The French Might Actually Be On To Something

With the election of center-left governments in London and Paris, a very different strategy for European growth and job creation becomes possible. Until now, only one course seemed open--deregulation and privatization, slashing of social benefits and taxes, and tight fiscal discipline. This was the neoliberal recipe. European monetary union by 1999, under the terms of the Maastricht Treaty, was the instrument. The German Bundesbank (whose rigidity makes the American Federal Reserve Bank seem profligate) was the interim enforcer.

What a difference a month makes. To voters, the neoliberal formula promised a dollop of austerity and little else for the time being. Electorates, of course, dislike reduced living standards. Economically, if this were simply a case of eat-your-spinach and there were no sensible alternative, one might fault the voters of Europe for living in a dream world. However, there is indeed a less painful route to higher European growth.

European labor-market institutions typically get the blame for high unemployment. Supposedly, companies create few jobs because workers are expensive to hire and hard to fire. Too much of the economy is still sheltered by state ownership and excessive regulation. Remove these protections, lower labor costs and taxes, let in the fresh air of competition--and jobs will follow.

This account is a half-truth. Some of Europe's labor protections are indeed excessive, and some of its sheltered industries ossified. But there is also a macroeconomic dimension to Europe's stubborn unemployment, as well as more than one brand of structural reform. The Bundesbank has inflicted an overly tight monetary policy on the entire continent. Given a more expansive policy, Europe could grow faster and reform its social protections, not scrap them.

DUTCH LESSON. With left-of-center governments now in 13 of 15 European capitals, the Maastricht criteria are up for revision. Proposed strictures, limiting deficits to 3% of gross domestic product and public debt to 60%, will likely be loosened and the deadline for compliance postponed. Over German objections, the softer-currency countries--Italy, Spain, and Portugal--will probably gain entrance. France also wants a more powerful European political authority as a democratic counterweight to an austerity-minded European central bank.

A less austere policy would certainly ease the task of structural reform. Small countries with left-of-center governments, principally Holland, Sweden, and Austria, have already demonstrated that Europe's social institutions need not be cast aside entirely but rather made more competitive. In Holland, where in 1982 the unions and the government struck an epic deal, unemployment is down to 6.6%. The deal involves wage restraint, shorter working time, budget discipline, and a trimming--not a gutting--of social benefits.

Much of the European social market economy is worth preserving. In the 1990s, European and U.S. rates of productivity growth have been almost identical. The U.S. has created more jobs, but at the price of widening inequality. According to a 1996 study by Norman Bowers of the Organization for Economic Cooperation & Development, despite higher unemployment, Continental Europe has not had the earnings inequality of the U.S. or Britain, thanks to stronger unions and social supports.

BAD MEDICINE. Those factors may depress job creation, but so does Europe's tight-money policy. Investment adviser Richard Medley observes: "All of Europe's policy levers--fiscal, monetary, currency, and structural--have been used to brake growth. It's no surprise that the train stopped." A more expansive fiscal and monetary policy would allow more public investment as well as cheaper European currencies, both of which would stimulate growth and job creation.

The project of European union, supported for half a century by mainstream conservatives and social democrats alike, has held opposite meanings for the moderate right and left. To the free-market right, it promised pan-European institutions of freer commerce, to sweep away statism at the national level. But to the democratic left, European union promised a compact to protect Europe's hard-won social gains from the winds of global marketization.

Both the left and right have hoped union would yield broadly distributed opportunity and prosperity. It is a travesty that the final push to European union is premised on years of austerity. The voters, sensibly, have insisted on a better way. We'll see if the politicians have the vision to pursue it.

Before it's here, it's on the Bloomberg Terminal.