Δυο ευρωπαίοι εξετάζουν την Ευρώπη (το 2006) και βρίσκουν ότι αν συνεχίσει στους ίδιους ρυθμούς, η πτώση είναι αναπόφευκτη. Alberto Alesina και Francesco Giavazzi, The Future of Europe, Reform or Decline, MIT Press, 2006).

Μερικά παραδείγματα που δίνουν:

·         Το μέσο ευρωπαϊκό ΑΕΠ αμέσως μετά τον 2^ο ΠΠ ήταν ίσο προς το 42% αυτού των ΗΠΑ. Στα τέλη της δεκαετίας του 1980 είχε φτάσει στο 80%. Το 2005 έπεσε στο 70%.

·         To 1960 οι δαπάνες Γενικής Κυβέρνησης ήταν 29% του ΑΕΠ (όσο το σημερινό των ΗΠΑ), το 1970 ανήλθαν στο 37% και το 1990 στο 50%. Αυτό σήμαινε αυξημένη φορολογια και μείωση της ανάπτυξης.

·         Από το 2^ο ΠΠ και μετά η Ευρώπη δεν επένδυσε στην τεχνολογική καινοτομία αλλά βασίστηκε σε αντιγραφές των αμερικανικών καινοτομιών (όπως και η Ιαπωνία και η Κορέα). Σήμερα που η καινοτομία και όχι αντιγραφή είναι η κινητήριος δύναμη της ανάπτυξης, η Ευρώπη έχει θέμα.

Αν και ξεχνούν δομικές ανεπάρκειες του όλου συστήματος τυφλωμένοι/καυλωμένοι από τον τότε καλπασμό του αμερικάνικου συστήματος που βασίστηκε σε φούσκες για να αντισταθμίσει την μόνιμη τάση του μονοπωλιακού καπιταλισμού προς στασιμότητα, γράφουν ένα ωραίο νεοφιλελεύθερο μανιφέστο και σε αρκετά έχουν δίκιο. Το όλον συμπυκνώνεται σε μια τους φράση: A market economy is a market economy: qualifications are misleading…

The Future of Europe
Reform or Decline

By Alberto Alesina and Francesco Giavazzi

Introduction

A recent poll taken in the European Union identified the

United States as the biggest enemy of world peace, after Israel

and North Korea, in that order. In the United States, anti-French

sentiments are widespread. Cross-Atlantic relationships have rarely

been at such a low point in the post–World War II era.

It would be superficial to attribute the cross-Atlantic animosity to

the European aversion to the current American president, George

W. Bush, or to the American irritation at the French and German

opposition to the war in Iraq. The truth is that Americans and Europeans

are different, think differently, and are becoming more

different.

Europeans work less, take longer vacations, and retire early.

Americans choose to work long hours. In August, Paris is a ghost

town, except for the tourists, and Milan is a ghost town, period; in

August, New York does not look very different than in any other

month except for more European tourists. Europeans view job security

and stability as a fundamental right and a ticket for happiness.

Americans are willing to endure the ups and downs, the bankruptcies,

and the unemployment spells as a necessary part of a market

economy. Europeans tend to hold the same job for most of their life,

Americans change jobs frequently. Europeans view any cut in

the size of the welfare state as unacceptable. Americans view tax

increases as an evil to be avoided at all cost. Europeans view

inequality as a major problem. Inequality in the United States is on

the rise, but Americans appear to be willing to live with it. Europeans

believe that the use of force in international relations should

almost never (read “never”) be used. Americans believe in the relatively

frequent use of force. Europe is relatively closed to foreign

immigrants. America is a country of immigrants. Europeans believe

that society determines much of an individual’s fortune; Americans

believe that individuals are responsible for their own fate. Americans

believe that competition is critical for economic success and

embrace it. Europeans are prompt to emphasize the benefits of a

Soziale Marktwirtschaft (a social market economy), a model invented

by Germany, which means putting restraints on market forces

through government regulation.

These differences are becoming more, rather than less, deeprooted.

In the recent debate in France, ahead of the vote on the European

constitution, both camps promised they would prevent the

country from adopting a social system resembling the despised

Anglo-Saxon “ultra liberalism.” The American form of capitalism

was the universal enemy; the disagreement was on the best way to

fight it and be different. Any discussion about economic reform in

Europe is prefaced by a disclaimer about the superiority of the

European model compared to the American one. In the German

election campaign of 2005, the conservative candidate, Angela

Merkel, promised profound change but committed not to touch the

basic characteristics of the German social model. All that her opponent

had to do to avoid defeat was to scare German voters about

the risks of market liberalism. By doing so, he engineered a phenomenal

last-minute electoral turnaround. Americans, on the other

hand, show no inclination toward changing their welfare system

and making it more similar to the European one.

In this volume we discuss the problems that confront Europe

using the rhetorical device of a comparison between Europe and the

United States along different dimensions. But this is not an academic

book, and we are not shy in taking sides on the issues we analyze.

We are very critical of many aspects of the European model. But

let us be clear. We do not argue that European countries should

simply copy the United States and adopt identical policies. America

is far from perfect; on the contrary, it has very serious problems. For

instance, the American health care system is explosively expensive

and many Americans do not receive adequate health care. American

inner cities are an embarrassment, and the correlation between

poverty and race is disturbing. America has a lot to learn from

Europe. Some aspects of the European welfare state can ensure

social solidarity and, when well designed, at relatively low efficiency

cost.

Are we then saying that there is a “third way” in between the

American model and the European model? No, or at least not in the

common way in which this is understood. Those who argue that

there is a third way—and talk about European reforms but in the

next sentence emphasize that Europe should be different from the

“American free market”—are simply fuzzy thinkers, the typical

example being the German notion of a social market economy. A

market economy is a market economy: qualifications are misleading.

But, quite apart from blank and somewhat superficial endorsements

of one model or another, our view is that Europe should

adopt very large scale reforms that would make its markets and its

institutions (such as universities and banks) look much more like

those of the United States than they are now; of course, these

reforms do not require the adoption of every aspect of, for instance,

the American welfare system. The most important lesson that the

United States can give to Europe is a belief that people respond to

incentives and most of the time markets work, or at least they work

better than any other mechanism.

Without serious, deep, and comprehensive reforms Europe will

inexorably decline, both economically and politically. Absent

profound change, in twenty or thirty years the share of Europe

in the world economy will be significantly lower than it is

today, and perhaps more important, its political influence will be

much trimmed. Europeans seem to be living in the dream that

their past splendor and their current prosperity cannot be lost.

This is a mistake. A major European decline is indeed a serious

possibility.

Think of Britain. It took the British people twenty years of economic

and political decline to realize that their country was about

to disappear from the world economic and political scene. In 1960,

Britain’s GDP per capita was 78 percent of US GDP per capita. By

1980, the ratio had fallen to 67 percent. Eventually Britain’s decline

was stopped by the policies adopted by Margaret Thatcher: by the

beginning of the 1990s, the ratio of UK to US GDP per capita had

stabilized to around 68 percent, although, relative to the United

States, Britain never recovered the losses it suffered in the 1970s.

(The percentages cited here are from Penn World Tables, compiled

by the Center for International Comparisons of the University of

Pennsylvania.)

Europe emerged from World War II with a level of per capita GDP

that was less than half that of the United States: 42 percent. In the

first thirty years after the war, Europe reduced that distance to

one-half. By the end of the 1980s, its GDP per capita was 80 percent

of the US level. Since then convergence has stopped. As a matter of

fact in the last twenty yeas Europe has lost ground: GDP per

capita today is about 70 percent of the US level, the position Europe

had reached at the end of the 1970s. One is reminded of Britain in

the 1970s, but we fail to see a new Mrs. Thatcher appearing on the

European scene.

The prospect of an economic decline comes out sharper if one

looks at individual countries. By 1970, Italy had reached a level of

GDP per capita equal to 68 percent of the US level, a big achievement

for a country that had started from 30 percent in 1950. By 1990,

the ratio had reached 80 percent. Today, it is back to 64 percent, the

level of the mid-1960s. In the same period, from the mid-1960s to

today, the South Korean GDP per capita has risen, relative to the

United States, from 12 to 50 percent. If the Korean GDP per capita

keeps growing, relative to the United States, at the same rate it has

grown over the past twenty-five years, by 2030, Korea will be richer

than the United States. It is unlikely that this will happen: the

Korean growth rate is, at least in part, the result of economic catchup.

The growth will inevitably slow down as Korea gets richer. But

there is nothing that can automatically stop Italy’s decline relative

to the United States. If the relative decline continues at the current

pace, in twenty-five years Italian GDP per capita will be one-third

that of the United States. Relative to the United States, Italy will

return to the conditions of the early 1950s. This doesn’t mean Italy

will be a poor country. The living standard of its (by then rather

aged) citizens will continue to be good.

This raises the issue of whether relative economic decline is really

so bad. In absolute terms, Europe is rich and it will not become poor

overnight: the decline will be relative to other countries. Should

Europeans care? To be concrete, why should a middle-class Frenchman

be bothered if a middle-class tourist from Korea in Paris will

soon be able to afford items out of reach for the French themselves?

We believe that this hypothetical Frenchman should and would care.

First of all, relative economic power matters in the area of international

relations. Second, and perhaps more important, a host of economic

and psychological research shows that individuals’ happiness

depends not only on their own income but also on their income relative

to others; it also depends on the growth of individual income.

Third, societies that stop growing develop a “culture of stagnation,”

which can have a host of negative social consequences, a theme

explored in a recent book by Harvard economist Benjamin Friedman.

Sure our hypothetical Frenchman will enjoy his longer vacations and

may criticize the hard-working Korean, but leisure increases happiness only to a point. In addition we should not forget that poverty has

not been completely eradicated from Europe and a sustained rate of

growth is the best cure for poverty. Generous welfare provisions

become difficult to sustain in a slow growing economy.

In fact relative decline can turn into absolute decline. The experience

of Argentina stands as a specter over Europe. At the beginning

of the last century Argentina was among the richest countries

in the world, twice as rich as Italy and about as rich as France. Then

the world changed, but Argentineans kept thinking that exporting

corn and beef was enough to remain rich. For a long time, until the

crisis of 2001, most Argentineans were unaware of—or refused to

recognize—the depth of their problem. When the crisis broke out

all at once, Argentineans found themselves poor.

Are Europeans aware of these unpleasant possibilities? In our

view, not entirely. But could they be right in not worrying? Certainly

history suggests caution in making long-run predictions about

winners and losers. In the late 1970s Japan was the model country

and many thought that the United States was doomed: eventually

exactly the opposite happened. In the same decade pundits were

talking about the American decline, pointing to the TV images of

long lines at the gas station, American hostages in Iran, and to the

“irreversible” decline in American productivity. Today all of this

seems far away—except, unfortunately, for hostages, although not

in Iran. Will we be saying the same thing in twenty years about

wrong predictions of European doom and gloom made in 2006?

May be, but lacking comprehensive reforms, these gloomy predictions

are likely to become true.

What happened to Europe? In the 1960s Europe looked like a

model for the world. With rapid growth and cohesive societies,

Europeans were among the happiest in the world. Why did the

miracle abruptly come to an end?

There are two possible explanations. The first points to politics

and the other to technology. We begin with politics. In the 1950s and

1960s Europeans worked very hard. Many European cities had been

leveled during World War II. Factories were destroyed, and human

capital was depleted by war casualties. This was not the time to

think about leisure and consumption. Europeans had to dig in their

heels and start to rebuild. By the end of the 1960s their resolve had

success. Europeans could now raise their thoughts to the quality of

their lives. Also the late 1960s was a period of political turmoil.

From universities to factories, Europeans demanded less work

with equal pay, labor regulations against firings, free education

and free health care for everyone, and generous pensions to be

enjoyed earlier in life. In the end, governments delivered what

the people asked. European economies had been growing fast,

and there seemed to be enough resources to accommodate all

demands. Then came the oil crisis and at the same time, at least in

some countries such as Germany and Italy, the fight for change

became tough. To prevent students and workers from being lured

by the call of the extreme left—these were the years of Bader

Meinhof and the Red Brigades—governments kept accommodating

even after it had become clear that the resources were no

longer there. In the 1970s the welfare state was paid for through

inflation and in the 1980s by building up public debt. From those

years Europe inherited large governments and the high taxes

needed to pay for it. In 1960, total government spending (the

average for the pre-enlargement EU 15 countries) was 29 percent of

GDP (the level of the United States today); in 1970, it was 37; in

1980, it was 47; and in 1990, it was 50 percent of GDP. The accompanying

increase in taxes depressed growth. Some other factors, the

oil shock in particular, contributed as well and compounded the

fiscal deficiencies.

Had Europe continued to grow as in the 1950s and 1960s, the

welfare demands of the 1970s could have been accommodated with

more limited increases in tax rates. But in the 1970s the engine that

until then had provided growth stopped working, and this is where

the explanation based on technology comes into place. As economists

Daron Acemoglu, Philippe Aghion, and Fabrizio Zilibotti

argue in their academic work, European growth in the 1960s was—

as Japan and Korea experienced later—largely of the catch-up type.

Europeans started off, after World War II, far from the technological

frontier: imitation of the best US technologies was enough for a

fast pickup. As we will discuss later in the book, imitation works

well with large incumbent and entrenched firms, a bank-centered

financial system, long-term relationships, a slow turnover of managers,

stable ownership of firms, and a hands-on approach by the

government. Industrial policy did work in the 1960s in Europe, as

it did later in Korea and Japan. But when Europe came closer to the

technological frontier, and innovation rather than imitation became

the critical factor for growth, Europe found itself ill prepared. The

very institutions that had been responsible for the success of the

1960s became an obstacle to growth after the 1970s. Rather than

speed up the destruction of old firms and favor the creation of new,

innovative enterprises, Europeans kept on protecting incumbents

and dreaming up industrial policy.

It is hard to see how Europe can turn around if it does not

change profoundly, but we do not see enough energy for

reforms. Germany has 5 million unemployed, the highest number

since the Weimar Republic, but we see acquiescence rather

than change. Italy and Portugal are falling behind even relative

to Germany: exports are falling and productivity growth has

virtually stopped. In both countries the political system is incapable

of delivering reforms. What we see instead of reforms, are the

attempts of insiders to protect themselves from the effects of economic

integration and the globalization of markets. France is

moving in a protectionist direction, that of the French fortress,

the Asterix village. French farmers are heavily protected from the

competition of farmers from developing countries. In Italy many

believe that only tariffs can save their country from Chinese competition

especially in the textile sector. These protectionist tendencies

are worrisome.

The reader should be aware of oversimplifications. To begin with,

we say Europe but we really mean continental Western Europe. In

many dimensions Europeans have, vis-à-vis the United Kingdom,

reactions that are similar to those elicited by the United States. The

French veto on the proposed new European constitution was partly

a vote against Tony Blair’s alleged plans to reform the European

social model along Anglo-Saxon lines. In Central and Eastern

Europe some countries are adopting models quite different from

those of continental Western Europe and closer to the Anglo-Saxon

type. Even within Western Europe there are many differences. The

Scandinavian countries, after suffering a deep crisis in the early

1990s, have been able to combine a far-reaching welfare state with

market flexibility and decent growth. It is too early to say whether

their current performance will be a long-lasting success. Hailing

Nordic countries as an example of the superiority of the European

economic model over that of the United States—an argument one

often hears in Europe—is at least premature, but no doubt something

very important is happening there. Unfortunately, the larger

European countries—France, Germany, Italy, and Spain—do not

show the political will and capability of adopting Nordic policies.

Moreover the social cohesions and “social capital” so diffuse in

Nordic countries and that greatly help their systems work well are

lacking in southern Europe.

Interestingly, while Americans and Europeans have different

views, they both seem happy with the societies in which they live.

A recent poll asked people how they felt about their quality of life:

eight European countries rank above the United States and seven

below, with no clear pattern: Italy and Spain rank 8th and 10th,

the United States 13th, France and Germany 25th and 26th. This

suggests that Americans and Europeans pretty much get what they

like: they are unlikely to want to switch sides of the Atlantic. By the

way, even in Argentina most people claimed to be happy right up

to the day of the crisis!

So is there no problem? Well, yes and no. It is certainly true that

by and large European policies reflect the will of the electorate,

as they should in democracies. Europeans are certainly not free

marketers trapped by interventionist politicians. However,

the Europeans’ aversion to market liberalism is often strategically

fostered by groups of insiders who benefit from market

protection. This is indeed one of the major themes of this

book.

In recent years numerous signs of dissatisfaction (still not well

channeled politically) have been arising in France, Germany,

and Italy. In all three cases one perceives frustration with an inability

to implement reforms that are urgently needed. More important,

lack of concern for serious reforms may simply reflect a failure

to understand what is coming. The European decline is a slow

process, and this makes reforms more difficult politically to

accomplish. Crises often generate the impetus for reform, a

slow decline less so. In Latin America, for instance, certain countries,

and especially Chile, emerged from a near catastrophic crisis

in the 1970s and a period of dictatorship with a new vigor. The

reforms in Chile have turned its emerging economy into one of the

most successful in Latin America. From the 1950s onward Europe

had no big crises, no hyperinflation nor hyper recession. An old

saying goes, if you put a frog in cold water and start warming the

water slowly until it boils, the frog dies. If you throw a frog in hot

water, it jumps out and lives. Europe is that frog in slowly warming

water.

Look at the facts. Partly because of high taxes, generous pensions,

high unemployment benefits, and unions’ insistence for fewer

hours of work and partly because of attitudes, Europeans work less

and less. Italian “kids” leave college at age 27; then they spend a

couple of years looking for a job, they work 30 years, and eventually

they retire at 60 and live until they are 90. The French have

obtained a 35-hour week and in May and August very few are at

work in France. In Germany peak hour traffic on a Friday is 2 pm.

You can’t grow very fast if you work fewer and fewer hours per

person, unless your productivity grows at extraordinary rates. For

this to happen, you need research and development and competitive

universities, not to mention truly competitive product markets

that promote the quick adoption of new technologies. Europe is

deficient in all these dimensions. Rather than building upon its most

talented young people, it does very little to stop them from migrating

to the United States, tempted by US universities and US hightech

firms. About one-third of Harvard’s economics department

is Europeans who have fled their countries’ troubled universities.

Western Europe, instead of trying to attract the most talented

youths from India, China, and Eastern Europe, restricts migration.

The immigrants allowed are not the smart people who in the United

States have created the many innovative start-ups. The best

educated Central and Eastern Europeans are flying over Western

Europe and going to the United States. “Wait ten years to open your

borders to my fellow citizens,” recently said the then Romanian

foreign minister, “and every smart Romanian engineer will have

migrated to the United States: what you’ll get will be our uneducated

peasants.”

Europeans are growing older. Fertility rates are exceptionally

low. Europe won’t thrive if only a few people work to support an

increasing number of retirees. The closed borders and irrational

immigration policies promise to make the European aging populations

amid low birth rates harder to sustain. These two demographic

trends will seriously strain European budgets.

Economic decline and political decline go hand in hand. Because

of its large social spending and the low growth rate, Europe cannot

support a powerful military. Sooner rather than later Europe will

lose its powerful role in international organizations. Already today

people around the world, especially in Asia, are wondering why

France and Britain should have permanent seats in the UN Security

Council. Countries like China and India with population sizes

orders of magnitudes larger than France, Britain, and Germany

combined will soon demand and obtain more power in world

politics, and rightly so. At the moment these countries are determined

to work hard and become rich. Pretty soon they will succeed

and call for more recognition at the political tables of world organizations.

European countries will have to move over.

The organization and allocation of power in international organizations,

from the UN to the IMF and the G7 (now G8) meetings,

still reflects a post–Second World War equilibrium that has become

obsolete. At that time Germany and Japan were the defeated aggressors;

the Soviets were a threat, Germany was divided and a wall

was about to be built. Much of the then-called Third World was

either recently independent or a colony but still very poor. Times

have changed: there were 74 independent countries in the world in

1945, and there are 193 today. Communism outside of China, Cuba,

and North Korea is popular only in Parisian cafés; Germany is

reunited; the Third World is growing faster than the First World.

Computer software is now mostly developed in Bangalore; graduate

programs in the United States, including business schools, admit

thousands of smart Asian students. Times have changed; France

and Britain continue to have permanent seats on the UN Security

Council and Italy, not China, is part of the G7. Not for long.

Europe’s lack of military spending also affects growth directly,

since much of cutting edge technology is developed in military

contracts. In the United States many high-tech firms, if they are

really good, thrive thanks to contracts with the Pentagon. In Europe

instead of military contracts firms often receive state subsidies,

which is a much less efficient way of stimulating research and innovation.

Europe could prevent its rapid military and political decline

by pulling together resources (political and military) with a true

foreign policy through the European Union. But recent experience

suggests that European countries are very far from reaching any

resemblance of this, and in fact they are walking away from any

further political integration.

So is the Untied States of Europe a way out of Europe’s decline?

Yes and no. As an economic area the European Union has worked

relatively well. As a form of political union, however, the rapid

annihilation of the proposed constitution has shown the severe

limits of this process. The idea of a European political union that

balances the United States in the international arena seems less and

less realistic every day.

The hurdles that stand in the way of a United Europe also stem

from one of Europe’s main advantages: its diversity—diversity of

language, of culture, of historical experience, and of lifestyle. Diversity

may prevent Europe from exploiting the potential of unity, but

a diverse society could be in a better position to adapt to change.

In a rapidly changing world this could be Europe’s most important

asset. Europe should embrace diversity both within its ranks and

with reference to non-Europeans. Instead, Brussels’ insistence on

coordination and uniformity is in sharp contrast with the “Let a

thousand flowers bloom” view of the world. In the area of diversity

Europeans could learn from the Unites States. Americans have

had a history of dealing with racial and ethnic diversity, and it is as

both an asset and a liability. It is an asset because being a successful

melting pot is what has made America great. It is a liability

because many of the social problems in the United States are associated

with race relations. Europe has the opportunity to learn from

this experience, or it can sit back and pontificate about American

failings. The view of French youths of African descent rioting in

Paris in November 2005 shocked the same Parisian intellectuals

who led the May 68 riots. Troubling as these riots seemed, they are,

unfortunately, the wave of the future.

Europe is at a crossroad. It can continue with business as usual

and accept a slow but permanent decline. Or it can initiate reforms.

Change is difficult, of course, where attitudes and institutions have

deep roots in history and in political and intellectual traditions. But

change is needed if an economic decline is to be avoided. Today the

choice is still readily available; another decade of decline may

foreclose this option.

Often the Europeans who worry about Europe’s problems

respond by proposing a long list of very detailed policies. Often

they call for more public spending on infrastructure, education,

industrial policies, and support for depressed areas. Our view is

different. Europe does not need more public money in a myriad of

programs. Europe needs reforms that create incentives and make its

people willing to work hard and longer, take risks, and innovate.

Europe needs more competition, not more public infrastructures.

European universities need more “market incentives,” not more

public money. European firms need lower taxes, less heavily regulated

labor markets, and better functioning product markets, not

more subsidies and protection. This does not mean that Europe

simply needs to adopt the entire US model. Indeed there are aspects

of the European welfare state that are efficient and should be preserved.

But too often the benefits to overprotected insiders get

precedence over the needs of the general public and, in particular,

at a cost to the younger generation.

Some observers are talking about the twenty-first century being

the European century, the same as the twentieth century was the

American century. We take a more skeptical view: there is as good

a chance that the twenty-first century will be the century of European

decline. We hope to be proved wrong.