What Those French Blokes Can Learn From The BritishRudi Dornbusch
This is not a good time for France. Unemployment is high and rising, and confidence has hit rock bottom. Policymakers are lost--and have been for the past decade. For lack of a better idea, they have simply mimicked German hard-money policies, cut spending, and deflated the economy. This has not done much for prosperity. True, France is not alone: All of Europe bears the imprint of the Bundesbank's boots.
France took a look across the Atlantic to see how the U.S. has successfully parlayed free-market capitalism into enormous job growth and prosperity. But it feels more comfortable dismissing America as a country that creates only low-paying, dead-end "McJobs."
But what about that other Anglo-Saxon country right across the channel? Over the past 15 years, Britain has accomplished miracles. Where once was a stagnant, socialistic economy with sporadic growth, high inflation, and suppressed individual drive, there is now a dynamic economy. Competition in the marketplace and pragmatism at the Bank of England have put Britain ahead of the pack. If French policymakers had to contrast their performance with Britain's, there would be nothing but embarrassed silence.
KUDOS. Margaret Thatcher gets the credit for the drastic change in British culture. Her ability to ride roughshod over the unions, bureaucrats, and her own ministers alike lies at the core of the British revival. Making money is O.K. again.
Monetary policy has been pro-growth in Britain. Inflation must be low, but not so low that it stifles spending and employment. Rather than simply copying the obsessiveness of the Bundesbank, the Bank of England has adopted a more flexible, inflation-targeting approach and has given the economy room to grow.
In 1992, Britain and France came to a crossroads. The issue: Whether to stay in the European Monetary System of fixed currency rates at any price or to throw in the towel, let the currency float, cut interest rates, and sail for prosperity. At the time, both countries had high interest rates and fragile currencies. Britain depreciated the pound, cut rates, and stimulated growth. The rest is history. France, by contrast, kept deflating. There has been some success. France's interest rates are currently at German levels, but only at the sacrifice of economic growth.
Has Britain paid for escaping from the Bundesbank? Over the past five years, Britain's growth averaged 2.9% per year (better than in the U.S.), compared with only 1.4% for France. Over that period, unemployment in Britain has fallen from 10% to 6.7%, while the French rate has risen from 9% to more than 12%. In France, unemployment benefits are a generous way of life. In Britain, they are called a "job-seekers allowance" and only last six months. True, Britain has an inflation rate of 2.5%, vs. only 1.7% in France, but so what? At these levels, it doesn't matter very much.
DEAR RUBIN. The Labor Party is sure to win the coming election. Although that prospect in years past would have upset markets, this time around the new Labor leadership isn't frightening anyone. It looks, in fact, modern and market-friendly--although time will tell for sure. On the fiscal front, there is plenty of room for spending. Britain, unlike every other industrial country, does not have a looming social security crisis (another of Thatcher's extraordinary legacies). Yet Labor should show restraint. A tight budget is the best way to enhance capital formation and growth. Here, U.S. Treasury Secretary Robert E. Rubin, dear to the new Labor leaders, should be the role model.
Labor should bolster programs for building skills. But the inclination for overmanaging the program must be resisted, and vouchers, not government work corps, should be the instrument. The Bank of England, for its part, has been doing just fine, but giving it full independence would help Labor gain the market's confidence. Last, Britain should become a strong voice for postponing the creation of a single European currency. It is far more important for European economies to take more time for essential structural reforms than to create a common money. Flexible labor markets are the key to Europe's future competitive success, not the EMU.
If the expected new British Labor government follows this agenda--if there is a Clintonite Labor Prime Minister--the Thatcher revolution will continue. In France, there is no such hope. The right in France does not like the market, and the left does not understand it. France has lost a decade already and is not even at the starting gate.