With much of Europe mired in a debt crisis and hamstrung by austerity budgets, one would think that EU leaders are busy examining their economic models, looking for ways to promote growth amid tougher global competition.
If so, they are keeping any radical new thinking well concealed. In a recently announced growth strategy for the next decade, -policymakers in Brussels are offering more of the same, even though the last set of goals, aimed at making Europe the world’s most dynamic region by last year, has not hit the mark.
For the last decade or so, the European Commission, the EU’s policy-drafting arm, has favored the Anglo-Saxon model of loosely regulated markets over the more statist impulses of France, Italy and, to a lesser extent, Germany.
That has not changed much, despite two years of financial and economic turmoil that highlighted some of the defects of that model. Britain and Ireland, which epitomized the free-market orthodoxy, both boomed for a time, but then were flattened by the bursting of a credit and real estate bubble and they had to nationalize weakened banks.
Yet the classic Continental model of large and costly welfare states, with more tightly regulated labor markets and governments that are less shy about intervening to keep struggling industries afloat, has hardly emerged unscathed: Witness countries like Greece, Portugal and Italy, where mountains of debt threaten the eurozone.
“An awful lot of people would be happy to dance on the grave of the Anglo-Saxon model,” said an ambassador at the Organization for Economic Cooperation and Development (OECD) in Paris, who was not authorized to speak publicly. “But it’s not that simple.”
While France and Italy went through a shallower downturn than many others in the EU, they were also hampered by slower growth during boom years. That makes it harder to fix today’s budget woes, as well as future challenges like keeping their pension systems afloat.
The recent struggle in France over establishing limited changes to retirement rules suggests that further steps will be painful. Yet with international investors increasingly unwilling to provide cheap financing to fill budget holes, options are becoming limited.
Some are looking now to Germany’s more-controlled Rhineland model of social capitalism, which prizes consensus over confrontation, with the state playing a supporting role when needed. Years of productivity gains, labor market changes and wage restraint seem to have paid off, as Germany is the strongest-performing major economy in the region.
“The Anglo-Saxon model was sexier than the Rhinelandic and a lot of the Anglo-Saxon orientations have been introduced in Continental Europe,” former Dutch prime minister Jan Peter Balkenende said in a recent interview. “Now you can see that people are rethinking what has happened.”
For Balkenende, the defining difference between the models has been the degree of financial regulation and control of credit.
“Supervision must be organized in the right way,” he said. “You need more transparency and integrity.”
However, more broadly, he said, if it is to compete, Europe has to follow its core beliefs of open labor and product markets, while “rethinking the concepts of the welfare state.”
Since 2000, the European Commission intently drove its mandate to open markets, pushing an ambitious set of policy goals laid out by governments in an initiative known as the Lisbon Strategy.
They set targets of achieving 3 percent average economic growth a year, as well as “full employment,” or 70 percent of the population, by last year. Neither has been achieved.
Still, a handful of the goals have been met, like improving broadband availability and reducing greenhouse gases in some countries. EU countries were also supposed to do more to support the digital economy and small businesses, as well as reduce regulation and improve competition in natural gas, electricity and telecommunications markets.
The commission and national governments have now tweaked that plan, extending its shelf life with a new name, Europe 2020. At a recent conference at the OECD, European Commission President Jose Manuel Barroso described the package as “a new growth model for Europe.”
However, as before, expectations are muted.
To most, the newer package doesn’t look much different. It has seven flagship initiatives based around a “digital agenda,” innovation and resource efficiency.
The predominant underlying direction still appears to be free market, emphasizing the obsolescent nature of national sectors and industries. It again presses for “structural reform” — a mantra for lower budget deficits, less-regulated labor markets and the removal of perceived impediments to growth, such as state aid for struggling sectors.
Reducing budget deficits remains at the top of that list.
“Without fiscal consolidation, we will not have growth for a very simple reason: There will be no confidence. Without confidence, no investment; without investment, no growth,” Barroso said.
OECD secretary-general Angel Gurria urged members to “go structural” at the same time, even while many countries were mired in austerity programs.
These deep structural changes were “put aside for the sake of dealing with the emergency,” he said. “Now it is the time to pick these things up and put them on the front burner.”
One big motivator for change this time is ensuring the future of the euro. It is hard to tell, though, if following the EU’s rule book will be enough.
The Irish in particular have a good case for feeling ill-treated. During the last decade, Dublin was regularly lauded as a good student, opening up its goods, services and capital markets.
A 2008 OECD survey of Ireland, written just before the bust, concluded that the economy had “performed remarkably well over the past decade” and that “the economic fundamentals remain strong.”
The report noted weaknesses, notably in infrastructure and the ability of public finances to deal with an aging populace.
However, it praised immigration policy and said Irish banks were “highly profitable and well capitalized, so they should have considerable shock-absorption capacity.”
Last week, the Irish government effectively nationalized a fourth major bank, Allied Irish, as required under the terms of its 67.5 billion euro (US$89.1 billion) international bailout.
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