Europe: A Few More Walls To Tear Down

Ten years ago, a wall still ran down the middle of Berlin, dividing the city, the nation, and the world between democratic capitalism and command-and-control communism. Hard to imagine now, isn't it? Yet anyone who has been to Europe lately knows it is utterly different from what it was a decade ago. A market economy is replacing the welfare state, sparking innovation and entrepreneurialism. A single currency, the euro, is replacing the French franc, the German mark, and the Italian lira. A wave of mergers and acquisitions is reorganizing and integrating European corporations. It's all so exciting--and so threatening.

The backlash against the New Europe is already beginning. Amid the euphoria running up to the November anniversary of the end of the Berlin Wall, it is easy to miss the strong reaction against the forces of globalization. The left argues vaguely for a new "third way" that combines market efficiency and social cohesion, while the right gains ground in elections. The Swiss People's Party just won on an anti-immigrant, anti-European Union platform. Austria's Freedom Party made sweeping gains with a policy against foreign laborers. Anti-Turkish feeling in Germany has boosted the fortunes of neo-fascists and old-style communists in the East.

The brutal truth is that Europe's economic progress of recent years may not be sustainable without some tough political choices. Here are the two most important issues:

-- Labor mobility. The European Monetary Union could fail if people are not free to move about the region. If employees are frozen in place, the euro will come under tremendous internal pressure. Wage differentials and differing inflation rates will make monetary policy by the European Central Bank difficult, if not impossible. Labor flexibility and mobility are key to the success of the euro.

But current welfare and labor regulations tend to keep mobility within individual European countries low by U.S. standards. And credentials for professionals--such as scientists, lawyers, doctors, teachers, and accountants--remain tied to national standards, impeding movement across borders by many of Europe's information workers.

-- Eastern Europe. Integrating Poland, Hungary, the Czech Republic, and other ex-communist countries into the alliance will be one of Europe's hardest tasks. It has already ignited fierce debates over agricultural subsidies (wheat and corn from the old East bloc are cheaper), competition (manufactured products from the East are cheaper), and, of course, labor (again, cheaper). The EU prefers to integrate Poland and Hungary inside a military alliance, NATO, which probably doesn't need to be expanded, rather than into an economic union, which does.

Europe has much to celebrate since the fall of the Wall. Privatization, deregulation, mergers and acquisitions, and the euro itself are all combining to generate new opportunities for growth and opportunity. But Europe is still in catch-up mode. To make the next leap will require creating a new political consensus to make some difficult decisions.

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