A World Economic Power Is Back

Cheap money, cheap energy and cheap labor are making for a comeback of industry. Europe looks across the Atlantic with envy. However, it cannot copy the American model.

Henry Ford would be pleased. After four and a half years of crisis, things are getting better for the children of the forefather of modern industry. Once again, at the turn of the year, the Ford Motor Company he founded sold as many cars in the U.S. as in 2006. Things are going similarly for the country. The world’s largest national economy may not yet be in full swing; unemployment remains high. Yet the recovery is already clearly visible.

U.S. stock exchanges have closed at high levels, eight of the 10 largest corporations are American and U.S. industry is experiencing a comeback. In the first three months of the year, the U.S. economy grew 2.5 percent. And even if politicians and economists appear disappointed by that, Europe can only dream of such growth rates. There is not yet precise economic data from the EU. Industrial production in the EU indeed fell in April for the 15th month in a row. Economically, Europe will teeter around the zero line this year.

That poses the question: What is the U.S. doing better than Europe? And can the old continent follow the example of the U.S.?

Growth on Credit?

Part one of the recovery has been carried by the money-printing press. Federal Reserve Chairman Ben Bernanke has held the interest rate at record lows for years and flooded the market with cheap money to stimulate the economy. The Europeans are certainly not far behind the Americans here. European Central Bank President Mario Draghi will probably keep the interest rates in the cellar this coming Tuesday. Is the U.S. only experiencing a recovery on credit? Summing up government, corporate and private debt, little has actually changed in the debt level since the high point of the boom. At 225 percent of economic output, it remains steadily high. However, the money-printing press is not the main reason for the recovery.

The U.S. is not (yet) experiencing a new version of a boom fueled by consumer credit. The government, too, has largely remained out as an investor. It is the businesses that are investing and driving the economy forward. For the first time since the ‘70s, U.S. industry is on the rise. At that time, U.S. industrial firms still accounted for one-third of the U.S. economy. With the rise of financial industry under Ronald Reagan, the [manufacturing] sector gradually lost importance. After the turn of the millennium, 6 million U.S. industry jobs disappeared in the direction of China. Now, they are slowly coming back. Apple has announced that, in the future, it wants to build Mac minis in the U.S., the Taiwanese electronics company Foxconn is investing here and the domestic steel company Voestalpine is also investing half a billion euros in a plant in Texas.

Lured by cheap energy and low wages, corporations from all over the world are bringing their money to North America. Industrial workers in the U.S. are available for about $35 an hour, including benefits; in the South, characterized by high unemployment, the figure is even as low as $25. In Europe, they cost $45. At the same time wages are dropping in the U.S., they have risen by leaps and bounds in China. While companies had to pay workers in the U.S. 40 times as much as in China, it is only eightfold today. In face of the higher productivity of U.S. workers, the advantage of plants in Asia is slowly dissolving.

The second big reason for the return of industry in the U.S. is cheap energy, a result of the shale gas boom. Within a few years, the country found a way to release gas and oil from deep shale by means of chemical substances (“fracking”). Today natural gas costs one-third of what firms in Europe pay. So it is that U.S. production is rising, while Europe’s industry is in a crisis.

Europe Now Calls For Re-Industrialization

No wonder the old continent looks across the Atlantic with envy. “We can bring back industry to Europe,” demands the responsible European Commissioner for Industry and Entrepreneurship Antonio Tajani. The only question is how. Europe is torn to and fro between debt crisis, climate goals and energy transition; not a lot of time remains for it to be concerned about industry. In any case, Europe cannot copy the American model, said Partick Artus, chief economist of French investment bank Natixis. Europe is far from lowering unit labor costs. Countries like Greece are admittedly making progress. In France or Italy the costs remain at a constant high. And the topic of energy? After all, shale gas slumbers underground in Europe, too. But here the chances are also bad. The influence of environmental protectionists is greater in Europe, so there is not even a beginning with exploiting the shale gas reserves. But even if Europeans were permitted to tap the treasure, they would be disappointed; the reserves are smaller than in the U.S. and are located twice as deep under the earth.