Commentary: Europe: The Road to Reform Peters Out

If economies remain dirigiste, Europe will not be an attractive place to invest, with rising unemployment and slowing growth

By John Rossant

If you don't peer too closely, Europe still looks firmly set on the path of reform. France's new center-right government is promising tax cuts and privatizations. Italy's Prime Minister Silvio Berlusconi still vows to accelerate sell-offs of shares in state-owned companies. Even the Social Democrats running Germany have endorsed the findings of a commission advocating measures to push unemployed people back into the workforce. And governments across the Continent are at last making the right noises about reforming pension systems.

Well, folks, looks are indeed deceiving. If reform isn't quite dead in Europe, it's fast becoming moribund. With deficits soaring, German and Italian leaders are delaying plans to cut taxes--not a good idea if you want to spur spending and investment.

Then there's France. True, Jean-Pierre Raffarin may be shaving levies on personal income. But frightened as he is of igniting a social explosion, the new Prime Minister is doing almost nothing to remove the strict labor-market regulations installed by the outgoing left-wing government. Among the free-market crowd in Paris, the new Prime Minister is already being nicknamed Jean-Pierre Fera-Rien--"Jean-Pierre will do nothing."

That would be a pity. With Europe's economy growing less than 1% this year, doing nothing is hardly a wise course of action. Certainly, a sluggish economic environment is a tough time for carrying out reform. But that excuse is getting mighty old: With brief exceptions, Europe has been sluggish for years.

Worse, Europeans thought 2001 and 2002 would be their moment to shine, as growth outstripped that of the U.S. Instead, even though American economic bulletins are far from glowing, U.S. gross domestic product is still set to expand at more than twice the European rate, to 2.4%. No wonder some economists are asking if Europe is the next Japan--which has suffered through a decade of contraction and seems entirely lacking in the will to grow.

In fact, Europe in some cases is not just stalling out on reform: It is shifting into reverse. Just a few years ago, Europe's policymakers swore they would let the market decide the fate of big companies--even ones that still counted the state as a shareholder. That vow is now forgotten. On Sept. 15, German Chancellor Gerhard Schröder's government strong-armed public banks into rescuing cellular operator MobilCom, the latest in a series of state bailouts. In France, the Finance Ministry is all but running debt-laden France Télécom. Paris is even guiding the breakup of troubled media giant Vivendi Universal to make sure its core assets remain in French hands.

The Europeans have found cover for all these moves by pointing to the corporate scandals and collapsing stock prices in the U.S. as proof that the Anglo-Saxon model is deeply flawed. "America is certainly no longer a role model and shouldn't have been in the 1990s," argued Fredmund Malik, the Swiss management guru, in German newsweekly Der Spiegel in early September.

The U.S. model definitely has its problems. But America-bashing avoids the real issue: Europe lagged behind the U.S. during the entire 1990s and looks now to be embarking on another lost decade of missed opportunities. Demographics don't help. In the next 10 years, the age group between 20 and 40--the most economically productive--is set to contract by 1.3%. Without serious reforms, says Julian Callow, an economist at Credit Suisse First Boston, "Europe will not be an attractive place to invest, with rising unemployment and slowing growth."

Europe's policymakers don't need to lead a Thatcherian revolution. But they do need the courage to push steadily on incremental reforms that, taken together, can reignite growth. Otherwise, Europe will eventually lurch into crisis or slowly fade away as an economic power--both dismal outcomes for a region of such promise.

Rossant covers European politics and economics from Paris.

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