EUROPE

Spring 2006

by Paul Hofheinz

Commentary:

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Just as French voters were saying “non” to the European Constitution, which it was said would lead to the social destruction of France through “ultra-liberal” reforms that would drive down living standards and ruin the French social model, John Christopher Vignati of the Génie Climatique et de Couverture Plomberie (GCCP) organisation representing French companies in the plumbing and construction sectors was telling a very different story. Instead of railing against the constitution and blaming it for encouraging “social dumping” by inviting an army of low-paid Polish plumbers to invade the country to steal jobs and impoverish hard-working French families, Monsieur Vignati was telling a Financial Times reporter that the construction sector in France is now growing so quickly there are more than 6,000 unfilled vacancies for plumbers. As to the “army” of Polish plumbers, there are around 150 working in France, who he generally characterised as doing valuable work on short-term contracts.
Monsieur Vignati’s little-noticed remarks were nevertheless a significant moment of truth at a time when failing politicians, dying economic interests and demagogic anti-globalisation groups have so often twisted the truth to suit their own short-term political interests. It was a year when those of us who stood up for reasoned debate about our common future – namely, that economic prosperity is the pillar sustaining our European social model; that changes in the global economy require a more mature response from our governments; that European integration has and will continue to bring peace and prosperity in its wake – were being denounced as “ultra-liberal” reactionaries. We were accused of undermining the European social model, and were threatened with marginalisation for defending political views that only yesterday had been solidly mainstream. The results of this policy are there for all to see – a damaged and largely discredited European project and a population profoundly confused about the appropriate response to the very real challenges society faces.

The truth is this: Europe’s success rests not on a further expansion of its social-benefit system, but on the urgent need to strengthen our social-market economy, a unique invention which propelled Europe to unprecedented prosperity in the post-war period. But that model has two pillars: social and economic. Efforts to defy the market to the exclusive benefit of the social have inevitably ended in failure, with the Soviet Union, North Korea and Cuba being the most obvious examples. Confronted with the dramatic entry of more than 300m low-wage workers into the global economy, many Europeans are drawing the wrong conclusion. They want to lock in Europe’s success by locking out the modern world. This policy would lead to disaster, but the truly shocking thing is how few people are willing to stand up for sensible policies – such as the twin-pillared social-market economy – that only yesterday were considered non-controversial.

It is worth taking a moment to ponder the origins of our society’s success. The great economic historian Angus Maddison calculated that the average European had a living standard in 1820 that was roughly 90% of the standard of living of the average African today. This is not a misprint; it is a clear expression of the often overlooked fact that our ancestors lived in precarious economic conditions that would be shocking to our modern sense of what is right and just. What, then, changed in the last 200 years? Why are we Europeans so much better off now than we were in 1820? And why are so many Africans still eking out a similarly difficult existence to that of an early 19th century European peasant?

The answer is growth. Not long after 1820, Europeans embarked on the industrial revolution, a process that led millions to leave the low-wage life of the farm for the new industrial age of the cities. The result was a slow but steady climb into prosperity. It is a climb that is far from complete, but it does provide us with the basis for sharing that prosperity with those who have been left behind. Incidentally, economic historians also tell us that the secret of European and North American prosperity came not through wild leaps forward like the ones we see in China and India today. On the contrary, lasting prosperity came mostly from slow but steady progress. “Even small differences in annual economic growth rates, if sustained for decades or centuries, eventually lead to huge differences in the levels of economic well-being,” wrote Jeffrey Sachs in his seminal study The End of Poverty, adding: “The key for the United States to become the world’s richest major economy was not spectacularly fast growth, such as China’s recent achievement of 8% growth per year, but rather steady growth at a much more modest 1.7% per year. The key was consistency, the fact that the United States maintained that income growth rate for almost two centuries.”

The problem today is that Europe has stopped growing. We’re not creating jobs, and we’re not creating enough wealth. And, even worse, our economy has stopped moving forward at precisely the moment when a lot of other places are surging ahead – mobilising massive resources and achieving substantial productivity increases, much as our own society did 200 years ago. Worse still, our social system is creaking under existing demands. People are getting older, which is a positive development. Advances in science and medicine will allow this generation to live on average 12 years longer than the previous generation. But we are stubbornly refusing to adjust our social systems to reflect the dramatic change in which men in OECD countries can now expect to enjoy 18 years of full retirement, up from 11 in 1970, while for women the figure is now 23 years of retirement instead of 14.

What is the solution to these challenges? First and foremost, we must re-embrace the principles that made us great in the first place – our commitment to the social-market economy, an economy based on free and open markets, full employment, sustainable development and educational opportunity. Second, we must embrace modernity, using our budgets not to artificially sustain 19th century economic institutions, but to help us develop a top-performing 21st century economy – an economy where our workers can and will produce goods comfortably at the high end of the global economic value chain. As a major priority, we must get over our irrational, counter-productive disdain for services and the service sector – the only part of our economy where growth is recorded and jobs are being created. As it is, the service sector employs 78.4% of all US workers, while in Europe, the figure is only 69.3%. Service sector jobs are important jobs that a modern post-industrial economy should embrace. They provide the best opportunities for women, minorities and the ageing – precisely the groups we most need to coax back into the workforce, and they will help take up some of the employment seeping steadily out of the industrial sector.

EU leaders meet in March to discuss the economy at the annual Spring summit of the European Council. With any luck they will do a better job than they did last year, when the summit’s key deliverable was the “reform” of the Stability and Growth Pact, a decision which officially sanctioned the dangerous break-down of fiscal discipline across the EU – a truly pitiful display for which future generations will pay a hefty price. This year, the leaders must find the courage to take the high road in this debate. They must use their bully pulpit to tell the truth to the people of Europe, and the truth is this: Our social model is built on our economic success, and we ignore at our peril the storm clouds forming around that economy. We all feel the threat that modernity poses, but many of us have formed the wrong conclusions about what we should do about it, rejecting the very policies that allowed us to build a generous social model in the first place. We continue to see the world through the hazy fog of our own clichés, viewing today’s highly vocal interest groups as the bedrock of our civilization and believing the modern world – and the consequent rise in trade that is lifting millions out of poverty – to be a threat to our way of life.

A few more years of this will be disastrous, because progress is what made Europe great in the first place. And if we choose now to block progress, if we choose to let our fear be the motor of our policy, we risk being left behind on the great highway of economic history. If we continue allowing our phobias to dictate our response to the future, we risk losing the thing we hold most dear: the economic and social model that made us great in the first place. The future is a choice. And it’s time we made the right one.