''The rates of return on investment in the same new technologies are correspondingly less in Europe and Japan because businesses there face higher costs of displacing workers than we do,'' Mr. Greenspan said.
From:
http://www.iht.com/IHT/TODAY/MON/FPAGE/reform.2.html
Paris, Monday, July 17, 2000 Tax-Cut Package Won't Cure the 'German Disease'
---------------------------------------------------------------------------- ---- By John Vinocur International Herald Tribune ---------------------------------------------------------------------------- ---- PARIS - The tax reform package in Germany is a modernizing investment incentive that carries the prospect of new business for the country's trading partners. But it hardly resolves in a symbolic swoop the kinds of problems that keep European economies from performing at the level of the United States. In a country often deeply resistant to change, Chancellor Gerhard Schroeder called passage of his tax-cut bill a breakthrough. And so it was, although an incomplete one in the years-long context of a German business world discouraged by the rigidities of intense regulation and high taxation.
For the rest of Europe - as welcome as a more positive climate in the European Union's biggest economy might be - a tax package alone without accompanying changes in job markets, pensions, health costs and education was hardly a conclusive signal that the Old World was rushing to overtake the New. Specifically, the German tax revision rids corporate Germany in 2002 of capital gains levies, unique to that country, that limit the ability of companies to sell off major blocks of shares and hinder restructuring.
This is a change of palpable importance. Still, it is a single step, affecting the tax laws of Germany alone, in a dense pattern of cost and regulatory factors that retard Europe's development.
The overall percentage cuts in income and corporate taxes might jog Germany's neighbors in the same direction - President Jacques Chirac of France called Friday for tax reductions as well - but the real issue in transforming European economies was finding the political will to recast the social protections, involving pensions, health and hiring and firing laws, that cut closest to people's lives.
In fact, while Mr. Schroeder said the tax cuts meant that no one would be talking anymore about ''the German disease'' of immobility, Mr. Chirac was drawing unusual attention to the underlying economic and social realities of his country - public debt growing at the rate of 1 billion francs ($143 million) a day, purchasing power that has stagnated, a deepening gulf between rich and poor (with growing numbers earning minimum wages) and an illiteracy rate whose decline had endangered movement toward a modernized economy.
This contrast in viewpoints on Europe's current economic situation has not a little to do with maneuvering for political advantage, in particular Mr. Chirac's desire in a Bastille Day conversation to dim enthusiasm about the performance of the Socialist government of Prime Minister Lionel Jospin in creating jobs and growth.
But a sense of how much work was left to be done in transforming Europe and in reinforcing its current, potentially fragile spurt of growth has emerged in the past month, almost in step with improved unemployment figures and projections of bigger gross national products. Economists and the markets alike have served as voices of particular caution.
Last week, Ottmar Issing, chief economist of the European Central Bank, referred to the current European growth phase as ''a cyclical turnaround'' that still had to be converted into a period of strong, noninflationary growth. Pointedly, he declined, in an interview with the newspaper Le Monde, to say that Europe would close the United States' lead.
And beyond the usual prescriptions concerning the insufficient flexibility of European labor and goods and service markets, Mr. Issing expressed doubt about the existence of a so-called new economy in Europe.
''It's difficult to identify the emergence of a new economy on the Old Continent,'' he said. ''We've got movements here and there in this direction, but nothing in a determined way.
''High-tech enterprises exist, of course. But the combination of microeconomic flexibility and macroeconomic policies contributing to the stability which characterizes the new economy in the United States doesn't exist in Europe.
''We aren't seeing, therefore, a substantial growth in productivity over a prolonged period. For that to happen, we need a period of heavy investment, in particular in high technology, as well as deregulation and more flexibility.''
Although projections for year-on-year growth in the EU run to 3 percent or more, long-term capital inflows of the kind Mr. Issing referred to as a necessity for sustained European expansion are uncertain.
In recent days, news agencies have reported one-way capital flows toward the United States against the background of UBS AG's planned purchase of PaineWebber Group Inc. and speculation that Deutsche Telekom AG was seeking a major American acquisition.
As an indicator of confidence, the euro has weakened again after gaining briefly against the dollar. And two major European-based initiatives have received only lukewarm support.
Share prices for the European Aeronautic, Defense & Space Co., or EADS, the new grouping of German, French and Spanish interests, were flat after its introduction last week. In addition, the markets have marked down Vivendi SA after the announcement of its planned deal with Seagram Co., the Canadian liquor and entertainment company. Weak demand led Vivendi on Thursday to withdraw the public offering it had planned for its utilities branch, Vivendi Environnement SA.
In a sense, tax cuts are the easy part of the European economic reform equation because, in comparison with pensions, health and job protection, they make smaller demands on the predominantly Social Democratic sensibilities of European governments and do not represent a direct challenge to many Europeans' view of national cohesion.
Indeed, Alan Greenspan, chairman of the Federal Reserve Board, made no significant reference to taxes Tuesday when he gave his version of why the United States had benefited more than Europe or Japan from advances in information technology.
''The rates of return on investment in the same new technologies are correspondingly less in Europe and Japan because businesses there face higher costs of displacing workers than we do,'' he said.
The issue, Mr. Greenspan made clear, was hiring and firing. Tax reductions aside, that is a matter Germany and France have yet to confront.