Colossus (45 page)

Finally, European productivity growth may have been more rapid than American for most of the postwar period, but in the last seven years the tables have been turned. According to the Conference Board, American GDP per hour worked grew at an average annual rate of just under 2 percent in the period 1995–2002, whereas for the EU the figure was closer to 1.2 percent. Only one EU country—Ireland—achieved higher productivity growth than the United States.
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EUROPE’S “LEISURE PREFERENCE”

Europe’s poor economic performance
despite
measures designed to enhance economic integration begs the obvious question why? One widely held explanation is that Europe’s labor market is insufficiently flexible, not just because of the obvious linguistic barriers but also because of regulations introduced over the years in response to the demands of trade unions.

A recent study by the International Monetary Fund considered the evidence from the period 1960 and 1998 and asked a simple question: What would the effect on European unemployment be if the EU labor market were Americanized? To be precise, the study envisaged:

Increasing the participation rate (the proportion of the population in the labor force),

reducing the replacement rate (the ratio of benefits to past earn-ings),

reducing employment protection,

reducing the tax rate on labor (introducing fiscal reforms to eliminate poverty traps),

weakening trade unions, and

decentralizing wage bargaining (where nationwide collective agreements demonstrably cause big differentials in regional unemployment rates).

Table 11
summarizes the projected short-, medium- and long-term impacts of three of these policies. Its message is clear: Only by doing all three would European unemployment come down to American levels—and that only in the “long term.” This suggests that labor market reform is bound to be difficult. Very radical changes are necessary, but the payoffs would be slow to manifest themselves.

A further difference between the European Union and the United States not captured in such calculations—or, indeed, by standard measures of productivity—is the widening gap between the amount of time Americans work and the amount of time West Europeans work. According to a recent OECD study, the average American in employment works just under 2,000 hours a year (1,976). The average German works just 1,535—fully 22 percent less. The Dutch and Norwegians put in even fewer hours. Even the British do roughly 10 percent less work than their transatlantic cousins. The extraordinary thing is how much of this divergence has occurred in the past twenty years. Between 1979 and 1999 the average American working year lengthened by fifty hours, or nearly 3 percent. But the average German working year shrank by 12 percent, and the average
Dutch year by 14 percent.
⁴⁹
It is a relatively new state of affairs that Americans get ten days of holiday a year, and Europeans thirty.

TABLE 11. EFFECTS ON EUROZONE UNEMPLOYMENT OF “AMERICANIZING” THE LABOR MARKET

Source: International Monetary Fund,
World Economic Outlook
(April, 2003).

In fact, these figures understate the extent of the European “leisure preference,” since they take no account of the fact that a much larger proportion of Americans actually work. Between 1973 and 1998 the percentage of the American population in employment rose from 41 to 49. But in Germany and France the equivalent percentages fell to, respectively, 44 and 39. The overall employment rate for the working-age population in the United States is 73 percent; in the EU it is just 64 percent.
⁵⁰
Unemployment rates in most European countries are also markedly higher than in the United States—over 10 percent in Belgium and Spain, more than twice the American rate. And then of course there are the strikes. Between 1992 and 2001 the Spanish economy lost, on average, 271 days per thousand employees as a result of industrial action. For Denmark, Italy, Finland, Ireland and France the figures lie between 80 and 120, compared with less than 50 for the United States.
⁵¹

This, then, is the main reason why the U.S. economy has surged ahead of its European competitors in the past two decades. It is not that Americans are markedly more productive. It is not about efficiency. It is simply the fact that Americans work
more
. It is the fact that Europeans take longer holidays and retire earlier. It is the fact that so many more European workers are either unemployed or on strike. Europe’s political leaders are belatedly waking up to this problem. In June 2003 a German politician took his career in his hands by daring to suggest that if Germans made do with fewer holidays, their economy might grow faster. Such views are no longer taboo in France either. But a century of European social democracy has created habits of mind that are extremely hard to break. From almost its very inception in the late nineteenth century, the German Social Democratic Party campaigned for shorter working hours and, more recently, shorter working lives. For their French counterparts, securing a maximum working week of thirty-five hours was one of the great achievements of the recent past. This tradition dies hard. A striking feature of the proposed EU constitution is that it seeks to enshrine as “fundamental rights” a number of the things that make the European population so much less active than their American counterparts. It alarms British business leaders that Article II-27
enshrines the right of workers to be consulted by the management about the running of the companies that employ them. But just as significant is Article II-31: “Every worker has the right to limitation of maximum working hours, to daily and weekly rest periods and to an annual period of paid holiday.”
⁵²

THE COMMON AGRICULTURAL POLICY

Europe may be running a trade surplus, but part of the reason is the relatively slow growth of domestic demand. Another relevant factor is the European Union’s continued protectionism, which is most evident in the agricultural sector. At the time of writing (June 2003), an agreement had belatedly been reached to reform the Common Agricultural Policy, which at present accounts for nearly half the EU budget. The system whereby the subsidies paid to farmers are linked to the volume of production is to be partly dismantled.
⁵³
The prices at which the EU commits itself to buy farm produce are to be reduced, though not entirely scrapped. CAP payments to farmers in the ten new member states will be paid at just a quarter of the level paid to existing members.
⁵⁴
But these reforms do nothing to reduce the tariffs currently imposed on agricultural imports to Europe. American proposals to the World Trade Organization prior to the abortive Cancún conference included the phasing out of agricultural export subsidies over five years as well as the reduction of subsidies to 5 percent of the value of farm production and of tariffs to a maximum of 25 percent. Before Cancún the EU indicated its willingness to reduce subsidies, which prior to last year’s reforms were around 33 percent of the value of production, compared with around 21 percent in the United States. Without a global trade agreement, however, these subsidies will continue.
⁵⁵
This state of affairs is simply indefensible—and politically almost incomprehensible given that barely 4 percent of the EU workforce is now employed in agriculture.

The United States is not significantly more virtuous in these respects.
⁵⁶
But Europe’s addiction to agricultural subsidies and tariffs nevertheless needs to be borne in mind when judgments are being made about the EU’s positive contributions toward developing countries. Europe may be more generous in its aid policy than the United States. But so long as the Common Agricultural Policy remains in existence—even in its reformed
incarnation—the EU will be giving with one hand while taking away with the other. Worse, it will be offering dependence on aid as a substitute for economic development based on agricultural exports. Were the EU to break the stranglehold of what are now numerically weak protectionist lobbies, the benefits—not least for developing countries around its Mediterranean and Slavic periphery—would be immense. There would be real benefits for West European consumers too. Only a relatively small number of inefficient farmers, notably in France, would lose out. And those who protest that the French countryside benefits aesthetically from subsidized agriculture should think again. If what is at issue is the look of the Gallic landscape, then farmers can quite easily be paid to act as glorified gardeners, charged with the task of keeping France pretty, but not paid to produce food that could come more cheaply from outside the EU.

THE EUROPEAN CENTRAL BANK AND GERMAN DISINFLATION

The Common Agricultural Policy also makes food expensive for European families, reducing their disposable income twice: by taxing their incomes and by inflating their food bills. But it is not the principal cause of Europe’s recent economic underperformance. Of far more importance is the mismanagement of Eurozone monetary policy since the creation of the single currency in January 1999.

The success of the euro as a substitute for the dollar in some international transactions masks a deeper failure. This failure has consisted in systematically underestimating the disinflationary and perhaps even deflationary pressures on the German economy of a monetary policy devised to achieve price stability in twelve quite different economies.
⁵⁷
Between 1999 and 2001 the Economic and Monetary Union meant higher interest rates for Germany, compensated for by exchange rate depreciation.
⁵⁸
In 2002 and 2003 it meant belated and insufficient interest rate cuts and a real monetary tightening through exchange rate appreciation. Some symptoms of deflation have already manifested themselves in Germany. Although the official consumer price inflation rate remains (just) positive, there is reason to think that this may conceal actual deflation. The main producer price index fell in 2002, and agricultural prices have been falling since mid-
2001.
⁵⁹
Uniquely among the major Western economies, Germany’s real estate prices have fallen—by as much as 13 percent in real terms—over the past decade.
⁶⁰

The problem has been compounded because German fiscal policy is also circumscribed by European rules. The misnamed Stability and Growth Pact—ironically, demanded as a sine qua non of monetary union by the Germans themselves—implied that Germany could be fined by the EU if, as seemed likely, Berlin ran deficits in excess of 3 percent of GDP for three years running (2002–04). In large measure, these deficits merely reflect the operation of automatic stabilizers in a recession or near recession. The idea that they could be made larger by the imposition of fines (a mechanism that was designed to elicit good fiscal behavior from Italy and other historically profligate member states) is among the most grotesque of the unintended consequences of monetary union. Small wonder the Stability and Growth Pact was hastily suspended in November 2003.

One way of seeing where the European Central Bank has gone wrong is to ask where German interest rates would be today if the German central bank, the Bundesbank, had not been emasculated. Given the Bundesbank’s record—which includes at least five episodes when rates were cut quite steeply in response to a recession (in 1967, 1975, 1982–83, 1987 and 1994–96)—it seems reasonable to assume that rates would be lower. Were it not for the ECB’s need to target inflation not just in Germany but also in Greece and Ireland, German base rates in 2003–4 would very probably have been closer to American rates—i.e., nearer to 1 percent than to 2 percent.
⁶¹

Under the circumstances, it is scarcely surprising that after much circumlocution, the British government has avoided committing itself to joining the Eurozone in the near term. Although one study in the voluminous June 2003 Treasury report on the subject suggested that euro membership might boost British economic growth, it was only by a modest amount—at best, 0.25 percent of GDP per annum; at worst, 0.02 percent.
⁶²
Even these calculations (which assumed that switching to the euro would boost cross-Channel trade and that this in turn would raise productivity) must be viewed with skepticism in view of the dismal performance of the Eurozone since its creation.
⁶³
The ten countries that have just joined the EU should also think twice about converting to the euro. They could lose more than they gain if, in order to qualify, they are required to spend
two years of purgatory in a second-generation exchange rate mechanism, given the volatile flows of speculative capital such a system would tend to attract.
⁶⁴
The government deficits of Poland, Hungary and the Czech Republic all were in excess of 4 percent in 2002; indeed, the Hungarian deficit was close to 10 percent. It is fortunate for these countries, too, that the Stability and Growth Pact is in abeyance.
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