What European economy?

Yes, there is a European economy. And according to this AP article (via BusinessWeek), it's not doing so well at the moment. The latest forecast is for continuing abysmal growth rates.

The interesting thing about this report is all the excuse-making. From afar, it's pretty obvious that labor-market rigidities, high taxes and only sporadic commitment to internal market liberalization (for example, there is still not a single EU market for banking services) are all to blame for the EU's stagnating growth. And, in their more honest moments, the Europeans themselves might admit this is true. Just witness the latest commotion in Germany about labor market reform there.

However, the most popular scapegoat at the moment is the Euro-dollar exchange rate. Now, they're getting hammered. One of the Cranky Relatives is involved in a European venture that exports to the U.S., and it's important not to underestimate the amount of damage that the weak dollar is doing to these businesses (a weak dollar discourages Americans from importing by making foreign goods seem relatively more expensive).

At the same time, the American economy has always weathered a strong dollar remarkably well. In fact, the American economy seems to be able to thrive regardless of the relative value of the currency (or at least, has been doing just fine lately; what would happen if the greenback continues to slide is another matter). That experience suggests that the European pain in the face of a strengthening currency is symptomatic of other problems.

The big one that presents itself is weak domestic (meaning, inside the euro-zone) demand. The U.S. has been enjoying improved competitiveness of its exports on the world market thanks to the weaker dollar, but back in the halcyon days of dollar strength, we could rely on enormous domestic demand to power the economy. It was the compound effect of years of economic flexibility and growth that created an economy large enough and strong enough to fuel its own growth.

But Europe is almost completely dependent on foreign demand? Even with all its hundreds of millions of inhabitants it can't sustain itself through a period of euro strength?

The point of which is that there's more to this story than meets the eye.