Such is the deep pessimism in Europe about the economy that the better the economy does today, the worse people think it will do tomorrow.
This year has been an excellent one for Europe's economic growth. Yet instead of thinking that the momentum building this year will carry forward and make next year an even better year, Europe's gloomy experts are predicting a significant slowdown. For them, it seems out of the question that Europe could have two good years in a row.
Of course, every year has its growth challenges, and next year will be no exception. What motivates -- or frightens -- the growth pessimists is higher European interest rates, a slowing US economy and the increase in the German value-added tax from 16 percent to 19 percent for the beginning of next year.
But they are wrong to be frightened by these factors.
Fear over the growth effects of this year's European Central Bank rate increases is based on confusion between real and nominal interest rates. By the end of the year, European interest rates will have been raised 150 basis points (to 3.5 percent from 2 percent in January).
But European inflation is growing at approximately the same rate. This means that real interest rates -- interest rates measured in terms of goods and services -- have stayed the same. And it is the real interest rate, not the money rate, that counts for economic growth.
Europe must ask itself how interest rates can induce a slowdown next year when real interest rates have hardly budged despite this year being economically healthy.
Moreover, because profits are high in Europe, likely future increases in real interest rates needed to ensure price stability can easily be financed out of profits without economic disruption. The truth of the matter is that interest rates -- both nominal and real -- are too low in Europe, not too high.
As for the US, plummeting gas prices -- an extraordinary 25 percent decline in roughly one month -- have increased consumer confidence and spending at a time when consumers were supposed to be in full retreat because of the housing market decline. Moreover, former Federal Reserve chairman Alan Greenspan says the housing market correction is already almost over.
Pessimistic Europeans are behind the curve. They are bracing for a US growth slowdown next year that has already taken place with little consequence for both the US and European economies.
Of course, falling gas prices are occurring in Europe as well, and this will help take the sting out of the controversial value-added tax increase engineered by German Chancellor Angela Merkel. She has been lucky, because the falling price of gas and Germany's high profits will "finance" the tax increase, which should prove little more than a speed bump for the German economy, at least if lower gas prices hold into the coming year.
Indeed, the German government is slowly coming to realize that its pessimism about the economy has been misplaced, which is reflected in continuous "upward revisions" of growth forecasts throughout this year. Recently, the government raised its growth forecasts for this year and next, from 1.6 percent to 2.3 percent for this year, and from 1 percent to 1.4 percent for next year. Expect further upward revisions as the government continues to be surprised by the economy's ongoing strength.
An important by-product of Europe's good growth is that it is making the need for structural reform an urgent matter. The lack of structural reform of Europe's labor markets, competitive practices and so on means that European potential economic growth -- its growth ceiling -- is lower than it should be. With a low growth ceiling, strong economic performance generates inflationary pressures at a relatively early stage in the growth process. This makes it hard for Europe to enjoy an extended period of high growth without inflation.
Premature inflationary pressures are a prime reason that European Central Bank presidents have consistently pressed for structural reform in their press conferences and speeches. It is the central bank, after all, that must fight inflation caused by Europe's lack of structural reform.
Growth pessimists have a point if they are wary about Europe's prospects for structural reform to raise the growth ceiling. Europe's politicians simply refuse to take the lead on this all-important issue.
They are wrong, however, about Europe's prospects for achieving growth. Europe's actual economic growth has been quite good and -- thanks to low gas prices, low real interest rates, solid profits and strong growth momentum -- promises to get better before the ceiling is hit and inflationary pressures set in.
Call me a "growth optimist," but Europe looks poised for good growth next year.
Melvyn Krauss is a senior fellow at the Hoover Institution, Stanford University. Copyright: Project Syndicate
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