Brendan: You mentioned Europe. Let's talk specifically about Europe. How do you see that shaking out? Do you think this gets solved any time soon? What should policymakers do?
Bruce: OK. I think that, really, the model you have to have for Europe is Japan, because what seems to be going on in Europe is that – I suppose you know this – that Britain and the United States and, to a lesser extent I think Denmark and the Netherlands, are the economies that have gotten rid of their manufacturing employment. We manufacture a lot, but under 10% of the population works there.
Brendan: More toward services.
Bruce: There is a big commitment in Europe, for emotional reasons, but also because the unions are very powerful, to preserve manufacturing, just as there was in Japan because they felt they were a resource-poor country. They had to export and have a big excess of exports over imports so they could always pay for these essential imports, and that meant manufacturing.
But in manufacturing, global demand growth is maybe 2%-3%. Productivity growth is probably 5%-7%. This is like agriculture in the old days. This is dying and the only way countries like Germany can survive is, of course, to destroy the manufacturing sectors of the weaker countries like Italy and Spain and so on, that can't protect themselves by devaluing.
I think you've reached a point now where these very high levels of unemployment have stabilized the external deficits of the Southern European countries, and the only question is how long they're willing to live with that.
Now, the Japanese have been willing to live with it for 25 years. Lots of luck in Europe.
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