Europe’s Sick Economies

From The American Enterprise, an analysis of economic performance of the nations of Europe.

Some key points:

The inescapable reality is that the economies of the major countries on the European continent are basket cases: They produce the unemployed by the millions. Even more frightening, European economies are creating a new kind of stratified society, in which a substantial and growing minority is shut out from the labor market permanently through absurdly high minimum-wage requirements and overly strict regulations (like the employment protection laws that can make it almost impossible to fire people).

The syndrome has not blighted all European countries equally—parts of Eastern Europe, and some Western European countries, are healthier than the norm. But in the three countries with the largest economies—France, Germany, and Italy— stagnation, joblessness, and low or no growth are now facts of life. Together, these Big Three countries account for about three fifths of the Euro Zone’s economic output, and they are not healthy—and haven’t been for years.

One of the bright spots has been Britain, rules by a nominal social democrat who nonetheless appears to understand economics.

And across the Channel, recently re-elected British prime minister Tony Blair has made it his mission to open an economic debate across Europe. By adopting economic policies much closer to America’s than to those of France and Germany, Britain has thrived over the last decade. The U.K.’s unemployment rate is half the continent’s, its growth has been almost twice the level of the Euro Zone, poverty is declining in Britain, and business creativity is rising.

In a June speech to the European Parliament, before Britain took over the E.U. presidency for six months, Blair argued against French and German insistence that to trim Europe’s welfare state and unravel some of its socialist policies would be to ape an American economy that “tramples on the poor and disadvantaged.” He asked bitingly: “What type of social model is it that has 20 million unemployed in Europe? Productivity rates falling behind those of the USA? That, on any relative index of a modern economy—skills, R&D, patents, information technology, is going down, not up?”

“The issue,” Blair warned his fellow Europeans, is not ideology, but “modernization.” It is absurd, he suggested, for the European Union to spend 46 percent of its money on subsidies to farmers. He called on Europe’s political leaders to show enough nerve to “send back some of the unnecessary regulation, peel back some of the bureaucracy, and become a champion of a global, outward-looking, competitive Europe.”

For making these points, Blair was attacked by French president Jacques Chirac and other Europeans, and a June E.U. summit and budget meeting degenerated into a debacle. Similarly, a series of market-oriented reforms proposed by European Commission president Jose Manuel Barroso was dashed earlier in 2005 by a group of European countries led by Chirac and Schroeder.

Continental Europe doesn’t follow perverse economic policies by accident; both the popular political culture and elite manipulation conduce to twart reform.

Nearly every top politician in Germany is on record giving a grave, smug warning about the danger of letting “American conditions” seep into the German economy. In Germany’s economic debate, “American conditions” is code for stiff economic competition, low taxes, minimal state intrusion, and limited duration welfare payments. Ireland and Britain have adopted many of these policies themselves, rocketing past Germany and France in living standards in the process. But for political opportunists in continental Europe, the quickest way to dismiss any talk of market freedom or reduction in the size of government is to ooze concern about American economic brutalism.

But the politicians have a receptive audience for their demagoguery.

When a majority of French voters rejected the proposed European constitution this summer, they could have been acting for any number of good reasons. . . . Yet when the French said “non,” polls showed it was not out of any qualms over the megalomaniacal document itself. It was because the average Frenchman wanted to punish the European Union for its role in opening up Europe’s economies somewhat. The typical French voter was not upset because her economy is too centralized and manipulated; she said she wanted France’s economy to be more statist than even Brussels allowed.

Likewise, the backlash against Gerhard Schroeder solidified not when his socialist nostrums ran the German economy further into the ground over six years, but when he finally put forth some timid reforms—such as cautiously cutting unemployment benefits—to try to slip out of his economic mess. A majority of Germans pronounced these reform steps as going in the “wrong direction”—as if Germany could possibly survive going any further in the social democratic direction.

The attitude still most widely held in Europe is that it is the job of politicians to distribute and redistribute society’s goods—be it jobs, income, or wealth. There is a deep zero-sum mentality in Europe which starts from the idea that politics, not competition, should govern economics. Asked in April 2005 whether competition is good for economic growth and employment, only 45 percent of Germans strongly agreed. In both France and Italy, the share was only 29 percent.

In short, the political culture of Europe has yet to catch up with the modern era.

Europe’s lack of economic performance, as well as the fact that Europe has been overshadowed by the United States both culturally and in international affairs, has been an important reason for anti-American attitudes on the continent. Smarting from their own failure -- and American success -- they make claims to moral superiority. The really think they are more civilized than the U.S. because they don’t have the death penalty. Given that polls show that a majority of citizens in Europe want the death penalty, this amounts to claiming moral superiority precisely because their political systems are less democratic than that of the U.S.

The culture will eventually change, but it’s an open question how much conditions have to deteriorate before that happens.