Lothar Spaeth may soon become the most important man in Europe. On Monday, Edmund Stoiber, who's trying to unseat German Chancellor Gerhard Schroeder, said he would appoint Spaeth as Economy and Labor Minister, charged with reviving Europe's biggest but most damaged economy.
Spaeth looks like a smart choice. A politician turned businessman, he steered Jenoptik AG through privatization and made it one of the few successful international businesses to emerge from the old East Germany. The appointment may prove just right for a country with mass unemployment and sluggish growth.
PHOTO: REUTERS
Germans do not like living in a basket-case economy, and will punish the man who put them there.
With Stoiber, a Christian Democrat, 10 points ahead in the latest polls, it looks almost impossible that Schroeder, a Social Democrat, can remain in power after September's election. If Spaeth does take power, he should find himself in good company.
Europe is filling up with pro-business, free market politicians.
In the space of a few months, the political landscape of Europe has changed dramatically. The center-left politicians who ruled in almost all of Europe's capitals are one by one being removed from power. The right is resurgent everywhere.
That may have far-reaching consequences for the euro, and for the European economy. Europe's center-right parties are winning elections on tax-cutting agendas. That has set them on a collision course with the euro-zone's stability pact, which put tight limits on budget deficits. Like all right-wing politicians, they will promise to cut both spending and taxes, but will find that taxes are easier to bring down than spending.
The right has swept across Europe from south to north.
Spain's Jose Maria Aznar took power in 1996, and in the years since then has liberalized Spain's economy. The result? Spain has one of the highest growth rates in the EU (though Aznar faces a general strike for a plan to end the benefits of workers who won't take a job). Aznar is cutting the top tax rate down to 46 percent and promised to bring it down to 40 percent.
In Portugal, the right-of-center Social Democrats rode a tax-cutting platform to victory over the Socialists in March. In Italy, Silvio Berlusconi's promises to cut taxes helped make him prime minister last year. He has already staged a bruising confrontation with the unions, and promised to cut taxes as a share of Italian GDP from the current 43 percent.
In France, center-right President Jacques Chirac was overwhelmingly re-elected against the far-right candidate Jean-Marie Le Pen. It remains to be seen if the right can capture control of the National Assembly in next month's election, but the omens must be good. If it does, France will have its most pro-business government for years.
France's new prime minister, Jean-Pierre Raffarin, has already appointed Francis Mer as finance minister. Mer was running Arcelor SA, the world's biggest steel company, and has pledged himself to supporting Chirac's planned tax cuts. By autumn, both the French and the German finance ministers may well have been plucked straight from the corporate sector.
The Dutch were to go to the polls yesterday, and look almost certain to elect the right-of-center Christian Democrats. They may also give a significant vote to the far-right List Pim Fortuyn (although Holland is its own unique place -- even their right-wingers are fairly liberal). By the end of this year, the UK will likely be the only big European country governed from the left.
Promises of tax cutting thrown around like confetti during election campaigns may prove harder to keep once those new governments are established in power. All the members of the euro have to keep their budget deficits within three percent of GDP.
That will be hard to achieve.
In France, Chirac this week abandoned a promise to balance the nation's budget by 2004. The new Portuguese government has already had to scale back tax-cutting plans after being censured by the EU. Expect more conflicts between new right of center governments and the EU and the European Central Bank.
Expect also to hear some very old tunes getting reprised.
The way for Europe's new governments to get out of this jam is to revive old-school Reaganomics. They will have to argue that cutting taxes will revive the economy, push down unemployment, and so solve the deficits -- exactly what Ronald Reagan argued as he pushed through big tax cuts without making cuts in spending in the US during the early 1980s. The Laffer curve is set to make a comeback, this time in continental Europe.
There are some signs that it works. In Spain, which started this process, tax revenue is rising. The government managed to balance the budget for this year, mainly because falling unemployment led to big increases in the tax yield.
But, Reaganomics in Europe is likely to have much the same results as Reaganomics in the US. The American economy started a two-decade long party, but the deficits did not come down for another decade, and then only after an assault on spending.
The same may well be true in the new tax-cutting Europe. The economy will boom, unemployment will start to come down, but the deficits might well be big. The stability pact may not survive, the euro will get battered, and the ECB may be tested to the limit. Yet if the recipe revives the euro-zone economy, as it revived the American economy two decades ago, most voters will probably conclude they have made the right choice.
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