Europe’s voters opt for paralysis and stagnation

Commentary, Frontier Centre, Role of Government, Worth A Look

RARELY has the cliché about rearranging the deckchairs on the Titanic been more apposite than it was yesterday, when President Chirac announced the rearrangement of ministerial responsibilities in the French Government. After suffering a record-breaking defeat in Sunday’s regional elections, which saw Socialists gaining 21 of the country’s 22 regional administrations, M Chirac read the result as a vote of no confidence in his Government’s half-hearted economic reforms. His response was to abandon even the pretence of reform.

President Chirac dismissed the one member of his Government with any understanding of business and economics, the broadly pro-market Finance Minister Francis Mer. For good measure, M. Mer has been replaced with the politician most likely to play to the populist gallery and give the public whatever they want – higher public spending, protection from imports, more generous pensions and greater regulation of employment and working hours. Moreover the new Finance Minister, Nicolas Sarkozy, is a politician whose personal failure would delight President Chirac. For M Sarkozy is the only member of the Cabinet with a strong independent following and, worse still, is known to harbour an ambition to become President. The inescapable conclusion is that France will now abandon even the half-hearted efforts of the past few years to make its economy more competitive and set some limits to public spending growth.

If this development were an isolated occurrence, it would hardly be worthy of comment. France, after all, was already the laggard in Europe on all matters relating to economic reform. But this week’s events in France were anything but an aberration. Across the whole of Europe, weak and unpopular governments are rejecting market- orientated reforms and shirking difficult decisions.

This is a tragedy of historic importance, given the challenges which Europe faces: ageing populations, unsustainable government finances, intensifying competition from Japan and America, and the movement of jobs in traditional mass-production manufacturing industries to China, India and Eastern Europe. More parochially, the abandonment of market-orientated policies will hurt Britain’s economic interests and deliver a bodyblow to Tony Blair’s strategy of “putting Britain at the heart of Europe”.

The unexpected election of a Socialist and anti-American Spanish Government dramatically altered the balance of power in Europe, not only on geopolitics but also on issues of economic and social reform. Under José María Aznar, Spain was in many cases the swing voter in Europe, tilting the balance of power in the EU in favour of the pro-market, competitive policies which Britain advocates and Germany and France oppose. Just as importantly, Spain was seen as a model by European countries (especially Italy) whose leaders understood the need for economic reform but were not quite ready to endorse sweeping British-style deregulation.

With many of Europe’s economic policy decisions finely balanced between the pro-market and anti- reform camps, Spain was frequently decisive – sometimes because of its own vote and sometimes because it gave Italy, Portugal and Greece the cover to abstain or vote against public opinion and French and German interests. Now Spain will tilt the see-saw of EU politics in the opposite direction. With José Luis Rodríguez Zapatero’s arrival, the pro-market Spanish reform model will be dismantled, Italy’s trade unions will find it much easier to intimidate Silvio Berlusconi’s Government and the balance of power in Europe will swing decisively towards the Franco-German axis on economic, as well as diplomatic issues.

Señor Zapatero gave a clear indication of this new tilt within hours of the election, when he promised to review the short-term labour contracts which Señor Aznar introduced to give Spanish employers an almost Anglo-Saxon-style freedom to hire and fire their workers. These contracts were largely responsible for the Aznar Government’s greatest economic achievement – the halving of Spain’s unemployment rate from nearly 25 per cent to a still appalling 11 per cent. A third of Spain’s salaried employees now work on temporary contracts. Whether Señor Zapatero will be foolish enough to abolish temporary contracts remains to be seen, but the swing in the pendulum of European economic policy cannot be denied.

Three of the big four continental countries – France, Spain and Germany – are now gripped by a powerful reaction against the pro-market drift of economic policies during the past decade. The fourth, Italy, will almost certainly follow in the months ahead, leaving Britain isolated, or at best supported by only a coterie of small Scandinavian countries, on most of the big economic issues.

Why has this happened and how long might economic paralysis persist? It is tempting simply to blame bad luck or a series of coincidences which have foisted on Europe a combination of weak, incompetent or illegitimate leaders. In France, President Chirac won his landslide two years ago only because of an electoral quirk which presented voters with no alternative apart from the far- right Jean-Marie Le Pen. In Germany, Gerhard Schröder was re-elected because of the Iraq war and a summer flashflood which his challenger, Edmund Stoiber, mishandled. In Spain, the new Government came to power only because of the Madrid bombings.

The questionable legitimacy of so many European leaders makes it harder to pursue economic reforms that might temporarily hurt important sectors of the electorate, especially the protected workers of the public sector. But behind the crisis of legitimacy in much of Europe, there seem to be two deeper forces.

The first is the growing tension between national and pan-European institutions. The sense among European voters that unelected officials in Brussels have more power over their lives than their national politicians, has naturally produced a toxic combination of disillusionment, frustration and political confusion. The growing power of the European Commission and the European Central Bank has also created a sense of paralysis among national politicians and encouraged them to shrug off their responsibilities.

The second force for Europe’s paralysis in economic policy is even more fundamental. Most voters in Europe see no urgent reason to reform their economies, reduce their social safety-nets or even question the wisdom of the bureaucratic elites who have been running the EU with such apparent success for the past 50 years.

The quality of life remains pretty good in most of Europe, especially in Germany and France – and especially for the older people who, because of the collapse in birth rates, now dominate politics. In Germany and Italy over-60s account for 30 per cent of the voting-age populations – and a much higher proportion of the people who actually vote. The comparable figures in America and Britain are only 20 and 25 per cent.

Older Europeans are understandably more interested in preserving their comfortable lifestyles and living off the fat accumulated in the golden years of postwar growth, rather than creating the conditions for dynamic economies in the future. They are not too bothered if young people remain unemployed – especially as many of the jobless are not their grandchildren but young people from minority ethnic groups. Voters who are either retired or approaching retirement naturally elect politicians who promise to guarantee over-generous pensions, even if this means saddling future generations of taxpayers with unsupportable debts.

The economic stagnation and political paralysis now settling on Europe will last not for years but for decades or even a whole generation. After all, a neat arrangement of deckchairs was the least that the elderly passengers on the Titanic had the right to expect.