The swing of the political pendulum in the US has had an equal and opposite reaction in Europe. In the 1990s, under the post-cold war order of transatlantic relations, Bill Clinton’s centre-left US administration promoted its own brand of caring capitalism. Inflation was banished, the world economy grew strongly and financial markets soared.
Just like the US, Europe’s four biggest nations all had centre-left governments. And they all tried to emulate the US model, embracing structural reform, liberalizing markets and encouraging the equity culture.
How quickly times change. The dot com bubble has burst and the US is flirting with recession. At home, the Bush administration is fixated on power-generation bills and tax cuts. Abroad, a grittier foreign policy agenda means that with the exception of a few key strategic interests (Argentina, Turkey) the US is hands off. Kyoto’s clean-up commitments are out, expansion of Nafta and a tougher attitude towards China are in. Most of this is at odds with Europe’s statist mentality and pro-green politics. So, just like the US, European governments are reverting to introspection.
With parliamentary elections in core Europe over the next 15 months, the focus is on meeting social obligations rather than looking to the US for ideological leadership.
The tone is set by France, which has both presidential and parliamentary elections. The Jospin government has made it clear that it will do nothing to undermine its popularity. The practical consequence is new measures designed to protect French workers’ rights in the face of the global slowdown. If they get through, it will be a lot more costly for profitable businesses in France to sack excess workers.
But it’s not just France that has decided to suspend structural reform. Germany has offered Paris its full support in blocking an accelerated electricity market deregulation, while watering down its own pension reform. Spain and Italy have taken a stance against rapid EU enlargement that could threaten their access to EU structural funds. An open-skies deal has been stymied until the UK and Spain can resolve differences over Gibraltar.
Everybody knows that EU enlargement without wide-ranging institutional reform risks total sclerosis. And yet Berlin’s latest proposals for a more accountable, democratic structure for key European institutions have been firmly rejected in Paris.
Euroland doesn’t needs this kind of stalemate. Economic growth is slowing fast. The euroland economy stinks of stagflation. Yet its politicians are faltering on reform amid electoral paranoia, the threat to jobs from the global slowdown and the US administration’s rightward shift.
Nowhere is this clearer than in Germany. The IFO business climate indicator has fallen precipitously since last autumn. And it’s a worryingly reliable indicator for both German and pan-European real GDP growth prospects.
Unemployment is now rising throughout Germany. That will undermine already fragile consumer confidence. So even though tax changes in the 2001 budget give the consumer a fiscal boost equivalent to around 1% of disposable income, a worker who fears for his job is not going to spend.
Germany accounts for a third of the region’s output. So it’s big enough to influence growth in the rest of the region, particularly now that the one-off single-currency dividend – low German interest rates for all – is receding.
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Unfortunately, the European Central Bank doesn’t see the warning signs. The US Fed, the Bank of Japan and the Bank of England have all cut interest rates, but the ECB stands defiant.
ECB president Wim Duisenberg insists that public confidence in the euro will improve if the ECB fulfils its obligation to control inflation. In the very long term that may well be true. Right now, keeping interest rates high is undermining growth as well as confidence in the relative merits of investing in euroland.
The region’s investment/GDP ratio has been falling steadily for years. And outflows of foreign direct investment and portfolio capital are running at high levels.
In contrast, the Bank of England’s willingness to cut interest rates promptly is already limiting the downside in the UK. Manufacturing is undeniably weak and exports are drying up, but all is not lost. A resurgent consumer will likely save the day.
Since the fall of the Berlin Wall, all numerate people have known that there is only one way to run country, economy and corporation – on the US model. Europe and Japan still reflect much of the top-down thinking that puts the state at the apex as the major driver of the economy. The US puts the individual and the consumer on top. The UK is closer to the US model, as are such countries as Ireland, where the state historically lacked legitimacy.
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As the US has the most efficient corporate sector and the biggest economy, the thrust towards globalization and the export of this model to the US’s comparative advantage has become the most potent cultural force around. Now corporations and economies can only survive if they can compete on the global stage.
It is no secret that this conflict will be resolved in favour of the US globalized model. People are greedy and it makes them richer, while empowering the individual consumer. But conflict resolution will take years and the more years, the deeper the historical roots of successful alternative models run. That is why it is easier for Mexico, Argentina, Brazil or Philippines to go with the global flow than for much of continental Europe.
Conflict breeds loss of confidence and loss of confidence is never pro-growth or pro-wealth creation. It is this mental depression that is making Europe growthless – not trade links to a moribund Japan or a stuttering US economy. And Europe’s loss of self-confidence is made worse by an almost total lack of political leadership.
When faced with the challenge of globalization the only sound policy for government is to go for it and recognize that its job is now to facilitate the leading role of the corporate economy to be competitive on the global stage. The current European governments are not up to that job.
