When I wrote two years ago that the Eurozone resembled the Hindenburg approaching the docking mast at Lakehurst, New Jersey, Euroskeptics cheered and only those committed to the worst features of Europhilia suggested that I had underestimated Europe’s capacity for recovery. Through gritted teeth, I am now forced to admit that the Europhiles were right, at least in the short term. Disaster has not occurred, and in some places, even some recovery has taken place. Nevertheless, this week’s European elections give me an opportunity to suggest that even though the EU Hindenburg may have docked safely two years ago, its construction remains fundamentally unsound, and it does not represent a viable means of transportation in the long term.

The fundamental problem of the Eurozone, and of the European Union as a whole, is its cost structure, which is excessive at all levels of the political economy.

Before the increased competition produced by modern telecoms, this didn’t matter much. Tariffs could be erected against disfavored American goods, while Japanese and Korean VCRs could be forced to clear customs at Poitiers, where one gathers efficiency and procedures hadn’t improved much since the Black Prince decimated the flower of French cavalry there in 1356.

However in a world where labor supply has been commoditized on a worldwide basis, and supply chains snake through the poorer parts of Africa and Asia, for many goods Western countries need to supply truly heroic levels of technology, design or specialist manufacturing or service skill to remain competitive. For the last twenty years, European companies have managed to cross this bridge, but the continent’s special skills are not getting any more special, while its cost disadvantages increase all the time.

The principal cost disadvantages Europe faces are those of government. These come in many forms. With three levels of government operating in most of the EU, there is duplication of functions far exceeding that in the United States, a polity of more or less similar size. Not only does this involve the employment of multiple layers of expensive functionaries, but the three layers of regulation themselves add costs to businesses and individuals operating within the EU.

The most damaging regulations have arisen out of the global warming mania, which the EU has taken more seriously than anywhere else, inflicting gigantic damage on its economies both through subsidies to uneconomic power generation and through grossly excessive energy costs. Germany in particular has a “green” energy system that like all things German is very elegantly designed but is forcing energy intensive industries to leave the country, as well as inflicting doubled or trebled energy costs on its inhabitants.

This column has written on the costs of regulation, how in the United States the surge in regulatory activity from the early 1970s appears to bear much of the blame for the decline in average productivity growth by about 1% annually since that time, which has cost American living standards close to a third in the subsequent 40 years. However in the last decade (2003-2013) while U.S. labor productivity has grown by a mediocre 2.1% annually (slowing sharply in the last five years), the 18 countries of the current Euro area have seen productivity grow by only 0.9% per annum.

It’s not a currency effect; non-Eurozone British productivity has grown by only 0.5% per annum. Japanese productivity has notoriously lagged, supposedly because of its aging society, but even there productivity in 2003-13 grew by 1.2% per annum, a third faster than in the Eurozone and more than twice as fast as in Britain. Not all the European lag is due to regulation; some of it is due to demographics. Nevertheless the economic effect of excessive regulation is over time gigantic, and far too little account is taken of it in conventional discussions of competitiveness and growth.

Some Europeans – say British socialists and Frenchmen – will argue triumphantly that the European productivity lag is a good thing; it prevented unemployment in Britain rising as far in the recession as it did in the United States. Living standards may be lower than they otherwise would be, goes the argument, but at least the great majority of people have jobs, since lower productivity allows the work to be shared around more fairly. It’s the “lump of labor” fallacy, believed in devoutly by Maynard Keynes among others, and it takes no account of innovation and investment in the private sector, the principal generator of jobs.

Attractive though this argument may be to its proponents, statistics prove it to be bunkum. For one thing, EU unemployment is now much higher than U.S. unemployment. According to the Economist database, Euro area unemployment is 11.8% compared to the U.S. 6.3%, while in some countries such as Spain unemployment is startlingly high – in that case 25.3%. Even British unemployment at 6.8% is now slightly higher than in the U.S., so while there may have been some cyclical benefit from lagging productivity at the bottom of the slump, it has disappeared now.

However Europe’s cost disadvantage does not consist only of regulation. Government itself represents a greater share of GDP in the EU than in the United States, even after President Obama’s depredations. The aging of European populations promises to make this problem worse, as many EU social security and medical systems are in worse actuarial trouble than the U.S. one. Of course, sluggish productivity growth itself worsens this problem; if future cuts in welfare are merely promising a smaller share of an ever increasing pie, they may be acceptable to the electorate, but actual declines in living standards will be fought vigorously, with the differential turnout of the elderly that makes them an exceptionally powerful lobby.

European apologists have always claimed that the continent has two solutions to the stagnation problem, but only one of those solutions is genuine and even it is rapidly losing its force. The entry to the EU of the formerly Communist countries of Eastern Europe seemed likely to produce a spurt in growth, as those countries’ living standards caught up with the West. However while before 2008 their growth was robust, Eastern European countries generally saw deep recessions in 2009-10 and have recovered only modestly since then.

The problem with Eastern Europe’s economies is that their political structures are not fully reformed and in some cases (such as Slovenia) their economic structures retain elements of the old central planning system – in Slovenia’s case, an overbearing quasi-monopoly state bank. Socialist parties are elected regularly that are much closer to their Communist predecessors than they are willing to admit, while some of the more constructive forces on the right, such as Hungary’s Viktor Orban and Poland’s Jaroslaw Kaczynski, are demonized both by the EU bureaucracy and the media. Thus it’s likely that even the best East European countries will struggle to reach fully Western standards of living while some, such as Romania, Bulgaria and Slovenia, with their incessant Socialist governments and corruption, will continue to be a drag rather than a boost to the EU as a whole.

The other proposed solution to Europe’s cost and demographics problem is immigration, but here the cure is far worse than the disease, with low-skill wages being driven ever downward – which in practice, given Europe’s high minimum wages, causes massive unemployment. Needless to say popular opinion has surged in protest against the costs, economic and social, of this elite-imposed immigration.

The list of areas in which European costs are excessive goes on and on. In some countries, notably the U.K., persistent low interest rates have caused a real estate bubble that has made the capital city completely unaffordable for those on normal incomes. Like Germany’s power costs, this imposes a huge hidden burden on the economy as a whole, which will be very difficult to remove.

Then there’s VAT and other taxes; the excessive burden of government in the EU has in turn imposed value added taxes at 20% or more that make ordinary goods and services far more expensive than in other countries. While the exemption for exports ensures that the EU’s payments balance is close to neutral, the excessive costs of goods and services drain the living standards of the continent’s inhabitants, making true purchasing power parity wealth far lower than it appears. Finally, there are the costs imposed by the continent’s high level of unionization and inefficient distribution systems, both of which make business much less efficient and flexible than it should be.

Europeans are by and large well aware of their continent’s failings, and have two separate strands of thought about how to overcome them. One is Pikettyism, the idea among Europe’s elite that the region’s problems are caused by excessively unequal wealth distribution, which should be solved by swingeing levels of 80% income tax, plus a substantial wealth tax. This is already being tried in Piketty’s native France, with notable lack of success, either economic or political – the ruling Socialists may well run third in this week’s elections. Needless to say, it will be highly damaging wherever it is tried, destroying the capital base and causing massive emigration of the most productive.

The other strand of thought, spurred by hatred of the EU bureaucracy and of the massive population movements that have suppressed living standards, is producing a tidal wave of support for anti-EU and nativist parties of one sort or another, some of the more or less free market right, others very much of the protectionist, statist left. These movements cannot produce a governing force of their own – for one thing, there is little in common between say the British UKIP and the Greek Syriza – but if they combine they can destroy the centralized EU bureaucracy that has done so much damage.

In the short term, Europe is condemned to continued relative decline because of its excessive costs. In the longer term, there is at least some hope that some future EU election will produce a 51% majority for a collection of miscellaneous protesters that together resemble that fine British political force, the Monster Raving Loony Party. Only when the Monster Raving Loonies take power, and smash the centralized EU bureaucracy, devolving power back to Europe’s component states and its people, does Europe have a chance at revival.

-0-

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)