The
decline and fall of Europe – and that includes Great Britain
16 April 2006
IN Decline and Fall of the Roman Empire, Edward Gibbon famously chronicled the
slow and tragic collapse of a great civilisation. After Italy’s vote for
paralysis last week and France’s abject surrender to striking students over a
modest attempt at economic liberalisation, it must be merely a matter of time
before Europe will require a new Gibbon to pen the story of its own gradual
demise towards economic, military and cultural obscurity.
Europe’s decline and fall is entirely of its own making. Deeply hostile
attitudes to the market economy among both voters and governing elites, as well
as defective political institutions that favour weak coalition governments
easily frightened by street protesters, have destroyed Europe’s reform agenda.
Together with Chancellor Angela Merkel’s continuing inability to push through
serious reform in Germany (hardly surprising given that she leads a left-right
Grand Coalition at loggerheads with itself), the renewed push by the European
elites for the fundamentally flawed European Constitution and a dangerous return
to protectionism and economic nationalism across the continent, these depressing
developments only confirm what this newspaper has long argued: the core
euro-zone powers will continue with their failing social-democratic policies,
condemning their people to high unemployment, low levels of growth and relative
economic, social, cultural and geopolitical decline.
The euro zone’s new Achilles’ heel is Italy, the region’s worst-performing
economy over the past five years. The Italian economy grew by a miserable 0.9%
in 2004, 0.1% in 2005 and is expected to struggle to make 1.3% this year and 1%
next year, according to Commerzbank. The budget deficit and the national debt
are surging, threatening further downgrades to the country’s credit ratings and
a major financial crisis a few years down the road which spells trouble for the
euro.
After a hostile court ruling on Friday, it seems this weekend that Silvio
Berlusconi, Italy’s outgoing prime minister, has little chance of over-turning
the official results of last week’s election, which gave former European
Commission president Romano Prodi’s centre-left government a wafer-thin
majority. Given the deep disagreements within Mr Prodi’s coalition, any
government he is able to put together is unlikely to survive for more than a
year. Italy is likely to be ungovernable for the foreseeable future, a tragedy
after five wasted years under Mr Berlusconi, who talked the free market talk but
failed to walk the reformist walk.
The situation in France is barely better, even though its economy has performed
less badly than Italy’s. Having last week capitulated to mass protests, the
French government confirmed on Thursday that it had scrapped the ill-fated
Contrat Première Embauche (CPE), which (in its original incarnation) would have
allowed companies to fire young workers during a two-year period after they had
been hired without incurring the costly penalties that are usual in France. It
was a modest reform, intended to help tackle France’s shocking 23% youth
unemployment by making employment of younger workers a less scary and expensive
prospect for employers. But the measure was greeted with outrage by France’s
middle-class students and has now been replaced by the traditional and failed
French policy of the government providing financial incentives for employers to
take on young workers.
The result of the CPE fiasco is that France too is now paralysed, encumbered by
a lame duck president, Jacques Chirac, and his discredited Prime Minister,
Dominique de Villepin. Nicolas Sarkozy, the interior minister and France’s only
hope for any kind of reform, has damaged his credibility by his naked
opportunism in opposing the reform to undermine Mr de Villepin, a potential
rival in next year’s presidential election. Although Mr Sarkozy claims to be the
candidate for “rupture” and to support a Big Bang approach to liberalisation
which would go hugely further than the ill-fated CPE, his behaviour has
undermined the cause of reform and emboldened the Left. Mr Sarkozy’s biggest
rival and the current front-runner in the opinion polls, Ségolène Royal, is a
traditional socialist who would make matters even worse.
Italy, Germany and France are divided straight down the middle between Left and
Right, making radical reform difficult. In France, everybody expects the
election results to be extraordinarily close; in Italy, the 49.8% to 49.7% split
of the vote was astonishingly close; in Germany Mrs Merkel did barely better
than Gerhard Schröder, her predecessor as Chancellor. But the even split of
voters into Right and Left is not the fatal roadblock to reform. Far more
important is the fact that a large majority everywhere opposes the sort of
radical medicine required to rejuvenate their economies and societies.
There is very little support in Europe’s major economies for the kinds of
reforms undertaken by Ireland, Iceland, Slovakia or Estonia over the past 10
years, which have transformed themselves by slashing taxes, privatising their
retirement systems, deregulating their economies and privatising their
industries. Even Mr Sarkozy, by contrast, supports economic nationalism and Mr
Berlusconi’s ministers openly appealed to the protectionist proclivities of
Italians in the run-up to the election. In Germany, Mrs Merkel’s Grand Coalition
is so centrist that it supports a swingeing increase in value added tax next
year which could easily tip the country back into recession.
The sad but realistic truth is that the voters of Germany, France and Italy,
whose economies account for more than two-thirds of the euro zone’s gross
domestic product (GDP) and over half of the EU’s, prefer the comfortable
stagnation of the social-democratic status quo to the creative destruction but
rising living standards of the market economy. Ideas really do have consequences
– and most Europeans have the wrong ideas, especially in France, where polls
show that only 37% of the population believe that the market economy is the best
economic system, against 50% who disagree, which explains why, in the voting
booths, they implicitly endorse destructive ideologies such as communism,
socialism, fascism or extreme environmentalism in such huge numbers.
False economic nostrums now pervade the population to such an extent that
Thierry Breton, the French finance minister, has officially deemed France to be
economically illiterate. The rot starts in French schools, where a bizarre mix
of Marxist sociology, left-wing journalism and 1970s sub-Keynesian economics is
taught to students under the guise of a core subject called “social and economic
sciences”. A study of the main textbooks reveals choice quotes, such as the
claim that “one must analyse the salary as purchasing power that you could not
cut without sparking a deflationary spiral and thus higher unemployment”,
implying that the answer to France’s problems is to increase salaries because
this would lead to more spending. Another textbook argues that the state should
subsidise jobs in the public sector as the solution to the jobless crisis: “We
can seriously envisage this because our economy allows us already to support a
large number of unemployed people.” Mr Breton plans to set up a 15-member
Council for the Teaching of Economics to remedy this; one think-tank is
sponsoring economics teachers to do work experience in private companies to
learn how private enterprise actually works. These are worthy endeavours but
unlikely to have any real impact.
Economies inevitably change, as industries decline and others rise, and as
technological change makes some jobs redundant while creating new ones. But the
failing economic model of the Big Three euro-zone countries makes it much harder
for people who lose their jobs to find new ones, unlike the more deregulated
American model, which makes it easy. In America there were 54m new hires in 2004
and 51m job changes in a labour force of 147m. Over half of job moves were
voluntary – people leaving because of better opportunities. In Europe, by
contrast, people are less likely to voluntarily change jobs for fear of becoming
unemployed.
In the US, younger baby boomers, born between 1957 and 1964, held an average of
9.6 jobs from age 18 to 36. That is the sort of statistic to fill the young
demonstrators on the streets of France with horror; their ambition is still a
job for life, subsidised by the state if need be; polls show that a French
mother’s highest aspiration for her child is that he or she becomes a civil
servant, with job security, regular pay and (in France) high social status. Such
attitudes do not make for flexible labour markets and it is the most vulnerable
who are paying the cost. Long-term unemployment in the euro zone is now six
times higher than in America, where only 13% of unemployed workers are unable to
find work within 12 months, compared with 21% in Great Britain, 42% in France,
52% in Germany and 50% in Italy.
Just as Europe’s long-term unemployed face the future without hope, the
productivity of those in work is lagging. Workers in America have produced a
stunning 31% increase in productivity over the past decade, thanks to more
flexible capital and labour, lighter regulation and taxes, better management
techniques and a payback from huge investments in information technology. By
contrast, workers in the euro zone have seen their productivity grow by just 11%
during the same period. One of the golden rules of economics is that living
standards closely follow productivity over time, which helps to explain why
America is again becoming attractive for ambitious Europeans, or at least those
who prefer financial rewards to longer holidays and leisure time.
Wherever you look in Europe’s major economies, the situation is grim; the recent
optimism about their improved growth prospects has been misplaced. Attitudes
remain deeply hostile to reform. The Left remains attached to a failed status
quo. The Right lacks the guts to force through radical reform and, in any case,
has its own attachments to the status quo. The British see themselves above this
continental drift; in fact, the British economy is now part of it.
It has been the peculiar achievement of Gordon Brown’s eight years as Chancellor
to take a dynamic British economy and place it firmly into the mainstream of
European tax-and-spend levels, with consequent sclerotic levels of
European-style growth. When it comes to tax, spending, regulation and even
labour flexibility, Britain looks increasingly part of the failed European
social-democratic consensus. At the same time David Cameron is turning the
Conservative party into a centrist affair that is also tied to the status quo –
a sort of British version of European Christian Democracy, without the religious
overtones. The decline and fall of Europe is continuing apace – and Great
Britain has joined it.