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How Durable is the Current Rosy Complexion of European Politics?

THE moderator wondered whether Europe's current paradigm of centre-left politics represents a new sort of rosy species, or just a genetically modified version of the old one. Most of the participants thought the latter. And many doubted that the continuation of consensus politics, albeit with a new-found respect for market economics, would be the way to solve the continent's structural problems.


On the face of it, Europe has a rosy complexion. Most of its governments are led by Social Democrats. Nine out of the 20 European Union commissioners also come from the Left. Yet the difference between the new Centre Left and the Centre Right is minimal. It is simply a rotation of power. The Right failed; now it is the Left's chance -- and in many cases the real power lies with central banks. The sort of policy the new Left follows is broadly the same old European model that stresses consensus and a large welfare state; the only difference this time is a new found appreciation for financial stability and the market economy.

The challenge these politicians face is fairly simple to sum up. In rough terms over the past 30 years, real labour costs have risen by 70% in Europe, and employment has grown by around a tenth. By contrast American wages have risen by a quarter and jobs have grown by 70%. The European Union has followed a specific path. Is it sustainable?

Unfortunately not. Thanks to Europe's labour-market rigidities, there has been a clear trend of rising unemployment in each successive cycle. The pressure of having to raise ever more taxes to support pensions and the unemployed will make Europe still less competitive and entrepreneurial. In America, 19 of the 25

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most valuable companies did not exist 30 years ago. In Europe, it is hard to think of one newcomer. The challenge that the European Union's politicians face -- to keep the level of social equality whilst finding some degree of growth -- is getting harder. This could well be the very last chance for the European model before it collapses completely.


The degree to which Europe has pinkened can be exaggerated. Social Democrats only maintain clear majorities in two countries, Britain and Greece. The rest are coalitions. At the EU politics is often driven more by national interests than ideological ones. Many of these governments are actually trying to govern despite their parties: issues like privatisation and tight fiscal policies are not popular with left-wing interest groups. Worse, many of them have failed to prepare the ground. In Britain, Tony Blair hit the ground running. In Germany progress has been much slower.

What do these new policies amount to? Some of the words the Left now uses, such as responsibility and self-reliance, have been co-opted from the Right, which leads to trouble with people like the trade unions. But it is not just conservatism with a pink mask. There is a general attempt to rethink the welfare state so that it does not just cover traditional issues such as pensions and unemployment assistance but also modern, new-economy ones, such as how to help people deal with a much less stable world.

How durable will these New Left politicians be? Part of the answer to this new riddle undoubtedly lies with their Conservative opponents. So far the Right has not really begun to tackle issues like responsible business. That means that the main responsibility lies with the Social Democrats themselves. They have to be a broad church.


Europe's problems stem from a mindset developed in the 1950s and 1960s. Those were marvellous decades of rapid growth and full employment; the time when ordinary people finally benefited from

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mass production. There were three main ingredients: a stress on being inclusive; an accent on consensus; and a desire to produce a regulated version of the market economy. This model worked till the 1970s.

Now technology and globalisation have upset these beliefs. Interestingly the reaction of Europe's leaders has been anything but Schumpeterian. There has been no creative destruction, just non-creative conservatism. This has been the objective of both the Left and the Right in Europe. America has created 50 million net new jobs since 1975; Europe practically none. Worse, the development model has begun to change. It is no longer inclusive, but exclusive.

Why is European politics so conservative? Ignorance is not the answer. Instead the political elites seem to be hostages to the structures that were set up in the 1950s and 1960s, and particularly to the illusion that those days can be recreated. There is no leadership, just pragmatic adaptation, telling the people what they want to hear.


A European politician began the debate by pointing out that national politics often mattered more than terms like "Left" and "Right". The new Left seemed to be better at co-ordinating policy at a European level; but there was no evidence yet that the Left was any better at implementing those ideas. Two tests will be the intergovernmental conference on structural reform, and the debate over tax harmonisation (which one leftist government -- Britain opposes but two others -- Germany and France -- support). The tax debate seems particularly important because, without some agreement, taxation might well end up falling almost completely on labour, rather than capital -- an odd result for the Left. However, another European noted that with taxes competition might be better than co-operation.

The biggest debate centred on just how much Europe needed to change. One Danish participant pointed out that a system that

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offered 90% of the population reasonable jobs and everybody a reasonable safety net had its advantages. Now that fiscal stability had been introduced, it might be durable. Who wants to be one of these hard working Americans? Another European participant objected to the idea that everything had to be compared to America. Europe should try to change its social model; but it did not have to adopt America's model. A Spanish businessman pointed out that Maastricht had helped change things. Public sector deficits had come down; so had inflation. But one of the panellists pointed out that there were a large number of Europeans who wanted to work harder -- in particular the unemployed. A Canadian agreed: the idea that America was a country of 160 million working drones was myth, just like the previous ones that it had only created McJobs.

But there was no shortage of people who thought that things had reached a fairly parlous state. Two participants from Central Europe worried that Europe's high social costs made enlargement of the European Union more difficult. It increased protectionism. Several participants brought up demographics. The number of 20-30 year olds in Europe is due to fall by a quarter. By 2025, one American argued, all the German government's budget would be spent on pensions. One European quoted the observation that Europeans are "interesting people: they will not be born and they do not know how to die." The panellists agreed. Europe would need a big labour force to pay for the elderly.

Several participants returned to the subject of fiscal incentives. It was not just a question of labour market rigidities, argued one American. Government spending was very high. In Europe a worker has to give 60% of each incremental dollar that he earns to the government -- double the proportion in America. Europe needed to move its social insurance from a tax-based system to one based around investment. Another participant described the liberating feeling of moving from a European country where he paid 73% tax to America where he paid only 33%. The first panellist argued that this was the inescapable trap.

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Steadily rising unemployment and the effect of demographics would push up spending, which would push up taxation, which would drive away entrepreneurs. Could this be changed? The New Left, argued one Briton, was consolidating the victories of the Right. The electoral failures of the Right had largely been self-inflicted; and the Left may well prove to be better at reforming the welfare state. With 17 million unemployed, it might be easier for somebody who claimed to be a socialist to impose change. Others disagreed. There was no evidence of guts in Germany, France or Italy, pointed out one panellist. Another said that the Greek government had not been rewarded for being brave. One Spanish participant cast doubt on whether European voters would ever accept, say, a Chilean pension system. A panellist pointed out that in Sweden most of the population depended on the public sector for their livelihood.

Several people argued that there was indeed a lack of what one Briton described as political competence. The failure to do things, he thought, could not be explained away as electoral self-preservation: after all the French had ejected just about every leader they had. The answer seemed to be a fear of social unrest. Things would only change when the cost of not doing anything really did seem larger than that of doing something. He thought that Spain seemed to have done the right thing by explicitly dividing the benefits for its old and young workers.

Whilst worrying that it would be another case of all talk and no action, a Swiss participant tried to push the argument towards possible solutions. The answer he thought was not to spend more, but to be much more efficient. A French participant agreed: governments had to think like business people. Yet the panel still seemed pessimistic. Welfare, one panellist thought, would be the Red man's burden. Another argued that root and branch welfare reform was the key, with the stress put on moving subsidies only to those who really needed it. But he was not optimistic. America appeared to have decisive advantages.