Still sclerotic, after all these years

Date: 15/03/03

Why is Europe growing so slowly?

CONCENTRATING on the finer points of economic deregulation in Europe is a challenge at the best of times. It will be particularly tricky for Europe's leaders when they gather in Brussels for a European Union summit on March 20th. In theory the meeting will be dedicated to economic reform. But there may be a few distractions - like the fact that the EU is split down the middle over Iraq, the UN is in disarray and, by the time the leaders meet up, bombs may be whistling down on Baghdad.

Manfully ignoring the muffled explosions offstage, EU leaders will still make an effort to concentrate on the “Lisbon agenda” of economic reform. Launched in 2000, it was a response to the growing evidence that European economies were falling behind America's. Over the past 20 years the EU has averaged growth of just over 2.3% a year, while the United States has managed 3.3%. At Lisbon the assembled leaders promised to turn the EU into the world's most competitive economy by 2010. Every year since then, EU leaders have met in March to review progress and issue platitudinous statements of the “much has been achieved, but much remains to be done” variety.

As it happens, quite a lot has indeed been done. Liberalisation of Europe's energy markets - the totemic issue at last year's spring summit - was agreed upon in November, albeit in a rather half-hearted way. There has been progress towards integrating financial markets and liberalising postal services. An EU-wide patent law - controversial, as it touches on sensitive matters of language and legal jurisdiction - will be agreed this time round.

And yet the results still seem disappointing. Despite the bursting of the dotcom bubble, September 11th and a rash of American corporate scandals, the EU is still growing markedly more slowly than America - and most forecasters predict that this will remain the case for at least the next couple of years. It is premature to declare the Lisbon agenda a failure, since most of its elements will take several years to kick in. But not too much comfort should be drawn from that. The Lisbon reforms are in essence simply consolidating and building upon the creation of an internal EU market - an effort to rip down barriers to trade and investment that was meant to have culminated in 1992 and was heralded as the dawn of a new golden age for Europe's economy. Since then the EU has grown at an average rate of just over 2% a year. A recent European Commission study concluded that the internal-market programme had added around 1.4% to the EU's GDP over the past decade - a welcome increase in wealth, doubtless, but hardly a radical transformation.

Since the original internal market programme delivered such relatively modest results, there is no particular reason to suppose that the Lisbon agenda will be any more effective. The blunt truth is that even if the EU fulfilled the Lisbon agenda down to the last comma, it would still not become the world's most competitive economy by 2010.

So what ails the European Union? There are comforting and not-so-comforting explanations. The comforting theory, which has some merit, is that Europe's slower growth reflects cultural preferences. Superior American growth in large part reflects the fact that America's population has been increasing faster and that Americans work longer hours than Europeans. European workers produce about as much per hour as the American average; it is just that they spend less time at work. If Europeans prefer time on the ski-slopes to extra pay, that seems fair enough. A similar argument can be made about welfare. It is a commonplace that generous welfare is a brake on European economic growth, leading to higher taxes and fewer jobs. But any politician who tries to reform the welfare state swiftly runs into trouble for a simple reason: it is very popular. Once again, argue the EU's defenders, Europeans are simply making a legitimate choice: for slower growth, perhaps, but in return for greater security and less poverty.

Unfortunately the idea that slower growth and a powerful welfare state are simply the result of a benign European consensus is too rosy. Many of the benefits of state welfare flow not to society as a whole but to entrenched interest groups - in particular to trade unions and recipients of tax-funded benefits. It is hard to see how the 11.3% of the German workforce who are out of work, measured by the latest unadjusted figures, benefit from trade-union opposition to the idea of more flexible working patterns and less rigid job protection. Moreover, as Adair Turner of Merrill Lynch pointed out in a lecture last month, not all of Europe's social choices are economically sustainable. In particular, “the current combination of birth rates, retirement ages and pension promises” threatens to boost taxes to unsustainable levels or to leave the elderly in poverty. But in countries like Italy, France and Greece, trade-union opposition to pension reform is so fervent that it can hamstring governments and even, on occasions, bring them down.

Stuck with an out-of-date model

Even politicians pressing for pensions and economic reform in Europe take care to acknowledge a presumed need to preserve a “European social model” as the basis for the prosperity and social peace of the last 50 years. What they miss, however, is that this famed model has changed over the years, as the welfare state has grown ever more complex and the stress on security over growth ever more suffocating. The great designer of Germany's post-war “social-market economy” was Ludwig Erhard, a Christian Democrat. Yet even he argued that the state should never aspire to “grant a man complete security from the hour of birth” and that “the welfare state must finally spell poverty for all”. It is a measure of how much Europe has changed that statements like that - perfectly compatible with the idea of a social-market economy in the German boom of the 1950s - would now be viewed as impossibly controversial.

Commentary feature. Why is Europe growing so slowly?

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