A One-Year Wonder; Germany is booming, pulling the rest of Europe along. Or is it?

Byline: Brian Wesbury (Wesbury is chief economist for First Trust Advisors in Illinois.)

Here's an interesting fact from supposedly sclerotic Europe. The German economy outperformed the United States in 2006, with real GDP up 3.7 percent for the year--the strongest growth in six years, more than twice the 1.7 percent rate of 2005 and a huge improvement from the average 0.2 percent between 2002 and 2004.

German economic activity, it's said, is acting as a "locomotive" for growth across Europe. Real GDP in the euro zone grew 3.3 percent last year. Three million new jobs were created. Unemployment fell a full point to 7.4 percent. After decades of sub-par performance, many economists and politicians have begun talking of a "renaissance" in Europe, with worldwide benefits ranging from higher global investment returns to rising tax revenue and lower costs for social welfare and unemployment insurance.

The reality is very different. These optimistic forecasts have little chance of coming to pass. Reason? The surge in 2006 German economic growth did not come from an improvement in the underlying economy. Because German tax rates were scheduled to move higher on Jan. 1, 2007, many companies and individuals simply shifted income and spending forward into lower-tax 2006. Those who did so were able to avoid a 3 percent hike in the VAT tax, to 19 percent, as well as a 3 percent hike in the top marginal income- tax rate to 45 percent. After all, if you knew that a store was raising prices next week, you would probably do your shopping this week, right?

For Germany, this means that growth was stolen from 2007, artificially boosting 2006. The forward shift in economic activity caused many forecasters to lift their projections for euro-zone growth in 2007. Others have been tempted to believe that Germany can raise taxes without hurting overall economic activity. If Germany has entered a "self-sustaining" recovery--not just surviving higher taxes, but actually seeing a boost in growth--then perhaps other countries can, too. ...