next year to allow governments to spend more freely." [1]

1. World News: Europe Expands Big Government
Fairless, Tom. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 10 Nov 2022: A.10.