Like Bill Clinton, Western European leaders are declaring the end of the era of big government — a radical development indeed for the world most highly developed welfare states. Unfortunately, Western Europe’s politicians are about as reliable as the American president in this regard. The era of big European government is far from over. Indeed, there is not even the slightest prospect that it is coming to an end. At best, the era of growing government may be over.
It is a fact commonly acknowledged that, with the possible exception of Great Britain’s, Western Europe’s principal economies are in danger of suffocating from the statist embrace. France’s government bureaucrats now claim more than half of the country’s gross domestic product, using some for purposes they deem wise — subsidizing a clapped-out airline (Air France), operating magnificently uneconomic trains — and redistributing the balance in a manner they consider just, after appropriate deductions for administrative costs. Germany’s workers, once famous for their work ethic and effciency, have used the economic clout of their trade unions and their political muscle to obtain lavish vacations, sick benefits so generous that it has become almost foolish to work on a Monday or Friday, and other fringes so costly that Germany’s principal export has become jobs, as employers flee the country in search of the lower unit labor costs of Eastern Europe, Great Britain, and the United States. And all the continental European countries have made it so difficult to discharge employees that companies are extraordinarily reluctant to hire new workers.
All in all, the huge ancillary costs associated with feeding these ravenous welfare states — even Great Britain’s Tory government defends the necessity of consuming 42 percent of all the goods and services Britons can produce — have produced levels of unemployment that may well threaten their future social stability. In France, 12 percent of the work force is out of work; in Germany, one in ten of the country’s workers can’t find a job; in Spain the unemployment rate is higher still, perhaps double those of its northern partners in the European Union. And in all of these countries the number of long-term unemployed is high and rising.
All of this would be bad but acceptable if relief were in sight. But any fair reading of the European situation leads to the conclusion that things are much more likely to get worse. Start with the drive towards monetary union — the replacement of individual national currencies with a single Eurocurrency. The Germans, determined to replace national sovereignty with a federal Europe, see such monetary union as a giant step on the road to that federal Europe. Perhaps recognizing that Daniel Goldhagen’s reading of the German national character in his bestselling Hitler’s Willing Executioners is correct, Helmut Kohl says he wants to subordinate Germany to Europe and thereby create a European Germany. His critics, of course, argue that he is seeking to accomplish with economic might what Germany never succeeded in accomplishing with military might: a German Europe.
No matter the motive, Kohl is Europe’s most durable politician and Germany, even in its currently weakened state, its most powerful economy. Its citizens may not relish surrendering their stable Helmut Kohl deutschemark for a currency to be managed jointly with the Portuguese, Spanish, Greeks, and Italians. And the inflation fighters at the German Bundesbank may shudder at the thought of dealing with the French, who have vowed to subordinate the austere bankers to the more open-handed politicians on the board of the new European Central Bank. But Kohl pushes on, and monetary union looks set fair to proceed — perhaps a bit behind schedule, perhaps with fewer members than originally anticipated, but proceed nonetheless.
And therein lies a giant land mine. For monetary union means compliance with the membership criteria set forth in the Maastricht Treaty: The most important of those criteria is that national budget deficits cannot exceed 3 percent of a member country’s gross domestic product. To meet this standard, many European governments, most notably France and Germany, will either have to raise taxes or reduce outlays. The former is probably politically impossible in these already heavily taxed countries and, even if attempted, would probably so slow growth as to be counterproductive.
That leaves cutting expenditures, which means attacking the cherished welfare state. Which brings us full circle. For it is the generous welfare state that makes it so expensive for employers to add workers; it is the generous welfare state that makes long-term unemployment a viable alternative to work; and it is the generous welfare state that dilutes workers” incentives to show up for work when mildly ill or merely with a felt need for a day off. Equally important, it is the generous welfare state that keeps budget deficits high, both by bloating expenditures and by stifling growth, thereby making tax cuts impossible — especially in countries in which self- financing, supply-side tax cuts are seen as a figment of the American imagination, implanted there by a second-rate movie actor who somehow became president.
It is this welfare state that Europe’s politicians cannot attack. When the French leadership proposed relatively mild reforms last year, it found itself confronted with burning automobiles and riots in the streets of Paris, as cosseted public-sector workers shut the country down.
The plain fact is that there is no support for market-based reforms in France. The Communist-led CGT union, of course, has no use for markets. And the elite that runs the country prefers its decisions to those of the market. The public sector workers prefer the overmanned, underworked existence that has been theirs for as long as they can remember, and the more than 2 million civil servants promise to make a year-round affair of the winter of discontent if Prime Minister Alain Juppcarries out his threat to trim “layers of fat” from the government payroll. The heavily subsidized farmers have no intention of being forced to compete with more effcient American and Eastern European farmers. And the telecommunications/ entertainment industry prefers protection from foreign competition, allegedly to preserve the nation’s ” culture,” to producing programs and films people want to see.
As for Germany, there is little hope that the current pressure of high unemployment and the exodus of jobs to more congenial climes will produce reforms drastic enough to allow Germany to break out of the economic trap in which it finds itself. Chancellor Kohl has proposed to trim his welfare state by, among other things, raising the retirement age for women from 60 to 65, freezing child benefits, and reducing sickness benefits so that absenteeism pays only 80 percent of a full day’s work. He also wants to encourage employers to increase their hiring by making it somewhat easier for them to fire workers who prove either unsatisfactory or unnecessary, which has provoked criticisms that he seeks to convert Germany to an American-style ” hire-and-fire” economy. Public-sector employees have taken to the streets, disrupting transport and mail delivery — a new style of confrontation that bodes ill for Germany’s traditionally consensual labor-management relations.
Finally, Kohl wants to cut the top rates of personal and corporate taxes, lower by a little the hated “solidarity tax” that has financed the reconstruction of East Germany, and scrap the 1 percent tax on personal wealth — the latter measure arousing the ire of the German states, which depend on the revenues from that tax.
These reforms are by no means trivial; Kohl’s proposed spending reductions come to 2 percent of GDP. But they are so limited they ensure Germany will remain the high-cost producer in many of the markets in which it must compete. That, at least, is the view of Kurt Biedenkopf, the Christian Democrat prime minister of Saxony and Gerhard Schroder, the Social Democratic premier of Lower Saxony, who argue that Germany’s pay-as-you-go welfare system must be scrapped if the costs borne by employed workers are to be reduced sufficiently to make Germany competitive. Significantly, even these two reformers, more radical by far than Kohl, make it clear that they are not espousing “the American way” for Germany. Free markets are not for everyone, and the hunt for that elusive “third way” remains a European sport.
Germany’s entry into monetary union with its European partners could thus prove to be an extremely expensive exercise. Even if its costs are trimmed a bit in the next few years, Germany is most likely to remain noncompetitive when the time for a switch to a single currency rolls around. Monetary union will lock into place the relationship of the mark to other currencies, which will prevent the deutsche mark from drifting down in value to make the price of German goods competitive with the prices of their rivals overseas. Unless the rest of Europe adopts highly inflationary policies — unlikely if the European Central Bank holds its members to high standards of fiscal rectitude — Germany will be forced to accept sustained levels of high unemployment or make draconian cuts in its production costs by forcing workers to accept lower real wages and skimpier welfare benefits. No one can predict whether German society can withstand the strains such policies would produce. Or whether the costs would be worth the benefits Kohl perceives in subordinating Germany to a federal Europe.
Americans should not delude themselves into hinking that none of this will have consequences here. French and German governments faced with persistent double-digit unemployment will look unfavorably on what they will see as job- destroying imports — like U.S. imports, $ 250 billion in all in 1995, fully one-quarter of America’s world market. Protectionist measures designed to keep American agricultural products, computers, telecommunications equipment, and other goods and services out of Europe will almost certainly be advanced. So, too, will stepped-up efforts to bar goods from Asia, forcing China, Japan, and other Asian countries to redouble their efforts to capture a greater share of America’s markets just when this country’s trade balance will be deteriorating because of foreclosure from access to a united Europe’s 370 million consumers.
An unlovely scenario. And one that American policy-makers blithely ignore as they encourage Europe’s nation states to submerge themselves in a centralized, federal Europe, in the vain hope that a United States of Europe will be just like the United States of America-free-trading, free-market oriented, driven to full employment by the efforts of relatively low-taxed entrepreneurs operating in flexible labor and product markets. It won’t.
lrwin M. Stelzer is director of regulatory policy studies at the American Enterprise Institute. A version of this article will appear in Eroupean Integration and American Insterests, edited by Jeffrey Gedmin and to be published in the fall of AEI Press.
