Nothing Sprouts From Brussels

This column was written by John O'Sullivan.

For Italy, the popular vote percentages in last week's elections say it all: Silvio Berlusconi's outgoing conservative coalition won 49.7 percent of the total vote and the incoming center-Left coalition led by former "Eurocrat" Romano Prodi gained a victorious 49.8 percent! Italy is divided right down the middle politically.

Under the rules of the Italian constitution — which give the winning party additional seats — Prodi will be handed a secure parliamentary majority. But that will not in fact remedy the stagnation of the popular vote.

Prodi's coalition is so divided between former Christian Democrats, former Communists, and still-faithful Communist true believers that it cannot unite around any reform program that is seriously contentious. It opposed Berlusconi's modest labor market reform — temporary contracts for younger workers to reduce youth unemployment — in the election campaign. So there is little or no prospect of Prodi adopting the wider labor market flexibility, pension reform, or tax cuts that Italy badly needs.

Result: paralysis.

Almost the same is true of Angela Merkel's "Grand Coalition" of Christian Democrats and Social Democrats in Germany. Ms. Merkel is winning golden opinions for her deft handling of foreign policy which, among other achievements, has restored good relations between Berlin and Washington.

That is because Merkel, as Chancellor, enjoys a relatively free hand on diplomacy. On domestic economic reforms, however, she will need to win the support of both her socialist ministers and a parliament that has a left-wing majority. Many observers forget that the center-right actually lost ground in last year's German elections when the combined parties of the Left — the social democrats, the Greens, and the Left — gained an extra forty seats.

Merkel became Chancellor only because of a recent political tradition that the party with the single largest number of seats should head the government. She therefore presides over a schizophrenic administration that is dubious about an economic reform program which probably could not win a parliamentary vote even if all her socialist colleagues were enthusiastically in favor of it. Unless early elections grant her a real center-right majority, Merkel must accept "reforms" that make no real difference.

Result: paralysis again.

In France's undeclared constitution, riots compete with elections as the means of determining government policy. Last week the center-right government headed by President Jacques Chirac and Prime Minister Dominique de Villepin withdrew a reform bill that would have allowed French employers to fire young workers without going through expensive legal procedures.

That bill had been originally passed because young men, mainly unemployed and mainly of North African extraction — the so-called "beurs" — had rioted and burned cars and buildings in cities throughout France. The beurs rioted, de Villepin argued, because they had been excluded from the world of work by laws that made it risky and expensive to hire workers who could not then be fired. Youth unemployment in France is 28 percent. The first step to integrating these underprivileged young people, therefore, was to deregulate employment — at least for those under twenty-six. They would have a better chance of getting a first job if it wasn't a job guaranteed for life.

Once the law was passed, however, French middle-class students rioted in favor of its repeal. After all, they were getting jobs for life. Employers who could not fire workers naturally hired those whom they knew or who looked safe, respectable, and French. Students who fitted this description could look forward to the privilege of secure lifetime employment. And they marched, rioted, threw stones, and attacked police in defense of this privilege and against the new law.
That law has now been ingloriously repealed. De Villepin, defeated and humiliated, has announced he will not now be a candidate in next year's presidential election. The current favorite is the Socialist Party's candidate, Ségolène Royal, who supported the middle-class student rioters. And though the center-right's new leader, Nicholas Sarkozy, favors a "Big Bang" reform program covering all workers rather than one confined to those under twenty-six, he is probably whistling past the abandoned factory. A nation which rejects even a modest reform is unlikely to embrace a "Big Bang."

Result: paralysis a third time.

How come? The three main nations of continental Western Europe have allowed their economies over the years to become encrusted with regulations, subsidies, and spending programs that misallocate resources (including investment), obstruct flexibility and innovation, and encourage social attitudes harmful to enterprise and wealth-creation.

As the two sets of French riots demonstrate, the effect of these "compassionate" policies is not to help the poorest but to create artificially high and secure living standards for those fortunate enough to be in work while driving a growing number of people into a permanent underclass of the seldom employed.

A British newspaper, The Business, an increasingly indispensable guide to Euro-realities, pointed out the consequences: "Long-term unemployment in the euro zone is now six times higher than in America, where only 13 percent of unemployed workers are unable to find work within 12 months, compared with 21 percent in Great Britain, 42 percent in France, 52 percent in Germany and 50 percent in Italy."

Ultimately, however, policies that discourage innovation and wealth-creation harm everyone, not just the underclass, by holding down economic growth. The entire Euro-zone is lagging behind the U.S. and the U.K. But Italy has had one of the lowest rates of growth in recent years — 0.9 percent in 2004, 0.1 percent in 2005, and a forecast of 1.3 percent this year — with ill-effects elsewhere.

Italy's budget deficit and national debt are high and rising. And its Euro-bond issues pay a higher rate of interest than those of Germany and France — which suggests that the bond markets have at least a theoretical fear that Italy will be forced to leave the Euro by a financial crisis.

Yet there is little or no public will — either among Europe's politicians or its voters — to swallow the necessary reforms. Most voters are in work and react like the French students. The unemployed naturally fear any change that might threaten their already low living standards. And political and intellectual elites are in the grip of anti-capitalist theories that treat job flexibility and tax cuts as "barbarism."

Faced by this clash between what the economy needs and what the voters will accept, European politicians act like Romano Prodi. Almost his first words after being elected last week were a promise to help revive the European constitution stalled by hostile votes in France and Holland. It seems an odd priority for an Italian leader. Why?

Prodi wants to pass the buck to Brussels and get the EU to solve Italy's problems. Given the chance, the leaders of other West European countries would do the same. But Brussels and the EU are run by elites who spend 40 percent of their budget on the wasteful and damaging Common Agricultural Policy and generally favor the same kind of social democratic corporatism that is the problem in the first place.

The result of transferring more power and the responsibility for reforms to Brussels would be continental paralysis.

Short of an economic near-catastrophe, Europe's economic problems will not be solved by Europeans alone. They need U.S. leadership bringing an Atlantic solution — maybe a transatlantic free trade area — that would give the European economies the boost they need as a springboard for otherwise painful structural reforms.

Unfortunately, U.S. policy is still on the pro-Brussels auto-pilot that was set in the early 1950s. It is reinforcing Europe's errors. It may be that an economic near-catastrophe will be needed to wake up America as well as Europe.

John O'Sullivan is a senior fellow at the Hudson Institute in Washington and editor-at-large of National Review.
By John O'Sullivan.
Reprinted with permission from National Review Online