South-Western College Publishing - Economics  
Consumers' Power
Subject Consumer Spending
Topic Aggregate Demand/Aggregate Supply
Key Words

Economic Growth, Unemployment, and Consumption

News Story

Reports out of Frankfort, Germany indicate that the European economy is showing signs of weak growth. According to Eurostat, the European Union statistics agency, economic growth among member countries slowed in the second quarter to only 0.5 percent, down from 0.6 percent in the first quarter. The reasons for the weakness include high unemployment, cuts in social welfare benefits, and the fact that consumers are simply not spending as much as they have in the past.

High unemployment has been a big factor among several of the 12 countries that use the euro as their currency. Take Germany, for example. Not only is the unemployment rate high, Chancellor Gerhard Schroder has proposed legislation that would cut back unemployment and social welfare benefits to eligible Germans. Consumers are reluctant to spend as they anticipate tougher times ahead.

Since consumer spending makes up such a large proportion of GDP, this lack of spending is a significant worry, not only in Germany, but also in all the European countries. The European Union has set a goal of becoming the world's most competitive economy by 2010. Their goal depends upon changing labor and pension laws and on encouraging businesses to spend more on research and new technologies. Each of these goals will be difficult to accomplish unless the pace of economic growth picks up from current disappointing rates.

"We won't manage to make Europe the world's most competitive area by 2010, but the aim is right and all countries of the E.U. must make their contributions" said Germany's Finance Minister Hans Eichel. The inability to take action on political reforms and the lack of spending on new research and technologies has lead to a mentality among consumers to save more and spend less.

Part of this mentality dates back to the introduction of the euro in 2002. Consumers who had money to spend perceived a substantial increase in prices; they responded by saving more. In Germany, for example, the perception of higher prices resulted in an increase in the savings rate from 9.8 percent to 11 percent. The economic implication of this change in savings habits was to withdraw billions of euros from the spending stream. Add this "save for a rainy day" mentality to high unemployment rates and a lack of political reforms and many economists expect economic growth in the region to be soft as long as consumers continue to hang on to their cash.


(Updated November, 2004)

Questions
1.

Compile a list of the 12 countries that use the Euro as official currency.

2. Comment on how slower consumer spending translates into higher unemployment and to slow economic growth.
3. Pick two of the 12 countries you listed above and find out the size of consumption expenditures as a percent of their GDP.
Source Carter Dougherty, "European Economies Slow as Consumers Stay Home," The New York Times Online, September 8, 2004.

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