March 4, 2024

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'The idea that Europe can follow America is too easy'

'The idea that Europe can follow America is too easy'

Federal Reserve Chairman Jerome Powell gave all sorts of interviews last week in which he tried to play down financial markets' expectations. And he succeeds well, says Professor Arnott Boot. 'Though the cases that followed his interviews were very interesting.'

Federal Reserve Chairman Jerome Powell gave all sorts of interviews last week in which he tried to play down financial markets' expectations. And he succeeds well, says Professor Arnott Boot. Although the material that followed his interviews was very interesting.' (ANP/AFP)

I refer to the interpretation of US economic statistics. More than 350,000 jobs were created in January, more than expected. It also means that you cannot lower interest rates because there is a shortage in the labor market.

'This also means that interest rates cannot be cut as the labor market continues to tighten'

Arnaud Boot

Powell has moved further with the financial markets than I expected. By financial markets, analysts who stare at a screen all day or consultants looking for companies to talk about problems so they can get work. In their herd behavior, they assumed there would be six interest rate cuts this year, with interest rate steps around a quarter of a percent. Starting in March, there will be five after that.

But isn't it?

What Powell said — and it surprised me — is that based on current views, he would cut interest rates only three times. And I think that's a pretty accurate statement. Of course, if the economy is stimulated further, interest rates will fall, he said. Anyway, it surprised me.

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The U.S. economy — which has actually created 350,000 jobs — has a three percent growth rate. Two percent next year, which is better than Europe. By extension, you also see that the labor productivity of the US economy has increased significantly. If you look at the real innovation and economic power, it's coming from America. From there you can also see Europe.

Why is European labor productivity low compared to the US?

Overall labor productivity is much lower than it was thirty to forty years ago, including in the United States. I think we are in a kind of welfare state 2.0. With every problem, we expect the government to solve it – and that's not good for productivity. It siphons energy from the economy.

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That support means you're holding more of the status quo – look at farmers. Europe's largest subsidy, covering a third of the budget, goes to farmers. Of course they want to stick to the status quo. In this way you create your own resistance to modernizing the economy.

Is that different in the US?

America is a different country with a different culture and we should not underestimate that. So the idea that you can follow America and maybe even want to follow it is too easy.

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