Britain: Each Reform Widens The Gap With Europe

Outside 10 Downing Street, a London bobby snaps a picture of his visiting family in the fabled doorway of British Prime Minister Tony Blair's official residence. Inside, past 18th century portraits in the hallway, an air of calm reigns as Blair pushes ahead with his quiet revolution.

Alone among Europe's major countries, Britain is making a serious effort to tackle the twin ills of unemployment and lack of competitiveness. Increasingly, Blair seems to be the only leader who knows what he wants and how to get it. Chancellor Helmut Kohl, for instance, has failed to enact long-promised tax and welfare reforms that could reenergize Germany. And in France, Prime Minister Lionel Jospin's Socialist Party is adding labor rules, such as cutting the workweek to 35 hours, which burden the economy.

In the British budget to be unveiled on Mar. 17, Blair and his Chancellor of the Exchequer Gordon Brown will likely take steps that open yet a wider gap with Europe. They plan to take another crack at reforming the welfare state. Last year, Blair announced a $5.7 billion program to put unemployed young people to work. Now, possible moves include tax credits for low income families. Brown may even halve the lowest income tax rate to 10%.

ENTREPRENEURS' CHAMPION. While Labour Party rhetoric stresses helping the poor, Blair is fascinated by the entrepreneurial verve that has created so many high-paid, high-tech jobs in the U.S. So he is looking for ways to supercharge Britain's entrepreneurial spirit. Moves under study include special tax treatment for risky investments; breaks on value-added tax to small business; and capital-gains incentives for investors to hold investments for the long term.

Individually, none of the measures will amount to huge bucks this year. Chancellor Brown's main priority is to keep spending down and policy credible so that the markets will cut British interest rates--now around 6% for 10-year bonds. The thinking at Downing Street is that the best way to help entrepreneurs is to provide them with a stable macroeconomic policy "and let them get on with it," says a Blair aide.

In many respects Britain is now the country best prepared for the rigors of European Monetary Union--even though it won't join in the first wave. Britain's tax and labor regimes are far more competitive than those of France and Germany--one reason it has attracted so much foreign investment in recent years.

Blair wants EMU to succeed because otherwise, he fears, economic chaos on the Continent could batter Britain. He has used Britain's current six-month presidency of the European Union to preach the reform gospel. "Labor market adaptability and flexibility will be necessary for the euro to succeed," he said recently. "If there are uncompetitive practices, they will be exposed."

Other EU members have agreed to study ways to get people off welfare. But just how much of Blair's message they absorb is another matter. Continental politicians, says Michael Hughes, an economist at Barclays Capital in London, are more likely to listen "to people rampaging on the streets of Paris."

Blair is playing for the long term. His main goal, for now, is to stop France and others from using the EMU to force Britain to raise its taxes and increase regulation to match Continental regimes. He has allies among reform governments taking root in smaller countries such as Holland and Denmark. Eventually, more competitive environments in those countries--as well as Britain--may force France and Germany to face global reality.

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