[VIEWPOINT]Europe: sick man of the world?

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[VIEWPOINT]Europe: sick man of the world?

China is growing at rates of 7-plus percent, and so is Russia. All of Asia is booming again, and the U.S. economy is growing at its long-term rate of close to 3 percent. The odd man out is Europe ― more precisely the euro zone, the 12 members of the European Union, who have joined in a monetary union.
In Brussels, the capital of the EU, euro zone forecasts were just brutally cut. Accordingly, growth will be only 1.6 percent this year, down from earlier estimates of 2.0 percent. Worst hit was Germany, once the shiny engine of European economic performance. Its growth rate was revised downward to 0.8 percent.
Germany is now the sickest man of Europe, but Italy, with a growth rate of 1.2 percent, is not far behind, and neither is France. The only exception is Britain, which is growing at a healthy 2.8 percent. There is a message in these numbers.
The message is: “Thatcherism.” Among the bigger countries of Europe, Britain is the only one that has taken the bitter medicine of microeconomic reform, as prescribed in the 1980s by the “Iron Lady,” also known as Margaret Thatcher. Luckily, when the Left came back into power under Tony Blair, it left Thatcher’s reform legacy intact.
As a result, Britain’s unemployment rate has consistently been one-half of continental Europe’s rate ― 5 to 6 percent rather than 10 to 12 percent in the big continental countries. And growth, as the most recent figures show, is about twice as high as in the euro zone.
As Asians look west across the Pacific, they should be as worried as the European themselves; after all, the EU and the United States are East Asia’s largest export markets. Europe is the only cylinder in the motor of the world economy that refuses to fire. Obviously, this is not a cyclical matter, but a structural one. Europe now looks suspiciously like Japan, which went through three recessions in 13 years before it came out of its slump.
Europe’s story may well be compared to Japan’s. It is the story of highly-protected markets, especially labor markets, of high barriers to entry by foreign competitors, of anti-competitive legislation, which favors producers over consumers, of wages that are too high, and flexibility that is too low.
Both Europe and Japan did extremely well with this model for about 50 years. But the tides of change could no longer be held back. Don’t call it “globalization.” It is “Europeanization.” If you live in Germany, as I do, our “China” is next door. It is called “Poland” or “the Czech Republic” ― countries with one-sixth of the German wage level, but almost the same productivity. Evidently, no German (or French) worker can compete with that.
But the French and the Germans have been the worst culprits. The two biggest countries of the EU, good for about 40 percent of total GDP, have acted as the two biggest brakes on reform. If the EU wants to liberalize the market for services, watch Berlin and Paris train their biggest guns on Brussels. Freeing labor markets? No way, we want to stay in our cozy protectionist hut, keep wages and welfare high, and pretend that the storms of change will just die out.
But that hut is not so cozy anymore, as the downward revision of EU growth figures shows. While it is true that high oil prices (over $55 per barrel) and a high euro have cut into growth, the fact is that the United States and Britain have suffered far less. And why? Because their economies are so much more adaptive and have been ever since Ronald Reagan and Margaret Thatcher took an iron broom to them.
Nor is it only right-wingers like these two who have done the necessary, but painful things. In the United States, Bill Clinton, a Democrat, boldly changed welfare legislation. As a result, more than one-half of the 15 million welfare recipients left public assistance. In Britain, it was Labor Prime Minister Blair who similarly transformed the system toward “workfare.”
So why can’t the Europeans do it? There are lots of reasons, but my favorite explanation is the electoral system. The two Anglo-Saxon countries have first-past-the-post electoral systems; the Europeans do it (more or less) by proportional representation. In Britain and America, you always get a clear majority, magnified by “winner-takes-all” rules. In Europe, where every party wins proportionally as many seats as it has gotten ballots, you never get decisive majorities. The outcome is a multi-party government stalemating itself and incapable of making bold decisions.
Eventually, Old Europe will reform; it has no other choice if it wants to keep up with East Asia and Eastern Europe. But compared to Reagan’s America and Thatcher’s Britain, the process will be very slow. The Germans have just started to change their labor markets at the margin; the French and Italians haven’t even begun. When will Europe come out of it? Please note that the structural slump is already 10 years old. Give it at least another 10 years before Europe will be a shiny engine of world economic growth again.

* The writer is the publisher-editor of Die Zeit.


by Josef Joffe

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