What the European mess means for the U.S.

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The U.S. has been mired in a deep economic mess since late 2007. In fact, but for a couple of years, our economy has under-performed for more than a decade now.

But if you want to feel a bit better about our situation, take a look at Europe.

Greece, of course, has melted down. Italy isn’t much better. Earlier this month, each nation’s prime minister — George Papandreou in Greece and Italy’s Silvio Berlusconi — were forced to resign. Spain, Portugal and France are on the rocks as well. Some see the European Union slipping back into recession.

What does this mean for the U.S?

The immediate issue is the possible EU recession, which would be felt via trade, specifically, a hit to U.S. exports. Consider trade in goods.

After declining amid a bad economy in 2001 and 2002, exports to the European Union grew steadily into 2008 — rising by 85 percent over six years. But the recent recession and credit mess hit trade hard. U.S. goods exports to the EU fell in 2009, started to climb back last year, and grew during the first eight months of this year compared to same period in 2010.

If the European Union slides into recession and related exports decline, what’s the potential overall impact for the U.S.? In 2010, goods exports to the European Union accounted for 18.6 percent of total U.S. goods exports. That equates to less than 2 percent of U.S. GDP. That’s significant. For good measure, to the extent that European troubles ripple elsewhere, the worse it gets for an increasingly integrated global economy. However, a tough time in Europe should not mean dragging down the U.S. economy, especially if we had our own economic and fiscal houses in order.

It’s important to understand the key problems plaguing Europe. As bad as U.S. economic growth has been, Europe’s has been worse.

EU real annual growth averaged a mere 1.3 percent over the past decade. Italy was the worst of the lot, with an average growth rate of 0.3 percent, followed by Portugal at 0.7 percent. Germany and France were not much better at 0.9 percent and 1.1 percent, respectively. And last year, it was not even close in terms of the worst performance, as Greece’s economy shrank by 4.5 percent.

Looking at industrial production — mainly manufacturing, but also mining and utilities — even with the recent economic downturn, U.S. industrial production was 45 percent higher in 2010 compared to 1990. But over the same two decades, France barely edged up by 3.6 percent, and Greece by 3.9 percent. Meanwhile, industrial production actually declined in the United Kingdom (-2.2 percent), Italy (-2.5 percent), and Portugal (-1.3 percent).

At its core, Europe’s economic woes are all about this dearth of economic growth. Without growth, income and living standards stagnate, and job creation becomes nearly nonexistent.

But why has growth suffered so much in Europe? The answer is that government eats up far too much of the economy.

From 2001 to 2008, for example, government spending ran in the range of 46 percent to 47 percent of GDP in the European Union. But it got even worse in 2009 and 2010, jumping to 51 percent.

In Greece, government expenditures as a share of GDP leaped from 44.6 percent in 2005 to 53.8 percent in 2009, then backtracking a bit to 50.2 percent last year.

When government claims nearly or more than half of the economy, it’s inevitable that entrepreneurship, private investment and production, efficiency, economic growth and job growth will suffer. After all, political decision-making is replacing or overruling market-driven, private sector decisions disciplined by prices, profits, losses and competition.

Ironically, jacking up already massive levels of government spending in 2009 and 2010 was billed as the path for reviving the economy. The same spin, of course, was served up in the U.S.

The results, as we all know, have been abysmal. Again, if you’re frustrated with a 9 percent unemployment rate in the U.S., consider some of the latest data from Europe. The entire European Union has an unemployment rate of 9.7 percent, with Greece at 17.6 percent, Spain at 22.6 percent, and Portugal 12.5 percent. Italy actually looks relatively good at 8.3 percent, but that number promises to worsen.

The current policy debate in Europe and the United States focuses on bringing down government debt levels. That’s obviously important. But mounting debt is not about a shortage of tax revenue. Instead, it’s about the breathtaking and destructive size of and growth in government. While we’re not as far gone as Europe, keep in mind that federal government spending as a share of GDP increased from 18.2 percent in 2000 to 19.6 percent in 2007, and then leaping to above 25 percent in 2010 and 2011 — peacetime records.

Throw in state and local government, and total government spending in the U.S. climbs still higher, moving from 28.8 percent of GDP in 2000 to over 36 percent in 2010.

Our greatest fear when it comes to Europe shouldn’t be a temporary loss in exports. Instead, it’s about becoming more like Europe in terms of the size and scope of government, and the resulting long-term economic stagnation.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.