The E.U. (European Union) was in the news a lot last week as the G20 nations met in London. The E.U. came out of the G20 meeting with virtually everything they wanted: no commitment to any deficit spending stimulus plans, more funding for the IMF to help eastern Europe countries (good news for western Europe exporters, bad news for American taxpayers), and a pledge to avoid protectionism at all costs. That last issue was especially important to them. And no wonder. The E.U. is latched onto America tighter than a lamprey eel, sucking the life blood from our economy at a rate that, relative to its size, nearly rivals China.
First, some facts about the E.U. It’s comprised of twenty-six nations with a total population of 487 million people and a land mass of 1.68 million square miles, giving them a population density of 290 people per square mile. That’s 59% more people than the U.S. in an area about half our size. The E.U. is only 20% less densely populated than China.
Because the E.U. is so densely populated, the theory I’ve presented in Five Short Blasts predicts that the U.S. would suffer a significant trade deficit in manufactured goods if a policy of free trade was employed with the E.U., which it is. The following chart depicts the U.S. balance of trade with the E.U. from 2001 through 2008.
As you can see, the U.S. had a trade deficit in manufactured goods with the E.U. of $72.6 billion in 2008. Thanks to the decline of the dollar vs. the Euro and the collapse of the global economy, it has declined from is peak of $93.4 billion in 2005, but it still accounts for some 20% of America’s total trade deficit in manufactured goods with the entire world.
In per capita terms (divided by the population of the E.U.), this deficit in 2008 was $149.17 for every man, woman and child in the E.U. That is, the income of a typical family of four in the E.U. was boosted by about $600 by trade with the U.S. Unfortunately, for the typical family of four in the U.S., this meant a loss of income in 2008 of $950. This per capita deficit in manufactured goods with the E.U. of $149.17 is only about 27% less than the $207 per capita deficit we had with China in 2008. Since the E.U. is 20% less densely populated than China, this is almost exactly what my theory would predict.
So it’s no wonder that the E.U. wants to avoid a turn toward protectionism. Such a move would restore a balance of trade with U.S. – great for us but bad for them. They’re very happy with the status quo. And why should they enact stimulus plans of their own? If Americans will stimulate their own economy, it’ll drive up the demand for European goods, providing them all the stimulus they need. They get all the benefit; Americans shoulder all of the cost – again.