Tuesday, 2 September 2003

Eliminating 'Eurosclerosis'

For many centuries Europeans have been fascinated with America’s political and economic developments. One of the best-known European explorers of the secret of America’s success was undoubtedly Alexis de Tocqueville. Dissatisfied with the prevailing political situation in Europe, especially France, he was eager to understand why America had apparently succeeded in realising the ideals of the French revolution (liberté, égalité, fraternité), while France was not. He went to the States and ‘sought the image of democracy itself’.

But Europe’s enchantment with America was not limited to its political system. If we take a leap in time, the focus of Europe’s admiration shifted to America’s superior economic power and technology, which enabled it to put an end to what now would be perceived as the intra-European fratricide of WW II. Subsequently, it came to Europe’s rescue with Marshall aid to assist it in recovering from the ravages of war, which was so aptly described by Henry Kissinger in his famous quote: ‘America, the daughter of Europe, repaid its heritage by contributing idealism and resources to the old Continent in its darkest hour.’

Part of the Marshall aid was money. But no less important was the American contribution to institution-building, of which NATO and the OECD still bear witness. Another crucial element was the shiny example of America’s economic model with its vast borderless market, economies of scale, mass production and mass consumption, which enabled the application of advanced technology and the achievement of a high and unprecedented living standard for broad layers of the population.

Besides Jean Monnet’s ideas about European federalism – which should be achieved by a bottom-up approach, to begin with economics – the American economic model inspired Europe to embark on economic integration. Contrary to what many people believe, the notion ‘integration’ itself is not of European origin. It made its first appearance in a speech that the American administrator of the Marshall plan, Paul Hoffman, delivered in 1949. He invoked the term to distinguish what the Marshall Plan aimed at from the disintegration of the interwar economy with its rising protectionism and competitive devaluations. Hoffman was quite unambiguous as to the meaning of the new term; it involved ‘the formation of a single large market within which qualitative restriction on the movement of goods, monetary barriers to the flow of payments and eventually all tariffs, are permanently swept away.’

In the following decades European integration made great strides, albeit with occasional set-backs. But in the second half of the sixties some uneasiness emerged about the fact that, despite reasonable growth, the European economies were less innovative than the American economy. This phenomenon became known as the ‘technological gap’. The prominence of this issue was even reinforced by the publication of Jean-Jacques Servan-Schreiber’s best-seller in 1967: ‘Le défi Américain’ (The American Challenge). The problem was put high on the transatlantic agenda. And in the words of a diplomat who was closely involved in the discussions on the issue: ‘The gap was filled with a mass of paper reports.’

Then came the lost seventies with its oil crisis and stagflation. Subsequently, in the middle of the eighties, and despite the resumption of growth, Europe was again alarmed about its lack of competitiveness compared with the US and Japan. Contrary to Europe, these countries possessed single currencies and large home markets, which served as launching pads to conquer the world market, especially in the field of advanced technology. This challenge was sometimes referred to as the American/Japanese duopoly. At the same time, and despite its common market, Europe was still fragmented by a great variety of currencies, customs posts and all kinds of other non-tariff barriers, including differences in regulation on health, safety, environment, phytosanitary issues etc. It was the so-called European Round Table of Industrialists that urged governments to eliminate these barriers. This time, Europe responded adequately and embarked on bold initiatives to create a single market and a single currency, which were successfully concluded in the following years.

It gave rise to an interlude of self-congratulation, which was marked by the publication of Michel Albert’s ‘Capitalisme contre capitalisme’ (‘Capitalism Versus Capitalism’) in 1992, in which he glorified the advantages of Europe’s ‘Rhineland model’, as opposed to the Anglo-Saxon (read: American) model of the market economy. He concluded that the first was superior to the second, because it offered a better mixture of economic performance and social justice, in other words: of efficiency and equity, in the form of the welfare state. However, the ink of the book was hardly dry, when Europe’s economic performance began to deteriorate. In the same period, the American economy was still outperforming that of Europe, benefitting form the emergence of the ‘new economy’, fuelled by innovation, especially in the field of ICT.

In the second half of the nineties, and to the surprise of many European policy-makers, the European economy recovered as well, which gave rise to an almost euphoric mood. Against this backdrop, the EU, at its Lisbon Summit (March 2000), formulated a couple of extremely ambitious economic policy objectives for the next decade. It had never done so before with such clarity and audacity. Europe wanted to become the most competitive and dynamic knowledge-based economy in the world, which is capable of sustained economic growth – 3% was considered to be a realistic proposition – with more and better jobs and greater social cohesion. It was clear that Europe was aiming at outperforming the US. Yet, the word America was never mentioned in the Lisbon Summit’s set of policy recommendations, even though it spanned 41 paragraphs. The reference to social cohesion was meant to underscore that Europe was not inclined to adopt the Anglo-Saxon model, which in the eyes of the Europeans, lacks a ‘human face’.

As a follow-up to the Lisbon mandate the European Commission proposed a number of priority objectives, including a coherent innovation policy, a favourable regulatory framework, the promotion of the establishment and growth of innovative enterprises, the improvement of the most important interfaces within the innovation system, and the creation of an innovation friendly attitude within society. These general orientations have subsequently been translated into a great number of concrete recommendations to the EU member countries. The creation of an innovation scoreboard, constitutes an interesting element of the new approach. It enables us to compare the performance of the EU with that of the US and Japan, as well as to identify strong and weak points in the innovation effort of the EU member countries. The scoreboard shows that the US is number one. In some fields Europe’s performance is superior to that of Japan, whereas it lags behind Japan in other fields.

Will Europe succeed in becoming the most competitive and dynamic knowledge-based economy in the world? And will Europe be successful in substantially reducing its high rate of unemployment through the promotion of innovative activities? Although the new approach to promote innovation might lead to some improvement, the answer to these questions is likely to be negative.

As regards the first question, it should be recognised that the more collectivist European Rhineland model with its highly developed welfare state and a relatively equalitarian income distribution possesses many advantages from a social and political viewpoint. But this socioeconomic system provides fewer incentives to engage in entrepreneurial activity, to take risks and to innovate, as well as to move from one job to another, than the more individualistic, less equalitarian American model. It is also striking that in the European approach governments play a central role, whereas in the US innovation is mainly a spontaneous market-driven process.

Moreover, Europe labours under the inconsistency between various policy objectives. At times, one can hardly escape the suspicion that the left hand does not know what the right hand is doing, or even wants to know what it is doing. Examples abound, as in the field of environmental protection where uncertainty is increasing because of differences in national legislations. Consequently, regulation is crippling private enterprise, especially SMEs. Additionally, the relatively strict application of the precautionary principle enhances risk-avoiding attitudes.

Other examples relate to microeconomic reform, e.g. the so-called golden shares, which are used to ward off foreign purchasers of domestic stock. The Commission proposal on crossborder takeovers has been rejected by the European Parliament. The basic issue at stake was whether management would have the right to initiate defensive measures without the approval of the shareholders. The proposal, arrived at after twelve years of discussion in the Council of Ministers, considered prior shareholder approval to be of the essence. After all, it is the shareholders that sell, not the management per se. The interests of management are not always the same as those of shareholders. But it was not to be.

It is, however, not only a question of inconsistency of goals. There are also persistent delays in translating agreed policy goals into concrete policy actions, as is illustrated by the liberalisation, or rather the lack of it, in the sectors of gas, electricity, transport and postal services.

As regards the creation of jobs, it is often suggested that the current European labour surplus could be absorbed by the promotion of innovative activities. Until recently, e-commerce and the Internet are supposed to be the magic potions to the problems at hand. Unfortunately, this has always been a fallacy. The causal relationship between the knowledge economy and the demand for labour is, at best, weak. Of course, one could argue that a country’s strong position in the knowledge economy will buttress its international competitiveness, which in turn, would result in increased employment. But irrespective of any knowledge economy, there has been nothing wrong with the overall international competitiveness of some European countries, given the lavish surpluses on their current account balances. Moreover, these surpluses occurred in a period when the same countries were facing both high and low unemployment. Hence, there must be some other factor that determines the level of unemployment. And this is of course the cost of labour.

All this does not mean that innovation is irrelevant. Because it does not concern employment tout court, but preferably well-paid employment. And this is the kind of employment that may be created in knowledge-intensive enterprises, with the caveat that these enterprises too are not impervious to failure and bankruptcy, as the experience over the last few years has amply demonstrated. But that does not alter the fact that the demand for labour – and, consequently, the level of employment – is primarily dependent upon the costs of labour, including wages, labour conditions, costs of social security and labour legislation (e.g. the right of dismissal). These are decisive for the flexibility of the labour market and, consequently, for the demand of labour.

But trade-unionism is well-entrenched in Europe. It has become part of the European creed of political correctness, even to the point that scientific analysis of the real causes of labour market rigidities and the ensuing remedies have, more often than not, been ignored or relegated to the dustbin of politically unfeasible propositions. This is particularly so in countries, such as Germany, where the political left and the trade unions are trapped in a suffocating embrace, which paralyses any policy reform. In such a situation, any proposal which aims at eliminating or even attenuating ‘Eurosclerosis’, including the rigidities of the labour markets, is rejected out of hand or effectively emasculated, because it presumably encroaches upon the rights of labour. Many people are even loath to take cognizance of objective economic analysis showing where the welfare state is at odds with its professed aims. They ignore the fact that an over-generous welfare state is responsible for a great deal of endemic or structural unemployment, which leads to permanent social exclusion of many people who are eager to join the labour market. In that sense a large part of European unemployment is undoubtedly a man-made disaster. In this specific respect, the face of the Rhineland model is anything but human.

So, again, will Europe be able to bridge the transatlantic gap? The answer is negative, unless it is willing to transform its Rhineland model by adopting elements of the Anglo-Saxon model. But in countries that are supposed to be the economic powerhouses of Europe, France and Germany, the steps in that direction are minuscule and hardly visible.

Hans Labohm

Hans H.J. Labohm is a senior visiting fellow at the Netherlands Institute of International Relations ‘Clingendael’.

This article first appeared on www.techcentralstation.be