Wed, Oct 05, 2005 - Page 9 News List

Europe's big three are unwilling to pay the price of reform

By Charles Wyplosz

Angela Merkel's poor showing in Germany's recent election has now put into cold storage any hope of a serious overhaul of the country's famously rigid economy. British Prime Minister Tony Blair was waiting for her to help launch a drive to make the current British presidency of the EU a historical turning point for the union's economy. Now Blair has no project, and all would-be reformers are most likely downsizing their ambitions. Europe appears to be more stuck than ever. But is it?

To start with, the private sector is doing well. Technology travels fast and is swiftly adopted. Firms have responded to inhospitable conditions by cutting workforces and boosting productivity through more capital-intensive production processes and, when needed, by offshoring their capacities. The laggards are to be found only in the service industry, which is largely insulated from international production chains and even from internal European competition.

More fundamentally, there is no such thing as a "European economy." The union's 25 member countries are very diverse. The Nordic countries are high-tech leaders; Spain has slashed its unemployment rate by half (it stood at 25 percent not so long ago); and the new members from Central and Eastern Europe are cruising briskly along a steady catch-up path.

The really sick countries are three of the EU's four biggest: France, Germany and Italy. But even they have carried out some reforms -- not enough and too recently to make a difference yet; nonetheless, they have started to move.

More importantly, no one ignores that the old ways have to go if prosperity is to be maintained. Except for a fringe of die-hard Marxists -- which can still collect up to 10 percent of the votes -- there is a keen sense that deep reforms are needed to come to grips with the high unemployment and poor growth of the last decade.

Continuing budget deficits have visibly failed to deliver what die-hard Keynesians had promised. These days, no politician dares to suggest that continuing to pile up debt is the way to go, even though few are prepared to articulate a credible plan for fiscal consolidation.

The problem, of course, is that the most urgently needed reforms will hurt a lot of people. Most economists agree that high levels of employment protection merely hold down the creation of new jobs rather than reduce joblessness. But reducing employment protection scares workers in the private sector. This is understandable, given an unemployment rate of around 10 percent in France, Germany, and Italy; with so few new jobs, becoming unemployed is a major disaster.

To be sure, comfortable unemployment benefits soften the blow. The problem, though, is that some people have even become addicted; they now aim at living on welfare benefits alone. This is why economists want to change the unemployment and welfare systems to raise the incentives to go back to work. Successful experience notwithstanding, most people interpret "incentives" as painful kicks in the butt, and they want none of it.

Then consider these countries' bloated public services, where jobs are guaranteed for life, promotion is by seniority rather than merit, and customers are seen as a nuisance. The result is red tape all over and a huge drag on productivity. Shaping up the public sector is an obvious goal, but civil servants are adamantly opposed to what would in effect mean new and much less attractive work contracts.

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