Friday, September 16, 2005

Old Europe at the Crossroads

The heart of Old Europe appears to be at a critical juncture. On Sunday German citizens will vote in national elections. The favorite is the CDP candidate Angela Merkel, who, despite or perhaps because of her East German background, is said to be in favor of economic reform.

The German elections are the second of three over the course of a year where reform of sclerotic economies to make them consistent with the rudely unavoidable demands of globalization is a primary issue. In the first election last week, Japan’s Liberal Democratic Party (driven really not by the party ideology that usually rules in parliamentary systems, but by the charisma and obstreperousness of their leader, Junichiro Koizumi) coasted to a big victory. Now it is Germany’s turn, and next year it will be France’s. In that case the nominal reformer, Nicolas Sarkozy, who pledges to fundamentally remake the French social model, will vie against the foppish Dominique de Villepin, who pledges in essence to tinker with the French model to protect it from Anglo-American economic barbarism. And these two candidates will also have to compete against the candidate(s) of the French left, and of the National Front, all of which favor even less accommodation to the world’s demands for more flexible economies less burdened by the anvil of the welfare state.

Old Europe – and here I mostly mean the heart of the mother continent, France, Germany and Italy – labors under the illusion that the “European model” of which it is so proud is sustainable in a world full of hard-charging people in the U.S., China, India, Mauritius, Chile, and more or less everywhere who are simply willing to work on (dramatically) better terms than the Europeans are willing to offer. Some Europeans, including many of the young ones, realize this, but I doubt whether it is enough. In any event, for Germany and France this is a moment of truth. The economic data for these countries is notable not just because it is bad, with unemployment rates hovering around ten percent, but because it has been so bad for so long. According to World Bank data, France, Germany and Italy have had unemployment rates exceeding eight percent without interruption since 1983, 1994 and 1982 respectively. These are long-term, systemic, social cohesion-corroding levels of economic dysfunction. If reform does not happen in the wake of these elections it is probably not going to happen at all.

And I suspect that they will not happen. Even if those pledged to reform win, the willingness to reform is not great. Prime Minister Berlusconi is pledged to reform, but finds that it has been difficult to bring his country with him. It may take the threatened separation of the more prosperous north of that country to bring change, and even that may not be enough.

Old Europe’s young disproportionately bears the pain of the European social model. They are with disturbing frequency separated for years at a time from the labor force in their 20s, when investments in human capital from job experience are most lucrative, because of chronic unemployment. But they are more and more outnumbered by older Europeans, who benefit from the lavish retirement, pension and vacation schemes and are thus reluctant to change them. As Europe gets older electoral demography will more and more work against reform. The consequences of continued refusal to change combined with the increasing costs of that refusal may be grim. At a minimum, Europe may lose more and more of its best, brightest and most ambitious to the U.S., where their future can be more in their own hands. This trend has been (mostly anecdotally) discussed in the current issue of the American Enterprise. It is possible, though far from certain, that old Europe’s difficulties could manifest themselves in a more sinister way, which is a topic for another day.

The example of Japan provides some possibility of hope, but the Japanese are not nearly as emotionally invested in the welfare state as the Europeans are; there is no “Japanese social model” that the Japanese wish to export to the rest of the world. The combination of belief in the European model in a world that is passing it by and the increasingly grim electoral arithmetic make true reform unlikely. But we will know better soon after next year’s French elections.


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