WE CAN STILL CHOOSE REFORM OVER DECAY

The Wall Street Journals Brett Stephens this week predicted “a long, likely parade of horribles” for Europe as a result of the current crises. He suggests that “the riots of Athens will become those of Milan, Madrid and Marseilles. Parties of the fringe will gain greater sway. Border checkpoints will return. Currencies will be resurrected, then devalued. Countries will choose decay over reform.”

In describing the path that Europe took to get to this sorry state of affairs, Stephens catalogs the changes to some key indicators over time.

In 1965, government spending as a percentage of GDP averaged 28% in Western Europe. Today it hovers just under 50%. In 1965, the fertility rate in Germany was a healthy 2.5 children per mother. Today it is a catastrophic 1.35. During the postwar years, annual GDP growth in Europe averaged 5.5%. After 1973, it rarely exceeded 2.3%.

Obviously if Stephens’s dire prognosis proves accurate, New Zealand will be adversely affected by Europe’s decline due to our strong trading relationships. But what about the prospect of a “parade of horribles” for New Zealand itself?

New Zealand government spending has steadily risen since the post-war period and is now around 45 percent of GDP. According to Statistics New Zealand the completed fertility rate for women born in the 1930s averaged 3.54. For women born in 1976 it is now 2.01, below the replacement rate. Annual GDP growth in New Zealand has also slowed over time. We recorded real economic growth of 3.7 percent a year on average between 1992 and 2002.  Since mid-2008, average annual GDP growth has remained below 2 percent.  Productivity growth has slowed. The goal of closing the gap with Australia by 2025 appears now to be more of an embarrassment than a target.

On the positive side, our public debt ratios are relatively healthy and our banks are not heavily invested in bonds issued by heavily indebted European countries.

We do have the ability to improve our performance greatly, but there’s been a lack of leadership to do so for close to a generation. As a result we are unduly drifting and
exposed. The coming general election will give the electorate another chance to send parliament a message.

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