Germany Reformed Labor Markets And Created A Pro-Growth Environment However, do not count on Southern Europe to follow suit. Political and cultural differences are too deep. Huge gap between North and South here to stay

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WASHINGTON – In a WSJ op-ed piece, Europe’s Supply-Side Revolution, by Donald L. Luskin and Lorcan Roche Kelly of Trend Macrolytics, (February 17, 2012), make predictions about the future of Europe so bright and so positive that they frankly border on absurdity.

Germany’s example

As the writers put it, following Germany’s example, Europe is bravely starting its own supply side revolution. Italy and Spain will turn into business friendly, market oriented countries. The discipline of debt is driving Europe to closer political integration. If Europe’s countries could finally erase their political boundaries, their debt problems would also vanish. And so on.

Europe is stuck because there is no political will to reform

I must be looking at a different Europe. I see a Europe that is not necessarily doomed; but a Continent that is stuck, precisely because there is no political will to do most of the things that the authors consider either a done deal, or so absolutely necessary that they become inevitable. The implicit assumption in this article is that Europe has had its moment of reckoning. Now it is “do or die”. And Europe chose to live –and live bravely, at that.

No “moment of truth” in Europe, just muddling through

But this is a major fallacy. This notion that Europe had only two choices: disaster and doom or vigorous renaissance, and that it (wisely) chose renaissance is just wrong.

The idea that at this juncture all the Europeans, having just stared into the abyss of the debt crisis, have irrevocably decided to finally do the right thing, is just fanciful. By the way, I really wish that it were so. But there is zero evidence to justify this optimism. My sense is instead that many European countries –and this would include all of Southern Europe– will just muddle through, with enough wisdom to avoid complete disaster, but insufficient political courage to really start the serious reforms the authors assume to be just behind the corner.

Political union a distant dream

As for this irresistible drive towards political unification starting with fiscal union, again, I must be looking at a different Continent. Political union is nobly advocated as a goal by many well-meaning Europeans. But it is a very, very distant goal, without any agreed upon road map and clear set of mile stones.

Sure enough, the Europeans recently agreed in principle to harmonize their fiscal policies in order to avoid a repeat of the debt crisis. But this is no done deal. And nobody has the foggiest idea as to how this generic agreement will become binding and, after that, how it will be implemented and monitored.

Germany succeeded, others will follow?

The op-ed authors premise is that since Germany could see the light at the turn of the millennium and embarked in serious labor market reform through which it regained economic vibrancy, it follows that the rest of Europe will see the value of such a historic change and follow suit.

Well, that would be wonderful. But it would entail a dramatic change of politics, psychology, ethics and business practices that, while possible in principle, cannot be taken for granted only on the basis that it would be the smart thing to do.

In Italy Monti wants reforms, but the country will not follow

Getting into specifics, to say that Italy’s Mario Monti would like to liberalize and open the professions, introducing needed competition and that his heart is in the right place is not the same as saying that Italy is with him and that he will succeed. And, by the way, Monti’s government plans to reform the “Workers Statute” caused the ire of the unions who are absolutely not on board on the critical issue of flexible contracts and more labor mobility –one of the key preconditions to attract investments and generate new enterprise.

Technocrat with no political base

And the authors should also know that Monti is an economics professor and not a politician with an organized following. He did not win any elections. He has no popular mandate. Late last year he was appointed as “chief rescuer”, as a technocratic Prime Minister with the limited (and really unpleasant) job of extricating Italy from the pain of the debt crisis.

Monti came in as the trusted fire man with no political agenda of his own. He has done a good job regarding the stabilization of Italian debt. But, so far, he has done nothing to bring the national debt (now at 120% of GDP) down to the agreed Maastricht levels of 60% of GDP .

Besides, he has a limited mandate. Any serious reform aimed at making Italy a lot more like Germany would require broad and durable political agreement binding the left, the right and the powerful trade unions. Nothing like this ever happened in Italy. That does not make it impossible; but it makes it unlikely.

Corruption

And let me add that other factors do not inspire confidence. Italy has third world level scores regarding corruption, (according to Transparency International) and “easiness of doing business”, (according to the World Bank). Just days ago, Italy’s ”Corte dei Conti’, something like a General Accountability Office, issued a scathing report regarding corruption and lack of ethics throughout Italys’s public administration. According to the report, this creates an environment that discourages investments, enterprise and therefore new growth. (Italy is now in a recession).

Demographic crisis

Add to all this a serious, systemic demographic crisis. Italy has  one of the lowest fertility levels among developed countries, (1.38 children per woman). While the Italians stopped having children, there is the steady arrival of difficult to assimilate, poor and mostly illiterate immigrants from Africa.

Sure enough, all this can and, in fact should, change. But let’s not mix wishful thinking and reality. Monti may like to modernize Italy; but I am not sure that the country’s mood and long-term systemic trends support optimism about success.

If Southern Europe changed its values…

If the Southern Europeans –and that includes Italy, Spain, Portugal Greece and even France– really changed their values, their ethics and their business sense, this revolution envisaged by the op-ed piece authors would take place.

But this is the same as saying that if the Indians were more organized and less corrupt, and if they put together a credible national infrastructure master plan, all kinds of good things would happen to India.

By the same token, if Angola’s leaders were not corrupt, the vast oil and mineral riches of the country could do wonders to finance sustainable development, thereby lifting millions out of poverty.

And we could add that, if the Arab countries would finally understand that they should adopt modern, pro-growth economic policies, this would unleash new economic growth. And so on.

Good outlook for Northern Europe

Yes, Germany reformed labor markets years ago and we can safely assume that the countries of Northern Europe that have a stronger cultural affinity with Germany have already been positively influenced by this pro-business climate.

So we can expect Germany, The Netherlands, Austria, Sweden, Denmark and Finland, and may be a few others to do well. (I am not so sure about France, flirting with the idea of electing a Socialist President).

Southern Europe a different story

But I would not bet on these wise choices to be embraced by the rest of the EU members, whatever Britain may or may not do as the perennial dissenter among the 27 EU members.

Do not count on Southern Europe getting the medicine. And do not tell me that this going go down well in far less developed Romania, Bulgaria or Hungary.

Political union a distant dream

As for Europe finally becoming a federation, with one government, one army, and one foreign policy, this is not impossible; but it is so unlikely that it is indeed peculiar to read in this article that it is sort of a “done deal”, with only a few details to be ironed out.

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