Europe Isn't Out Of The Woods Yet

There was more than a hint of schadenfreude in the voice of German Finance Minister Hans Eichel as he joined Deutsche Telekom executives in Frankfurt on Apr. 17 to celebrate the flotation of the company's T-Online Internet unit. "Europe," Eichel declared as the champagne flowed, "has the chance to replace the U.S. as the growth motor of the world." As if to underscore his point, T-Online shares defied the U.S. stock market trend and shot up 39% before the day was out.

In fact, Eichel may be right. Europeans have watched glumly for a decade as their largest economies stumbled along with double-digit unemployment and the U.S. economy relentlessly churned out new jobs. Now, Europeans feel, it's their turn, and the numbers seem to be on their side. European growth is expected to reach 3% in 2000 from about 2% in 1999, and unemployment is finally beginning to decline.

But a dip in German business confidence in March--from a five-year high--was a reminder that the recovery is still fragile. Kudos go to Eichel and German Chancellor Gerhard Schroder for finally rousing Europe's largest economy from its stupor. They're aggressively cutting taxes, dismantling barriers to restructuring, and hacking away at bureaucracy. Schroder has proposed cutting Germany's punitive 54% capital gains tax, which companies must pay when they sell their stakes in publically listed German companies. This will now allow Germany Inc. to unravel its web of interlocking cross-holdings, permitting each to focus on core competencies. Schroder has even come out in favor of letting German high- tech companies hire skilled workers from India.

But these alone won't allow Europe to match the U.S. in job production. Sustained expansion will come only after the Continent attacks structural impediments to growth. Above all, Europe must free its labor market. As harsh as it sounds, the freedom to fire increases the freedom to hire. European companies think very hard about adding staff because it's so difficult to cut back if business turns sour. But Schroder and his French and Italian counterparts are so far staying clear of this politically sensitive issue.

That must change if Europe really wants to boom. Leaders must insist on Europeans taking more responsibility for their own welfare. They have to enact significantly deeper tax cuts to promote investment. And, of course, they must free up the labor market. Germany is off to a good start. France and Italy must follow. And European leaders must realize what they have to do won't be nearly as much fun as launching a European Internet IPO and watching it rocket to the sky.

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