A Turning Point In The Battle For Europe?

European policymakers are torn between common sense and a myopic denial of reality. They can't decide whether to let market forces operate or simply keep the status--and statist--quo. The French election of a Socialist Prime Minister and the recent Italian deal between Prime Minister Romano Prodi and his left-wing coalition partner suggest that Europe's statist side may be triumphing. But Tony Blair in Britain and Gerhard Schroeder in Germany (if he wins the upcoming elections) may tilt Europe toward markets. The fight for Europe is in full swing.

Over the past year, Europe's political landscape has changed a lot. Britain elected Labour, and Blair is less likely to halt the Thatcher revolution than complete it. He is simply putting a softer face on conservative policies. It is no accident that he was not well received when he talked to the Trades Union Congress.

The exact opposite is Lionel Jospin, France's new Prime Minister. He came to power to everyone's surprise. An overconfident right wing called an election to strengthen its lead, only to find that a population tired of arrogance and globalism, unemployment and economic insecurity wanted a break from reality. Jospin told them what they wanted to hear. He said "no" to privatization, "yes" to shortening the workweek to cut unemployment, and "no" to globalization. To escape the market's punishment of high interest rates and a collapsing currency, he kept France's commitment to European Monetary Union.

PAINTED PINK. The most recent events in Italy reinforce the Jospin direction. An Italian government came to power by defeating the right-wing administration of Silvio Berlusconi and then crumbled when left-wing partners would not swallow the budget cuts designed to meet Maastricht targets. Prime Minister Prodi resigned. But this being Italy, new elections are not being called, and Prodi has made up with the leftists. The deal he made is the worst of both worlds. The left accepts some budget cuts to keep Italian EMU membership alive in exchange for stopping privatization and introducing a short workweek.

Italy is being painted pink, just the same as France. Worse, they are working hand in hand. Privatization of France's airline is off; so is that of Italy's money-losing airline. Rather, the two are being merged. Instead of two bad airlines, there will be one big, very bad airline. Now if there is a strike, it will be in both countries. Such solidarity will soon become the standard for more European mergers. Keep an eye on the oil companies and a few other public-sector megabusinesses. The rhetoric will be modernization, but the reality is that cross-border solidarity will be a new union weapon.

LIFTOFF? The next round in the battle for Europe will come in Germany. Chancellor Helmut Kohl has done his great deed--reunification. He is too tired to campaign for victory, and the electorate is too weary to hand it to him. More likely than not, Social Democrat Schroeder will beat him, just as Labour won in Britain. His victory is more likely because he has the Clinton-Blair touch: He is not burdened with a lot of convictions. Accordingly, he has no program and can seem caring, sympathetic, and unthreatening to all. But come next fall, he will probably be in office and must then make his choices.

If Schroeder goes the way of Italy and France, Germany will respond to its unemployment by shortening the workweek, pressuring companies not to restructure, and pushing Brussels to enact Europewide policies to protect the social status quo at the expense of corporate profits.

If Schroeder goes the way of Britain, he will not only give Germany a great chance to get out of the welfare state but also make life impossible for France and Italy. Ultimately, Germany sets the tone in Europe for monetary policy, business practices, and labor relations. If Schroeder goes pink, unions will call the shots everywhere. If he asks how jobs get created and wealth gets built, Europe will shoot like a rocket out of its current mess. The Euro will create important capital markets, and a can-do attitude will bring back business enthusiasm and growth.

What do we know about Schroeder? He certainly is not running on a business ticket, but he did let slip a powerful hint. Asked about Britain, he noted that Blair had a cushy job: Thatcher had done the dirty work, while Blair got to put some frosting on the cake. In Germany, he added, they would have to do the hard work themselves. Once in office, Schroeder can tilt the European balance toward prosperity and save it from its retrograde half. Here's hoping.