QUERETARO, Mexico, Aug. 28 (UPI) -- "Four legs good, two legs bad" becomes the mantra of the pigs in George Orwell's "Animal Farm." "U.S. good, Europe bad" might be the mantra of many an American businessman.
For though the antiquities of Rome, the pubs of Dublin and the boulevards of Paris enchant Americans, old Europe tends not to charm economically or politically in the United States.
The European economy is seen as hugely inferior to the American one: less competitive, more expensive, less flexible, more statist. America leads; Europe does not follow: it is pulled along -- by the higher growth of the United States.
Politically, meanwhile, Europe is seen as the home of uncommitted and the plain wrong. The "old Europe" of France and Germany, to use U.S. defense secretary Donald Rumsfeld's disparaging term, opposed attacking Saddam Hussein's Iraq while Britain stepped forward. Europe laughed at Reagan and his "tear down this wall" message to Mikail Gorbachev. Look what happened.
And Reagan's supply-side economics? Twenty years on it is the economics rather than the laughter that has lasted. Driven by rising fiscal deficits -- themselves, ironically, a speciality of Reagan and the current Reaganesque U.S. president, George W. Bush -- and by the persistent low growth or "eurosclerosis" that the euro was supposed to cure, old Europe is coming round to cutting back "big government," as Reagan called it.
In France the government led by Prime Minister Jean-Pierre Raffarin managed in July to push through a reform of the state-run pension system. That was an achievement because a previous, right-wing prime minister, Alain Juppé, tried in 1995-97 and not only failed but fell, victim of worker protests that racked the nation.
This time, too, there was opposition, but less strong. "Raffarin's willingness to push the reform through in the face of opposition in the streets from disgruntled public-sector workers and some of the more intransigent trade unions marked something of a first for a French government," comments Philip Whyte, senior economist for Europe at the Economist Intelligence Unit in London.
Raffarin has also partially undone an unhelpful legacy of its predecessor, the government of Lionel Jospin: the 35 hour working week. Most workers can now work a 39 hour week. (But more flexibility is needed.) And he has privatized. His government divested stakes in Credit Lyonnais, the bank, and Renault, the car company.
But the story is not all positive. Raffarin's government "is already beginning to backslide on its commitments to reduce staffing levels in France's public sector," says Whyte. "It was supposed not to replace one out of every two public-sector jobs freed up through natural wastage, but staffing levels in the public sector are barely expected to fall at all in 2004."
Slow progress in cutting state jobs makes it harder to comply with President Jacques Chirac's campaign promise to cut the tax burden "by 30 percent." France, Whyte says, "entered the downturn (in the global economy that began in 2000) with a much larger structural deficit than most other euro area countries." He expects France's fiscal deficit to exceed the 3 percent of GDP limit set by the European Union's growth and stability pact in 2004 for the third year running and probably again in 2005.
Without cutting state jobs, France cannot cut taxes. Both the fiscal deficit and the tax burden will remain high. The economy is unlikely to find fresh dynamism. Raffarin's reforms are welcome and useful but insufficient.
Germany's economy, Europe's largest, is seen still more negatively than France's. German growth has lagged that of France in recent years. Unemployment climbed to one tenth of the workforce during Chancellor Gerhard Schroeder's first term. He may have felt fortunate to be re-elected late last year and his victory did not promise much. But he has since tried to press ahead with reforms. This summer, most notably, some health and social programs were trimmed in what constituted an important break with the past. In the view of Charles Jenkins, Director for Western Europe at the EIU, "Schroeder is "doing quite a lot, the question is whether he's doing the right things."
What Germany most needs is greater flexibility in labor law. If companies can hire workers on more flexible terms and dismiss them more easily they will hire them more readily. On this Schroeder has not made much progress. The unions resist change and seek still less flexibility. This summer, however, the second biggest union, I G Metall, suffered an important political defeat, abandoning a strike that was intended to bring up wages in the old East Germany to the West German level.
Why has Germany, Europe's biggest economy and the world's third largest, proven so poor a performer in the past decade? Jenkins traces it back to the mishandled reunification of West and East in 1990, "economically an 80 percent failure." The Ost-mark of the east was given the same value as the Deutschemark. East Germany, decades behind its western sibling because of the pall of communism, was made highly uncompetitive. More than a decade on, unemployment is still much higher in the old east.
Yet the early days of reunification were far from gloomy. There were major investments and a construction boom. The German economy is still fading from that boom, in Jenkins' view, while the state government of Berlin and many banks are "almost bankrupt." Meanwhile, the structural flaws have persisted.
U.S. good, Europe bad. Old Europe: wealthy, overweight, complacent, is only now, three years into the downturn in the world economy, ready to look for more labor flexibility, a reduced tax burden, a trimmed state sector. It will continue to lack the legs of the mighty U.S. economy, won't it?
The answer is not so clear.
U.S. President George W. Bush launched himself into war in Iraq while old Europe held back. That is a choice we will not analyse here, but Bush must bear the costs. Like Reagan, he has cut taxes but increased spending on defense. Suddenly the U.S. fiscal deficit is spiralling much higher (as a share of GDP, as well as nominally) than those of France and Germany.
And the United States also has a record deficit in trade while the slower growing European economies, with their more cautious consumers, are, in this regard, in balance.
During the reunification boom, much went wrong in the German economy. How much went wrong with the U.S. one in those exciting days of the stock market boom? How much has gone wrong since, as fiscal spending and a house price boom are used to prop up demand?
Americans have known of old Europe's complacency for years but have been largely blind to the excesses that have made their own economy hum. The U.S. economy, though hard driven by Bush and Federal Reserve Chairman Alan Greenspan, will, in our view, stall again in 2004. That will do slow-moving old Europe no favors, but it may be laughed at a little less.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to [email protected]
