theskeptic's Journal: Behind Slow Growth in Europe: Citizens' Tight Grip on Wallet

What an eye opener this article is.(Is that correct english?)
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Cash Economy
Behind Slow Growth in Europe:
Citizens' Tight Grip on Wallets

A Thicket of Laws to Protect
People Damps Spending;
'Debt Is Disreputable'
Better Things to Do Than Shop
By MARCUS WALKER
Staff Reporter of THE WALL STREET JOURNAL
December 10, 2004; Page A1

BRUSSELS -- Giuseppe Ivaldi has a few ideas about why Europeans consume so little. An Italian who opened a men's clothing store here nine years ago, Mr. Ivaldi closes his doors in the chic Espace Louise mall each weeknight at 7 p.m. He puts items on sale only in January and July, and the rest of the year marks up a hefty profit margin even though he's sure that drives many customers away.

He wishes he could do business differently -- stay open late and offer some items below cost -- more like shops in the U.S. But in the Belgian capital, as in much of Europe, retail laws require that shops close early to save staff from long hours. And tax laws require that he makes a comfortable profit on each item, to limit price competition and protect small stores.

"I would like to be more flexible," says Mr. Ivaldi. "Europe is very paternalistic."

While American consumers devour goods from around the world and fuel global economic expansion, thrifty Europeans are contributing far less to growth. The strong euro -- up more than 10% since September against the dollar -- should enable consumers in the euro zone to buy more.

But rules designed to save citizens from harm have conspired with economic cautiousness to close wallets in continental Europe. A thicket of laws to protect employees ensnares retailers, keeping prices high and store hours short. Among other regulations, Greece bans non-Greek store names, and Italian supermarkets cannot have gas pumps. Limits on consumer finance protect borrowers from indebtedness -- and stifle the use of credit cards. Western Europe has only 0.27 credit cards per person, compared with 2.23 in the U.S. State pension systems are running out of funds, so people save extra for their retirement. Moreover, many affluent Europeans just don't want to spend their free time shopping.

Residents of the 12 countries using the euro save 10.5% of their disposable income compared with 0.8% for Americans, according to the Organization for Economic Cooperation and Development. (The British, who don't use the euro, are bigger spenders and save less than Continentals.) In the past three years, the gap has widened. U.S. consumers have increased their spending more than three times as fast as euro-zone residents. This year, overall euro-zone consumption is set to grow at only around 1.2%, the OECD says, compared with 3.6% in the U.S.

"People have an urge to spend nothing," says Rolf Kunisch, chief executive of Beiersdorf AG, one of Germany's largest makers of household items, including Nivea skin creams. In the days when the German economy was growing fast, "we had about 5% growth a year in domestic sales. Now it's zero."

Weak consumption in the euro zone -- the world's second-biggest consumer market after the U.S. -- means one less source of growth for U.S. exporters. It has thus contributed to the ballooning U.S. deficit in the trade of goods and services, and is weakening the dollar: European companies that export to America are paid in dollars, which they then sell to buy euros. But because Europeans aren't consuming as many American products, U.S. exporters don't receive many euros to balance things out. Eventually, the falling dollar will mean Americans won't be able to afford as much from Europe, which will threaten Europe's meager, export-reliant growth.

Much of the red tape is designed to preserve continental Europe's quality of life. Europeans tend to see themselves as workers first and consumers second, and they elect governments that protect them from long, irregular work hours. Regulators here have limited price competition between stores to stop out-of-town malls from wiping out the small shops that enrich the character of European cities.

But low consumer spending is impeding Europe's already slow growth -- the region's economy will likely have expanded an annual average of just 1.1% from 2002 to 2004, compared with more than 3% expected for the U.S. Stagnant domestic demand is driving European manufacturers to invest outside their own borders, where they can increase sales faster. Beiersdorf, for example, recently expanded its factory in Shanghai and launched its skin creams in Vietnam. "We will continue to live off globalization, thankfully," says Mr. Kunisch.

Such moves hold back hiring and wage growth in Europe, and so further discourage spending. The only way out of this cycle: shopping. "It is time for you to consume," Jean-Claude Trichet, head of the European Central Bank, told the citizens of the euro zone at a news conference several months ago.

Anke Hemmann isn't ready to heed that advice. A psychologist from Plauen, Germany, Ms. Hemmann thinks the country's state pension will be severely reduced by the time she retires. As in much of continental Europe, German pensions are almost entirely paid for by levies on current earnings, instead of by investing money over time. But a low birthrate will reduce the working-age population while the ranks of pensioners are swelling. Experts say this will result in drastic future cuts to pension payments.

"I'm not relying on there being anything," says Ms. Hemmann, 27 years old. "If there is something, that's a bonus." So she puts 12% of her disposable income in a life-insurance policy that will serve as a private pension. That doesn't leave much for shopping, which -- like many Europeans -- she's not that interested in anyway. She buys shoes three times a year and an item of clothing roughly every six weeks.

Despite having a steady job, Ms. Hemmann doesn't like to spend with her credit card. She mainly uses it for convenience when vacationing abroad, and her current balance is zero. "I know it's probably bad for the economy," she says of her prudent lifestyle, but adds: "Debt is disreputable. I was brought up to spend only what I have."

Cautionary Tales

In France, the evening news repeatedly broadcasts features on the dangers of over-indebtedness, and regulations discourage borrowing to consume. For example, the French central bank requires credit cards to display clearly the words "Carte de Credit," to distinguish them from more popular, less-stigmatized debit cards, which draw directly on a checking account.

"The consumer doesn't want to show to the retailer that he is paying on credit," says Herve Kergoat, MasterCard International Inc.'s country manager for France. "In France there is a culture strongly averse to credit."

David Thesmar, an economics professor at the École Nationale de la Statistique et de l'Administration Économique in Paris, doesn't even have a credit card. He and his wife want only enough money to meet their spending needs, and he would rather spend his free time with his kids than go shopping, he says. "I'm not a very big shopper," says the 32-year-old. "I don't feel bad when I buy cultural things like books or CDs, but it feels bad to buy futile things, especially when I buy clothes."

Even Europeans who want more consumer credit find it restricted. In Belgium, people can borrow only as much as about $1,600, unless they sign a lengthy written contract and their bank scrutinizes their debt history. Most customers stick to the cap instead, which also applies to overdrafts on bank accounts. "It's to protect the consumer from himself," says Jacques Zeegers, secretary general of the Belgian Banking Association.

As a result, while the average American spends more than $5,500 a year using credit cards, the equivalent figure for Germany is only $64, and for France just $30, according to Euromonitor International, a market-research company.

In most of continental Europe, banking regulations don't allow borrowing backed by home equity, as in the U.S. In Montclair, N.J., Alex and Gail Ciecierski's family home has more than doubled in value since they bought it 13 years ago, and the Ciecierskis have taken out a $205,000 home-equity loan. They used this and another mortgage to buy three properties in Florida, entirely with borrowed money. With this arrangement, Mr. Ciecierski, a 48-year-old technical manager at a television studio, is financially secure even though he saves little from his salary and the family spends more than he earns. His savings-account balance is just $1,000, while his credit card is $13,700 in the red. His wife Gail considers shopping "a sport," he says. "I'm living the American dream: no cash in pocket."

But in Italy, for example, home loans are restricted to 80% of a property's initial purchase price, and Italian law and banking practice make it difficult to increase borrowing against the value of a house.

"I can't imagine that Italians would link their spending to capital gains instead of their income," says Tito Nocentini, head of retail at Banca di Roma. "When Italians think of home loans, they think of buying a home. Unlike Anglo-Saxons, they don't think of doing it to buy something else, like a car."

Luca Tardella, a 37-year-old statistician, bought a house in Rome five years ago. Since then, its value has more than doubled. But he doesn't like being in debt, and chose the shortest possible mortgage-repayment time, 10 years, in case Italy reverts to its double-digit interest rates of the past. He wouldn't want to take out home equity for consumption even if his bank allowed it.

"If I consumed the capital gains today I wouldn't be able to use them to buy a bigger house as my family grows," he says. "I don't have the mentality of borrowing to consume. I buy things little by little from the money I have, to preserve peace of mind. It was the way in my family: Never owe a debt to anyone."

European policy makers have tried to boost consumer spending. In July, France's parliament enacted a tax credit worth 25% of any interest paid on consumer loans this year and next. Then-finance minister Nicolas Sarkozy also cajoled supermarkets to reduce by 2% the price of hundreds of branded goods from yogurt to shampoo. And Mr. Sarkozy proposed loosening a French law that stops retailers from selling goods for less than they paid for them -- but his plan only let them reduce their prices by a limited amount, as he feared complete liberalization would spark a price war favoring the biggest retailers. Despite all these moves, French household spending has stalled.

The European Commission, the executive arm of the European Union, has pushed unsuccessfully since 2001 for a liberalization of laws on sales promotion, to cut through national rules that inhibit cross-border competition. France, for example, bans promotional games like lotteries, while Austrian law prohibits the advertising of free gifts if they exert "psychic pressure to buy."

But national governments, which have the final say on pan-European laws, couldn't agree on the proposed liberalization in September. Objectors, such as France, claimed it would leave consumers vulnerable to misleading offers.

Restricted Hours

European store hours are often restricted to protect staff from working late. French labor law keeps most stores closed all day Sunday, and they can only open for 10 hours on other days because staff can't be required to work longer.

Over the past few years, vending machines offering milk, cereals and toilet paper have sprung up on Parisian streets to meet a demand that shops can't. In Germany, after years of tortuous debate between government, retailers and unions, stores were in 2003 allowed to remain open until 8 p.m. from Monday to Saturday, instead of 6 p.m. on weekdays and 4 p.m. on Saturday as before.

But when Belgium's biggest supermarket chains demanded longer open hours in the evenings last spring, retail unions threatened to strike, and the chains gave up, says Frederic Lernoux, a policy adviser for Belgium's small-enterprises ministry. "There is no more social life for the self-employed if they have to open 24 hours a day to compete," says Mr. Lernoux.

These laws stop Mr. Ivaldi, the Brussels shopkeeper, from staying open until 10 p.m., as he would like to some nights, for clients who work late.

He also wants to offer promotional packages, such as a suit and tie with shoes, and discounts for goods that aren't selling well. But the law forbids promotional discounts outside the official sales in January and July -- and stores can't even advertise coming special offers in the run-up to these sales.

Mr. Ivaldi's discounts even are limited during the authorized sales, because the tax authorities expect him to sell his wares for an average margin of 50% over purchasing cost. Belgium's finance ministry says the rule is designed to simplify the calculation of value-added tax.

But even if retail restrictions were swept away, many Europeans would carry on saving to supplement their future pensions -- Mr. Ivaldi among them.

"If I had less sense, I would be a spender," he says. "I would love that. I would go to boutiques and buy clothes, I would buy cars, I would buy a sailing boat."