In case anyone missed it, the sick man of the global economy is getting much sicker. And it’s not just “peripheral” economies like Greece asunder in a sea of stagnation. Some of the European Union’s biggest players are in serious economic trouble. What’s especially striking, however, is so many European governments’ continued inability, and often unwillingness, to respond appropriately.
In this connection, Italy and France — still two of the world’s biggest economies — feature prominently. France hasn’t managed two quarters of consecutive growth since François Hollande became President in May 2012. Despite promising fiscal constraints, France has engaged in a series of typical and probably extra-legal Eurozone fudges to try and disguise the fact that it has failed again and again to cut its fiscal deficits to a promised 3 percent. That’s called “non-austerity.” In fact France’s finance minister Michel Sapin recently conceded this target won’t be met until 2017: two years later than promised. In the meantime, unemployment in France reached 3.4 million people in June this year: 11 percent of the workforce.
To France’s southeast, Italy’s unemployment crisis — fueled by a situation of jobs-for-life for some and unstable part-time contracts for others — has entered the realm of high farce. The country’s youth unemployment rate stands at 42.9 percent, while the overall official unemployment rate is 12.6 percent. But no one should be surprised. A recently released World Economic Forum report, for instance, ranked Italy 136 out of 144 economies on labor-market efficiency, just outpacing exemplars of economic success such as Zimbabwe, Iran, Venezuela, and Argentina.
Prime Minister Matteo Renzi is the latest Italian head of government to propose some marginal labor-market reforms. Alas, he too has discovered that Italy’s unions are essentially opposed to anything except the status quo. That’s why an estimated 1 million Italians marched in the streets on October 25, claiming that “fundamental rights” (which evidently don’t extend to Italians below 30) were being endangered.
In response to criticisms of union intransigence, the General Secretary of Italy’s Confederazione Generale Italiana del Lavoro, Susanna Camusso, insisted in a letter to the Wall Street Journal that unions weren’t against reform. All they wanted, she said, was “a reform of the social safety net to include all workers; a reform of the fundamental law for the regulation of labor relations aimed at extending universal rights and protections to everyone; a new type of employment contract designed to promote permanent employment.” In other words, she wants even more state-enforced guarantees for employees.
What General Secretary Camusso doesn’t appear to grasp is that if you want an economy that grows, seeking to realize “permanent employment” through state intervention is a nonstarter. In competitive, entrepreneurial economies that produce growth, businesses must be able to hire quickly and, if necessary, let people go. It’s precisely because it’s virtually impossible to fire anyone in a permanent Italian job that employers avoid hiring full-timers, or keep their businesses below 15 employees so that they don’t face their workforces’ compulsory unionization (so much for freedom of association)
For all of Italy and France’s problems, more worrying are developments in Germany. Germany has weathered the Great Recession better than most EU states because a Social Democrat-Green coalition government implemented a series of liberalizing reforms from the early 2000s onwards, known as Agenda 2010. After an initial jump in joblessness, unemployment fell and stayed relatively low. Exports took off, and growth ensued. The contrast with France, which wasted the entire decade trying to ignore globalization, was vivid.
Times, however, have changed in Germany. The European Commission has just cut its estimate of Germany’s growth rate for 2014 from 2.2 percent to 1.1 percent, barely outpacing France and Italy, which come in at 0.7 and 0.6 percent respectively. There’s also evidence of backsliding on the part of Angela Merkel’s Christian and Social Democrat coalition government. Not only has a minimum wage been introduced (due to come into effect in 2015), but many employees are now entitled to retire at age 63. Remember: Agenda 2010 had previously raised the retirement age to 67.
There has been plenty of criticism of Merkel’s policy regressions from across the political spectrum (meaning it couldn’t be dismissed as the complaints of evil “neoliberals” — whatever that means). The Social Democrat Chancellor who presided over the Agenda 2010 reforms, Gerhard Schroeder, described Merkel’s changes as “absolutely the wrong signal, especially in view of our European partners, from whom we’ve rightly been demanding structural reforms.”
Nor did Schroeder hesitate to point out how Germany’s disastrous demographic outlook undermines the long-term sustainability of a lower retirement age. “There are simply not enough workers,” he said, “who can finance the growing group of pensioners.” Schroeder’s argument was echoed in an April report presented by four leading German economic research institutes. They maintained, for instance, that “the entitlement to a full pension at age 63 is a step in the wrong direction” in view of Germany’s aging population and below-replacement birthrate. It jeopardized, they said, the sustainability of fiscal policy and “counteracts efforts to adapt pension entitlements to rising life expectancy and will instead serve to curb production potential.” As for the minimum wage, the report argued that it “will tend to reduce the employment prospects of low-skilled workers overall and… will hardly help to reduce poverty at all.”
The intergenerational injustice of all this was not missed by some Germans. As noted by the German national daily, Die Welt, the political advantage of Merkel’s changes is that the costs will be paid by those who presently can’t vote. Die Welt then added that the government was either completely ignorant of Germany’s demographic challenge, or operating according to the motto popularly attributed to Louis XV: “Après moi, le déluge.”
But what about Britain? Isn’t it doing well? The answer is: yes and no. Yes, growth rates are up. Yet as a recentreport by the Institute of Economic Affairs illustrates, the price is the “accumulation of such large levels of debt during a long period of peacetime [which] is more or less unknown.” For this, the report notes, there will be consequences.
So why do we see persistent refusal to change throughout Europe? Part of the problem is the consensus style of politics prevailing in much of Europe. Most EU states’ electoral systems are designed to prevent one party getting outright majorities, partly because of memories of the sharp left-right fissures that tore many European nations apart in the recent past. This means endless compromises. That’s not always a bad thing, but it often nullifies attempts to apply harsh but necessary medicine in times of crisis. Then there is the journalist Janet Daley’s observation that virtually all European nations are governed by people (including those belonging to center-right parties) who adhere to broadly social democratic positions and who are remarkably isolated from the rest of the population. This creates an incestuous bubble, from which Europe’s politicians and civil servants rarely emerge.
Part of the puzzle requiring more attention, however, is the fact that large segments of Europe’s population like the (untenable) status quo. Let’s say you are an Italian baby boomer enjoying a comfortable salary. You also know that you keep your job no matter how lousy your performance. A well-padded retirement soon awaits you. So why should you desire change?
Yes, many Western Europeans are unhappy with their political and economic circumstances, but that doesn’t mean they will accept radical economic transformations. Certainly there are resurgent market-orientated parties like Germany’s Alternative für Deutschland, which, being founded by mild-mannered economics and constitutional law professors, can’t be dismissed as loons. But many other non-mainstream parties, whether on the left or right, which gained many seats at the recent EU parliament elections (such as Marine Le Pen’s Front National), actually want more government economic intervention and enhanced protection from global competition.
Therein lies Europe’s dilemma. Despite all the evidence of the need to reform a failing economic model, curb over-mighty unions, have more children, be more competitive, be less obsessed with economic equality, stop equating solidarity with state intervention, and be more open to freedom, far too many Europeans have adopted a Louis XV mindset.
And we all know where that ends, at least for Europe’s forthcoming generations. A deluge, indeed.