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Andrews John, The Economist - 22 ottobre 1994
EU: the social question.


Margaret Thatcher will never find a M place in a pantheon of the EU'S champions. That will be reserved for "true Europeans", such as Messrs Monnet, Adenauer, De Gasperi, Delors, Kohl and Mitterrand. The Iron Lady may have impressed with her intelligence (Jacques Delors, president of the European Commission, admits his admiration for Britain's prime minister of the 1980s), but she dismayed with her handbag-waving pursuit of narrowly defined national interests. if she is happy to be rid of Brussels (the derisive shorthand for the EU's affairs and institutions), the feeling is reciprocated.

Even so, future historians may yet place Lady Thatcher on an EU honour roll. After all, it was she who insisted on counting every ecu that went into and out of the community's budget, so highlighting which countries were net contributors and which net beneficiaries. Moreover, it was her Micawberish determination to balance Britain's own books and lessen the role of the state that spawned privatisation programmes across the whole of the union and beyond. Even the dirigiste French now sometimes praise market forces and the reduction of government spending as though they mean it. Much of the Thatcherite message has become Europe's conventional wisdom.

But in the end Europe would have got the message even without Mrs Thatcher. The countries of Europe are, quite simply, living beyond their means. Social benefits, from family allowances and unemployment assistance to sickness pay and oldage pensions, are paid for by taxation and corporate earnings. If tax rates are too high, corporate earnings could fall and workers be laid off, meaning that tax revenues would flag or even fall-so tax rates would have to rise even higher. Individuals can try to escape from this vicious circle through the black economy: let no taxman benefit from bar~ gains struck between willing householders and willing window-cleaners. Employers can seek refuge by laying off workers or moving their businesses to a friendlier country.

The escape route of governments, however, is to borrow, and this produces a second vicious circle of tax revenues being used to service the public debt instead of to build roads, hospitals and schools. When the Maastricht treaty set out the route towards a single currency, one of the signposts was that a country's gross public debt should not exceed 60% Of its GDP. Belgium's level last year was almost 150%; Greece's almost 110%; Italy's almost 120%. Those numbers are signs not so much of recent recession but of prolonged irresponsibility. The governments of all three countries are having to make annual interest payments on their debt equivalent to at least a tenth of their GDP (see chart 3 on next page).

To escape through borrowing is a mere illusion, and the longer it is indulged the more damaging it becomes. Any Cassandra can see that over time a country's interest rates will have to rise, its infrastructure will deteriorate-and its quality of life will gradually decline. Is that to be Europe's fate?

The real escape would be to find ways of helping Europe's jobless back to work. As the social costs of unemployment fell, tax revenues would rise and tax rates could fall, and happy employers would make bigger profits and so bigger investments. That virtuous circle, however, is hard to create.

To thwart Cassandra

One reason is that governments have to live with the mistakes of their predecessors. In Italy those predecessors - a succession of venal, Christian Democrat-dominated coalitions-handed out state pension-rights like confetti. Italy's pensioners (almost a quarter of them claiming disability pensions) now soak up two-fifth is of government spending. If the government of Silvio Berlusconi is to fulfil its promise to cut both debt and tax, it must reduce spending on pensions and on other aspects of a generous welfare state. Yet Mr Berlusconi was told in June by the Constitutional Court that he could not renege on $19 billion-worth of unpaid state pensions. And because Italy has the world's lowest fertility rate, the number of pensioners will grow faster than the number of workers whose efforts support them.

Italy's problems are bad but not unique. Statutory charges on labour-that is, the sum of taxes and obligatory social-security contributions-now account for around two-fifths of the EU'S GDP. In 1970, they took just over a third. By comparison, the proportion in America has remained stable at just below 30%, and in japan it has risen from just under 20% to just over 30%. One reason for the proportional increase in Europe is that economic growth has slowed. But - welcome to another vicious circle - a cause of that slowdown has in turn been the burden on employment and wealth creation of the statutory charges. Businessmen are deterred from investing and hiring by the extra cost.

Changes in the demographic profile will make the burden still heavier. At the moment every 100 European workers are supporting almost 40 retired people; in ten years' time, unless unemployment falls dramatically, this grey pressure on the workforce will rise, to almost 50 pensioners per 100 workers. No wonder EU governments are trying to stabilise or cut back on statutory charges as a proportion Of GDP, for example by raising retirement ages (as in Italy) or by changing the rules (as in Britain) for inflation-linked pensions or by encouraging greater reliance on private pensions.

Enter Delors

All of which is expressed in admirable detail in that special report on growth, competitiveness and employment - commonly known as "the Delors white paper" - which was laid before last December's Brussels summit of Europe's heads of government, and portentously subtitled "the challenges and ways forward into the 21st century".

The stark conclusion of the white paper and other reports is that Europe's taxes, social obligations and rising real wages-plus the high interest rates that resulted from the cost of German unification - have combined to stretch public finances, reduce corporate profits, constrain investment and inhibit the creation of jobs. Comparisons with America and japan reveal a Europe that is singularly bad at creating employment even when its economies are booming. over the past three decades, as America was adding to its store of jobs at a rate of 1.8% a year, the countries of the EU were managing an annual average growth of just 0.24%. In the past two decades America has created 30m privatesector jobs, Europe just over 10m (see chart 4).

Even in the second half of the 1980s, a boom period when Europe had recovered from the oil shocks of the 1970s and was investing for the impending "single market", the number of jobs rose by only 1.3% a year. That meant that even though Europe created 9m new jobs (mostly in the public sector), its unemployment rate fell from its 1985 peak of 10.8% to a still dismal 8.3% in 1990. Today the Eu is back on that nasty peak with around 18m people, more than a tenth of the workforce, looking (at least in theory) for jobs. By contrast, America's jobless rate is about 6% and Japan's 3%.

You might conclude that Europe has a lot to learn from both America and Japan.Yet it is understandably reluctant to imitate what it sees. Japan has a culture of life-time employment (now eroding) and a willingness to accept wafer-thin profit margins and tiny share dividends. For its part, America's capitalism is too raw for most European stomachs. Whereas article 2 of the Maastricht treaty specifically calls for "a high level of employment and of social protection", the American model combines a high level of employment with a low level of social protection. The result is that an American in the bottom tenth of the workforce earns less than two-fifths of median pay; his European counterpart earns more than two-thirds.

Britain's Conservative government may find inspiration in the American way-on the grounds that a low-paid job is better than no job at all-but the EU'S other governments tend to shudder. Continental Europeans cherish the concept of "solidarity", the notion, held by Socialists and Christian Democrats alike, that people have a moral duty to help each other. To them, the American way smacks of an unnecessary drive to "align our costs on those of our competitors in the developing countries: socially unacceptable and politically untenable", in the words of the white paper.

What, then, is the remedy? The white paper's prescription mixes a dose of Adam Smith, a touch of Colbert and a hint of central planning. Let there be deregulated labour markets, lower taxes on labour and less profligate social spending-but also government-encouraged research into areas of high technology and a government-commanded infrastructure policy to create "trans-European networks" (TENS) of motorways, railways, energy pipelines and telecommunications links. Let there also, in order simultaneously to make up for the lost taxes on labour and to protect the environment, be new taxes on energy use.

Mix and match

Whether such a cocktail can be swallowed in one go is perhaps irrelevant. The point is that it contains at least one ingredient for every taste. The British will savour the stress on deregulation, the French the emphasis on high-speed railways, businessmen the stress on telecommunicating "superhighways", and so on. Politically, Mr Delors's white paper is superbly adroit, not least in the way that it preserves a strong role in co-ordinating the TENS, for example for the European Commission.

That may sound somewhat snide. But the sneers will increase if the financial arithmetic goes astray. The white paper talks of financing needs that amount to 400 billion ecus ($492 billion) over the next 15 years, including by the end of this century 200 billion ecus for transport projects and 3o billion ecus for energy networks. Mr Delors argues that such amounts can be raised easily, since much of the money is already there in the spending plans of member countries, and the private sector will happily provide the lion's share of what is not. But the figures are large enough to alarm the EU'S finance ministers-who have vetoed Mr Delors's plan for the commission to issue "Union bonds" (a clever ploy to increase the Commission's power) to help pay for the TENS. As for the private sector, the example of building a tunnel between England and France is one that will persuade most companies to proceed with caution.

It is possible to cwil at many bits of the white paper. Europe's industrialists, for example, reckoning that their energy bills are already on average 33% higher than in America, are particularly upset by the proposed energy taxes. But if the union is to fulfil the potential of its single market, it needs to make a bigger collective investment in infrastructure. The finance ministers may worry, but Mr Delors is adept at outflanking them. in June, at their summit in Corfu, the Union's heads of government turned visionary and approved an early start for the first 11 transport projects, and an urgent examination of nine "priority" energy schemes. The challenge now is for Europe's industrialists and businessmen to seize the opportunity.

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