Monday, March 27, 2006

Economic Reform: Is Europe Blinking?

The Brussels Journal has an interesting post, based on a report from the “Flemish think tank” Work for All about Europe’s economic decline, and its relation to high taxes and public spending. There is nothing unfamiliar in it to readers of this blog, but the new data presented there are interesting.

Make no mistake about it, economic reform is one of the most pressing items on the European agenda - an issue of continued civilizational vitality. Note first that "Europe" is a big, diverse place -- economic reform has already paid off handsomely in Ireland and, depending on the credence one gives to official unemployment data, labor-market liberalization in the 1990s may have done the same in Holland, Denmark and Sweden. But I predicted last year that the central spine of Europe in which the need for reform is most acute – Germany, France and Italy – will ultimately turn away from it because the political pain is too high. In that post I was agnostic about the most likely outcome, but that prediction now may be closer to reality. The French prime minister, Dominique de Villepin, is under siege from huge numbers of protesters demonstrating several times a week against what must be judged to be trivial economic reform. He has proposed that in the first two years of employment workers under 26 may be discharged for any reason. This is radical stuff in France, even though (absent collective-bargaining agreements to the contrary) most Americans of any age can be so discharged.

And the country has turned out in force against it, with a general strike of huge numbers of public and private workers perhaps in the offing. What is worth noting is that the protesters have been led by college students, who (once they ultimately leave the campus, often later than Americans do) are far more likely to find work under the existing contract than those without degrees, and certainly than les beurs in the suburbs. So naturally the elite, cosseted section of French youth has little to gain from such a law. And those who would benefit from greater economic liberty are seldom as motivated to demonstrate in favor of it as those who believe (in ignorance of the idea that job destruction is the inseparable partner of job creation) that they will be harmed by it.

The most likely outcome is that Mr. de Villepin will lose this battle, and the cause of French economic reform will be pushed back at least one election cycle, perhaps permanently. France will thus join Italy, which appears poised next month either to elect Romano Prodi (who is a man of the European left and therefore unlikely to impose substantial reform) or re-elect Silvio Berlusconi (who tried but failed to impose it) in flinching at the critical moment. Germany, with its status-quo left/right government elected last year, will preserve the tepid reforms of the previous administration but not go much further.

In the post linked above I argued last year that the center of the EU-15 was at a critical juncture, because soon demographic realities –- an older, risk-averse population with no desire to trim pensions and health care or to liberalize labor law –- would make reform impossible. In turning away at this moment, France and Italy (and perhaps, ultimately, Germany) have perhaps answered that question. They have turned away in fear from the bridge that links them to a better future, and in so doing perhaps cemented their status as a declining civilization.


Blogger ChessPlayingAustrian said...

I am dumbstruck by the protests.

Any intelligent person who wants to figure out for themselves whether the law makes economic sense needs only to use a little time and google to determine the answer. It is clearly "oui." The proposed change to the law makes sense. The current laws make no economic sense, whatsoever.

I can only guess that the unions are somehow influencing the students. The current union leadership stand to lose the most, and they are the ones with the least economic sense of all.

2:16 AM  
Blogger Evan said...

Well, the unions have a lot of economic sense in that they see clearly where their self-interest lies. That they protect their privileges so relentlessly even though it comes at the expense of their children and their country's future says a lot about either their cruelty or their capacity for cognitive dissonance.

2:24 PM  

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