Angela Merkel used to say that “the European Union is c5% of the world’s population, c25% of its GDP and c50% of global welfare spending”:

The real data is more concerning.

The European Union is:

7.2% of the World Population.
23.8% of the World’s GDP.
58% of the World’s Welfare Spending.

Something has to give.

The EU average tax burden on workers is 44.9%. The average worker in the EU spends half a year working for the tax man.

Taxation accounts for 41% of the euro area GDP.

Ease of doing business remains below the leading economies of the world.

Bureaucracy is asphyxiating. The EU approves on average 80 directives, 1200 regulations and 700 decisions per year.

The main EU economies remain significantly below the leaders in economic freedom.

At the same time, despite massive tax burden and constant confiscation of wealth, the EU’s average debt to GDP is 90%. Continuously making science fiction estimates of tax evasion and calling to tax the rich as a mirage, has led to unsustainable levels of government burden on the real economy and hinders investment and capital investment as policies are increasingly aimed at taxing the productive to subsidize the unproductive.

Using unrealistic estimates of tax revenues made by politicians -that are always missed- for very real expenditures -which are consistently above budget- has made the EU miss its debt reduction expectations.

The cost of hiper-regulation and excessive taxes to job creation, investment and innovation are evident. The EU has an unemployment rate that almost doubles the leading economic peers, and taxation hinders the growth of SMEs (small and medium enterprises), which shows a ratio of development to large companies that is half the same ratio in the US.

The EU has many positive things, as I explained here. But we cannot let bureaucracy and confiscatory taxation to take over a worthy project. Because ignoring those risks, we would make the EU implode.

Unless the EU politicians change their mindset of a model built on massive taxation and bureaucracy and start putting at the forefront of policy cutting taxes, slashing red tape, more open business, more economic freedom, focusing on job creation and attraction of capital, the welfare state will implode.

The EU’s welfare state can only be protected defending growth, investment, and job creation. However, it will likely be destroyed by the same ones that say they defend “the public sector”. By making it unsustainable.

Daniel Lacalle is Chief Economist at Tressis SV, has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

Images courtesy Lisa, 2012 at Washington Post Writers Group

(Data Eurostat, World Bank, Daily Telegraph)

Please read the entire article here.  Focus Economics analyses the weak productivity growth in most OECD countries.

23 economic experts weigh in: Why is productivity growth so low?

The OECD has written extensively on the subject of productivity growth observing that productivity is pro-cyclical, meaning that in times of recession productivity tends to fall and in times of economic growth, productivity tends to increase. Therefore, looking at producitvity growth in the shorter-term, such as quarterly or annually, can be misleading, as it is often extremely volatile. Most strong quarters or years of economic growth will show strong gains in productivity and vice versa. Looking at multi-year longer-term productivity growth, however, is more useful. For example, producivity growth has been low in the U.S. for the last 5 years, even as the economy has emerged from the financial crisis, which raises a lot of red flags.

Indeed, U.S. manufacturing sector productivity increased 0.5% over the last five years from 2011 to 2016, which the U.S Bureau of Labor Statistics notes is “well below the growth rate of 3.2 percent from 1987 to 2016.”

This is not exclusive to the U.S., as productivity growth has generally been low going back to the financial crisis for most developed countries. However, the drop in productivity has been going on for decades, all the way back to the 1970s in some cases

My opinion:

“The decline in productivity, in my opinion, is the result of a combination of factors:

– Perpetuating overcapacity through cheap debt and excess liquidity.
– Large increase in subsidies to obsolete or low productivity sectors (particularly so-called national champions) including currency devaluations that are indirect subsidies to rent-seekers and crony sectors.
– Large increase in government spending aimed at financing areas with no real economic return and white elephants.

These factors make capital allocation go to low productivity sectors because incentives are provided through fiscal and monetary policy. Financial repression incentivises low productivity subsidizing it.”

All text and graph courtesy of Focus Economics @focuseconomics

This article was published at The Epoch Times.

For many traders, it was a shock to see the barrel of oil collapse to 12-month lows in June, despite an agreement from producers to cut supplies. However, not many people are talking about the falling prices in other commodities, as well as the positive impact of low oil prices on global growth.

So why is a barrel of West Texas Intermediate still trading for below $50? The problem is not just due to oversupply, but also to a slowdown in the growth of Asian demand. Chinese demand has supported prices for the past decade, as demand in developed markets has reduced thanks to increases in efficiency, substitution, and technology.

However, China’s stockpiles have risen to 511 million barrels in capacity, just below the 693 million barrels the United States held in March. Chinese industrial demand is also falling, due to rebalancing away from the industrial sector and toward services.

But oil prices, in this context, are just a symptom of a much more severe illness: the excess debt and overcapacity created in China to support an unsustainable growth model.

In the first five months of 2017, China has added more debt than the United States, United Kingdom, European Union, and Japan combined. While GDP growth looks healthy as is, it appears weak and potentially dangerous when compared to the increase in the money supply. As the old economy tapers off, fewer and fewer raw materials will be needed for production.

Dollar Flows

Low oil prices have knock-on effects on other emerging markets. Commodity producers like Mexico and Saudi Arabia are facing another “sudden stop”: the abrupt reduction in U.S. dollar inflows, as debt repayments in foreign currency escalate.

Most economic growth estimates for 2017 were made using much higher oil prices, and the market is likely to see downgrades in expectations of inflation and growth in the majority of the large emerging economies. We are already seeing significant downward revisions for Brazil, Argentina, Russia, and other economies.

According to ICBC Standard Bank, emerging market debt maturities through 2020 will exceed $1.4 trillion. At the same time, as rates rise in the United States, capital flows to emerging markets are much lower than those seen in the past decade. Low interest rates may mask these risks in the short term, as central banks are increasing the money supply by more than $200 billion per month, but they do not eliminate them.

Not Just Oil

There is another factor beyond oil prices worrying investors. Copper prices, a major indicator of global economic activity, continue to be weak due to oversupply and lower Chinese demand.

Market expectations for revamped growth and higher inflation in 2017 and 2018 stand at odds with the decline in major commodities like copper and oil. More importantly, the decline might be a warning sign of a much deeper problem. The more than $20 trillion in monetary stimuli globally has delivered disappointing growth, as well as contagion risk as financial imbalances across countries rose.

Low oil and commodity prices benefit the users of such commodities like the United States and Western Europe. However, given their negative impact on weaker emerging economies, their price decline may be the canary in the coal mine for the world economy.

Daniel Lacalle is a professor at IE Business School in Madrid, a fund manager at Adriza International Opportunities, and the author of “Escape from the Central Bank Trap.”

Article courtesy of The Epoch Times