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A different view of euro-sclerosis Samuel Brittan: Financial Times 28/02/03 According to the conventional wisdom, Europe has been growing more slowly than the US for 20 years as a result of structural "rigidities". EU countries have themselves have signed up to reform declarations at one EU summit after another, starting with Lisbon in 2000. Doubt is cast on this diagnosis in a recent paper, "What's Wrong with Europe's Economy?" by the former CBI director Adair Turner*. At the very least his paper comes as a refreshing contrast to the dead and repetitive prose of EU communiqués and of the latest UK Treasury Paper on European Economic Reform. To start with, the facts are not as they are often made to appear. Over the 21 years 1980-2001 real growth per annum was indeed nearly half as fast again in the US as in the eurozone countries. But if you look at growth per head of population, nearly all the difference disappears; and the US lead represents mostly population growth. Indeed, for a long time output per hour rose more quickly in the eurozone than in the US as European countries caught up with best American practice. If you look at the bigger picture, the differences between US and eurozone output per hour are now hardly visible. What is visible is a substantial remaining gap between British productivity and both American and eurozone levels, which has been impervious to over 50 years of productivity drives by governments of widely varying political complexions. We are however still left with some key questions. Why is US output per head of population nevertheless still larger than that of core eurozone countries? A related issue is: why has eurozone employment performance in these core countries been so poor? A lesser question, is why has US productivity apparently begun to pull ahead again since the technological developments of the mid-1990s? Turner puts under the microscope the difference between US and French GDP per capita, which put the US some 40 per cent ahead in 1999. There was virtually no difference between output per hour in the two countries. The differences were due to two factors. American workers put in nearly 20 per cent more hours than French ones and the employment ratio per 1000 of the population was 15 per cent higher in the US. Turner rightly argues that if French people are happier with a shorter working week and a shorter working life than Americans - and are prepared to pay for it in lower take-home pay - then "no liberal economist should criticise them for that choice". Simply posing this question is sufficient to cast doubt on the lumpen economics of governments that evaluate economic performance entirely in terms of growth rates and GDP. Indeed it is American behaviour which is then more difficult to explain - "a society getting steadily richer, but totally focused on more income not more leisure". Turner concedes shorter French working lifetimes may not be freely chosen. Some of the difference results from involuntary unemployment or involuntary early retirement, reflecting labour market distortions. There is room for disagreement with Turner's view that the greater part of the US-French GDP gap represents voluntary choice. One of Turner's more surprising findings is that nearly all the differential US productivity spurt since the mid 1990s can be attributed to the distributive sector. His explanation is that the US, which is far more land rich, can rationally allow more freedom for developments such as out of town shopping centres than land-hungry Europe. This diagnosis is corroborated by the fact that France, which is richer in land than many other European countries, had notable improvements in retail productivity in the 1970s and 80s, but has since clamped down for planning reasons. Turner scores a bull's eye in belittling the "Barcelona reform agenda". This consists of five main items: strengthening European transport networks; liberalising energy markets; further financial market liberalisation; promoting education and research; and reforming labour markets. The first four of these items are undoubtedly desirable. But their contribution either to promoting growth or improving employment prospects is extremely slight. He is particularly scathing about the hopes placed in freer energy markets, a sector which amounts to no more than two or three per cent of European GDP. The all important item is of course labour market reform. He does not mention the political reasons why governments bury this instead of highlighting it. It is that an attack on union privileges or union-backed legislation is particularly sensitive, especially, but not only, for left of centre governments. Governments hope that they can get away with some freeing of labour markets if they bury this in a great many worthy declarations on other subjects. When it comes to labour markets, Turner is rightly sceptical of the importance attached to social security contributions on their own. It is high time someone pointed out that if labour markets are reasonably flexible, "workers receive a lower wage rate than they would if payroll taxes were lower." What are so obviously too high in Germany are total labour costs: wages plus payroll contributions. It would be just as valid to advocate cutting German wages as cutting German payroll contributions. The truly liberal answer would be to give the choice to the workers themselves. The conclusion that the former CBI director draws is that ideally Germany ought to receive a reduction in labour costs through a lower exchange rate - the opposite of what has happened when in recent months when the euro has been rising against the dollar. But because it is pert of the eurozone the devaluation option is closed to Germany. Rather oddly for a euro enthusiast, Turner is blaming the new European currency for a bit too much. I can see the advantages if Germany were allowed to depreciate. But in the last analysis, one has to ask whether the organised representatives of German labour would accept a reduction in real wages plus benefits through the exchange rate back door that they would refuse if offered openly. In the heyday of discussions about European stagflation in the 1970s and 1980s, economists often spoke of "real wage rigidity". By this they meant an insistence on levels of remuneration which priced people out of jobs and which could not be overcome by any combination of fiscal monetary and exchange rate policies. It was instead partly overcome by Margaret Thatcher's efforts to weaken unions' monopoly power, and their pale imitators elsewhere, and - just as important, by the relative decline of the manufacturing sector where unions are particularly strong. One final point. Let us suppose that Turner is wrong and the core European economies are as high cost and inefficient as British propaganda suggests; or at least that they are full of labour market inefficiencies. In neither case do we find a valid reason against British participation in the euro. The more rigid and sclerotic that European products or labour markets turn out to be, the greater the opportunity of British firms to make a killing. The main arguments against the UK joining the euro relate to the positive advantages of a floating exchange rate and the close relationship between stop-start in British economic policy and attempts to maintain a rigid exchange link. Euro opponents should concentrate on this positive case rather than regarding everything they do not like about the EU as an argument against adopting the euro. * http://cep.lse.ac.uk/queens
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