Liberal versus social Europe

Europe is in the grip of a fundamental debate about its economic future, or at least that is what some politicians and many journalists would have us believe. Britain’s Times newspaper warns of a forthcoming “clash between nations such as France which believe in the old-style Europe of social protectionism and the more free-market Anglo-Saxon model”. Germany’s highbrow weekly Die Zeit calls it a “war of ideologies”.

Ireland, the new EU members in Central and Eastern Europe and to a lesser extent Spain are usually depicted in the Anglo-Saxon camp. The French vision is said to be supported by Germany, Italy and Belgium. Both sides are viewed as trying to model the EU in their own image: either aiming to reduce the EU to a vast free trade area or pushing for more ‘social Europe’.

Is the gap between the Anglo-Saxon economic model and the continental one really that big? On closer inspection, there are as many similarities as there are differences. More importantly perhaps, there are signs of convergence. It is not late-night Brussels haggling that drives this convergence, but EU countries’ attempts to learn from each other, and competition to find the best solutions to common problems.

Many commentators argue that ‘old’ Europe needs a dose of ‘Anglo-Saxon’ capitalism if it wants to replicate the UK’s superior performance in terms of growth and employment. But what exactly makes the big continental European economies different from the UK?

Britain is more open to foreign capital, but in terms of trade, Germany beats the UK by a mile. Last year, German companies sold goods worth $900 billion, more than any other country in the world, including the US and China. The UK, on the other hand, runs Europe’s largest trade deficit. Germany is also more open than the other big EU economies: exports and imports together account for more than 70 per cent of its GDP. In the UK, the share is around 50 per cent, the same as in ‘protectionist’ France and Italy.

Another feature of Anglo- Saxon capitalism is said to be the minimal role of the state. Really? According to Commission figures, public spending amounts to 44 per cent of GDP in Britain, only a little less than in Germany (47 per cent). Allegedly ‘liberal’ Poland spends more than the eurozone average. The odd ones out are the Nordic countries and France, where state budgets make up well over half of GDP, and Ireland, which spends only 30 per cent. What is more, while state spending in the eurozone is on a downward trend, it has been rising in the UK as the government has ploughed billions into underfunded public services. The UK budget has swung from a big surplus (almost 4 per cent of GDP in 2000) into a sizeable deficit (close to 3 per cent of GDP last year). Like in the US, which has seen a similar turnaround, government spending has boosted growth and helped employment. Public sector employment in the UK has risen by one million since 1997.

What about jobs and social protection? Almost one-third of British workers belong to a trade union, compared with 10 per cent in France, although the French (and German) unions have a bigger say in setting wages. Unlike Germany, Britain has a national minimum wage. Britain beats most eurozone countries when it comes to implementing EU rules for health and safety at work. Britain spends 22 per cent of its GDP on social welfare, according to the OECD. That is lower than in Germany, France and Nordic countries (27 to 29 per cent) but much more than in the US (15 per cent). Unlike the US, Britain offers free healthcare for all.

So the UK is not necessarily less ‘social’ than the continent. The real difference lies elsewhere: unemployment in Germany and France is roughly twice as high as in the UK, and the general level of employment in the UK is higher. Why? For prime-age male workers the employment rate is the same in the UK, Germany, France and Italy (85 to 87 per cent). But the UK’s more flexible labour market offers greater job opportunities for youngsters, women, unskilled workers and people close to retirement.

While Britain struggles to bring its public services up to levels enjoyed by the French or Austrians, Germany and others are seeking to replicate the UK’s success in creating jobs. Both Germany and France now have UK-style ‘job centres’ to get the unemployed back to work. Germany has slashed unemployment benefits and eased job protection rules for small companies. France is loosening its much-maligned 35-hour week. In both countries, politicians calling for more labour market liberalisation are leading the polls for forthcoming elections.

While Germans or Italians may be envious of British growth and job figures, they would rather not copy other features of the UK economy. For example, the average Brit works 230 more hours per year than German and French workers. The UK also scores badly on indicators such as child poverty and income inequality. And it famously lags France, Ireland and others in its level of productivity, although here again there seems to be convergence.

The reforms that Germany and France have pushed through over the last few years may have been timid. But they are likely to pay off in terms of growth and jobs eventually. Economists predict that growth in all the big eurozone countries will pick up after 2006 (although performance will remain far from stellar). The UK economy, on the other hand, is slowing down.

Perhaps the convergence in growth rates will make the debate about the ‘right’ economic policies less antagonistic. At the moment, the two sides appear out of sync. When Brits think about ‘social Europe’, they are haunted by pre-Thatcher memories of high taxes, state industries and social unrest. When the French or Germans talk about ‘Anglo-Saxon liberalism’ they envisage a future of cut-throat capitalism where social safety nets have dissolved and all workers earn Chinese wages. In the end, all EU countries are struggling to preserve a decent level of social safety and public services in the face of growing global competition and ageing populations. Each country will have to find an answer suited to its own, circumstances. But the EU, and its Lisbon reform programme, can help them to compete, compare and learn from each other.