European governments need to reform their social policies to remain economically sound, even if this is unpopular, argues Dennis Turner
Public debate on the European Union (EU) seems at times to confuse several separate issues: the proposed constitution, the single currency and the performance of the European economy. From the UK’s perspective, they are in many ways inter-related.
When this government came to office it was committed to placing the UK at ‘the heart of Europe’. That stance has shifted almost 180 degrees.
Hostility to the constitution and talk of the single currency area breaking up both appear to be the result of the continuing stagnation of the eurozone economies. The British public’s scepticism about closer integration seems justified, and the politicians are following suit.
Since the single currency was conceived at Maastricht, the eurozone’s economic record has been lamentable. Growth and job creation among the 11 members have consistently lagged behind the UK.
In the search for the guilty, European fingers point to the single currency. Polls in several countries suggest that a majority would favour the restoration of their original currency. While this is technically difficult and expensive, the sentiments are understandable. As many claimed at the time, the eurozone countries are very different and at different points in their respective business cycles. They do not form an optimal currency area.
The eurozone interest rate is set by the European Central Bank (ECB), whose remit on inflation is less flexible than that of the Bank of England. As a result, the ECB has been cautious, focusing more on inflation than growth.
Fiscal policy has also been a problem. By locking themselves into the growth and stability pact, European governments gave up a weapon to counter cyclical downturns in their own countries.
While euro-related policies are partly responsible, structural issues play a much bigger role in Europe’s deep-seated malaise. In the period since 1945, Europeans enjoyed a rising standard of living, improvements in social protection, high social benefits and shorter working weeks. Any threat to reform this social model is fiercely resisted by its voters.
But the global economy has moved on. Today, European workers cost about 20 times as much per hour as Chinese ones, even though China produces increasingly sophisticated goods in direct competition with Europe. In the modern world, it is not enough for Germany or France to be more competitive than Italy or Spain; they have to be able to take on China and other Asian suppliers.
This means making wholesale changes, and liberalising many parts of their economies, particularly labour markets. To many Europeans, such reforms would be an attack on the coveted social model.
European politicians are caught in a classic Catch-22 situation. Many governments are unpopular because of slow growth, declining living standards and unemployment. Radical restructuring of welfare states, tax systems, labour markets and public sectors are a necessary prerequisite to reverse the downward trend, but this would only make the politicians even more unpopular.
Those who are not brave enough to face up to the need for change have only one alternative – protectionism – and this promises an even faster slide downhill.
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