European economic reform: From Lisbon to Brussels

France, Germany and Italy are the biggest obstacles to economic reform in Europe

NEXT week, European Union leaders gather in Brussels for a summit on the economy. Their meeting marks the halfway point in their supposed strategy, agreed in Lisbon in March 2000, to turn Europe into the world's most competitive economy by 2010. It is an objective they are manifestly failing to achieve - even though the new European Commission president, José Manuel Barroso, coincidentally a Portuguese, has made a relaunch of the Lisbon agenda, to ensure it is not “decaffeinated” as he puts it, the centrepiece of his presidency.

This is not to say that all of Europe is doing badly. By some measures Finland is the world's most competitive country, with Denmark, Ireland and Sweden close behind. Germany and France, the two biggest euro-area economies, have some of the world's strongest companies. Germany is the world's biggest exporter. And growth has not been universally poor. In terms of productivity per hour worked, Europe matches America. Many small EU economies, including the new central European members, are growing fast. Yet growth in the core euro-area countries remains sluggish at best. Unemployment in Germany, France and Italy is 10% or more, and far worse for the young and those near retirement age. Over 5m Germans are out of work, the most since the 1930s.

What is wrong with Europe? Some of the answer is macroeconomic: the three core countries all suffer from a lack of demand. The one-size-fits-all monetary policy of the European Central Bank has saddled Germany, in particular, with higher interest rates than it wanted - though with the ECB's rate at just 2%, the pain cannot be terribly searing. Fiscal policy is more problematic, because the euro-area's ill-named stability and growth pact has stopped governments pepping up their economies through tax cuts. As it happens, next week's summit may spend more time squabbling over the stability pact than discussing the Lisbon agenda. It would do better to scrap the pact briskly rather than tinker with it, to give more fiscal freedom (but also responsibility) to national governments - and then to focus on relaunching Europe's economic reforms.

The reluctant reformers

For the biggest failings in the euro area remain microeconomic, not macroeconomic. There is a reason why Denmark and the Netherlands have higher employment and lower unemployment than Germany and France: it is that the latter two have overly regulated labour markets, tougher hire-and-fire rules and high minimum wages. The evidence that excessive interference to “protect” people in work penalises those who are out of work has seldom been as clear as in Europe over the past five years. As this week's Lisbon scorecard from the Centre for European Reform (CER), a think-tank, shows, a similar story emerges on energy and telecoms liberalisation, competition in financial services, industrial subsidies and the rest: countries that have been fastest to open their markets to competition have outperformed those that have been slowest - notably France, Germany and Italy.

These three countries are still Europe's back-markers on economic reform. Their governments have pushed through some politically painful measures to shake up labour markets, cut pension burdens and increase working hours. But the CER report names Italy as the villain of the Lisbon piece. And Germany and France are leading the opposition to the EU's services directive, intended to liberalise cross-border trade in services. The effort to “protect” services from competition is spectacularly wrong-headed. Services now account for 70% of euro-area GDP, and for all of net job growth in the past five years. An official French report last autumn suggested that opening France's services sector to as much competition as America's could generate over 3m new jobs.

So why are the leaders of France, Germany and Italy so hesitant about reform? The answer lies in domestic politics. France's Jacques Chirac, behaving like a left-winger, is eagerly appeasing union protesters against change. Germany's Gerhard Schroder, struggling with unpopularity, talks of more reforms, but on too timid a scale. Italy's Silvio Berlusconi is nervous about April's regional elections. Even Mr Barroso, opponent of decaffeinated reform, is reluctant to press for stronger measures, fearing that scare stories of American capitalism trumping the European social model may scupper referendums on the EU constitution. Such alarm is specious: if they look north, not west, EU leaders can see Nordic countries doing well and keeping their social model. It is not the Lisbon agenda that threatens the model: it is failure to reform.

Editorial argues France, Germany and Italy are the biggest obstacles to economic reform in Europe.

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