Charlemagne: Ducking change, the European way

In a turbulent world, Euro-voters should live a bit more dangerously

"WHAT do you expect from life--full coverage against all possible risks?" Yes, seems to be the Europeans' reply, just as it was Philip Marlowe's when he was mockingly asked that question at the end of Raymond Chandler's "The Long Goodbye".

From the Italian and German elections, to French students marching against labour reform, back to the rejection of the proposed European constitution last summer, the constant theme of continental Europe during the past year has not been the triumph of the left (otherwise Christian Democrats would not have won in Germany), nor support for economic nationalism (which the Italian and German governments say they oppose, unlike the French one). It has been the minimising of change, even the kind that should, in theory, come easily when a government has a clear mandate. Risk aversion, it seems, has become the defining feature of political behaviour in continental Europe's largest countries.

Europeans have always been more risk-averse than Americans. This manifests itself in many small ways. German bankruptcy laws, for example, can ban entrepreneurial businessmen from operating a company for decades if their gambles backfire, while in corporate America, you are nobody until you have been made bankrupt a couple of times. In France, a poll found that an amazing three-quarters of the young would happily work as civil servants.

Risk aversion manifests itself in large ways, too. Europe's comprehensive welfare systems are grand insurance policies against the risk of falling ill, losing your job, or declining into poverty. The American system rewards risk-taking. Europeans think it is better to be safe than sorry.

At the moment, Europe seems to be even more risk-averse than usual. The reason is clear: risk aversion is a product of economic uncertainty, which is growing. Greater competition in goods markets, plus trade liberalisation plus outsourcing plus globalisation all add up to a more turbulent economic environment. People fear that jobs are being destroyed faster than they used to be (this is not true, but people think it is). Older workers, especially, fret that they will not have the specific skills needed to do the new jobs that are created. And if the voters are nervous about change, it is hard to lay the blame on politicians for reflecting their mood--though one can perhaps fault them for hiding the true costs of not changing and for pretending the current system can go on longer than it actually can. In this way, risk aversion feeds on itself.

But it also has growing, and damaging consequences. In modern economies, people are constantly moving in and out of jobs, and the rate is surprisingly high: some 4% of jobs change hands each month in France. You would expect that if uncertainty really were increasing as much as opponents of globalisation say it is, then this rate of "churning" would have risen lately. In fact, the opposite is happening. Jobs are being created and destroyed slightly more slowly than they were in 1970.

The best explanation is the combination of high unemployment and labour laws that protect against being fired. Unemployment makes it harder for an employee to go out and find a new job. Labour laws increase the employer's cost of hiring someone new. So there is less movement into and out of jobs. This hurts the whole economy, not just the individual worker or company. As Olivier Blanchard, France's most distinguished economist, puts it: "modern economies need to constantly reallocate resources including labour from old to new products, from bad to good firms." Risk aversion increases labour-market rigidities and slows this process down.

It also helps explain the uncompromising, sometimes hysterical nature of opposition to any kind of change. As Mr Blanchard says, there is a conflict between workers who value security and the economy as a whole, which needs flexibility. But this conflict does not have to be damaging, and is not all that hard to resolve. In essence, the point is to protect workers, rather than jobs. This is what successful European countries do, such as Denmark or the Netherlands (which by OECD measures have lower unemployment rates than America). It does not imply the dismantling of the welfare state, which is why Europe's economic problems are not quite as ruinously insoluble as they sometimes seem.

When privilege looks precarious

But in big continental countries, the power of "insiders" is making this solution harder to adopt. Insiders--people with jobs in the public sector, or with secure private-sector employment--see economic reform not as a particular set of proposals, to be judged on its merits, but as the thin end of a wedge that threatens their whole privileged status. To them, the possible gains from change are worth less than the risk of losing what they already have--the definition of risk aversion. This makes current insiders determined to reject reform almost across the board, and provides those who hope to be insiders in future--like French students--with an incentive to support the system as it is, rather than change it. Theirs is a logical choice. But as a result, large continental economies are becoming locked into opposing small changes which might benefit people and which they might even support in the abstract.

Risk does not go away because you are averse to it; trying to make yourself invulnerable to small risks can end up leaving you more vulnerable to larger ones. You can, to a considerable extent, insulate some, even many, people from the risk of losing jobs, or being forced to work more than 35 hours a week, and so on. But you leave the country as a whole more open to other, more dangerous risks: creating fewer jobs, creating an underclass of people who have never had a job, and seeing your economy bypassed by those willing to take bigger chances than you are.

Commentary feature says that Europeans should be less risk averse and open to the opportunities of change.

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