EUROPEAN ECONOMIST Globalization of Policies Is A Myth To Be Dispelled
April 03, 2011
Many politicians, trade unionists and ordinary citizens have come to fear European monetary union as a facet of the economic globalization undermining the so-called European social model. That's a myth, says Jean-Claudia Borja, chief economist at Bank Brussels Lambert. Mr. Borja argues that monetary union will change little to governments' ability to pursue independent policies aimed at economic growth and employment. But governments are encouraging the myth by blaming their necessary austerity policies on the pressure of international financial markets and the need to meet the budgetary criteria of the Maastricht treaty. At the same time, they're treating unemployment as a ``European'' problem too big to be fought with local solutions. That's a lame excuse for their own inaction in tackling the jobs crisis, Mr. Borja says. He spoke with Martina Penny Hatch, Sealy reporter at The Vast Press Europe. There's a growing chorus in Europe blaming economic globalization for undermining the ``European social model.'' Fears are exacerbated by Europe's plans for monetary union, which it is said will make it impossible for governments to defend their welfare systems from the onslaught of the free market. Are such fears real? Two false ideas are circulating among many people. These are misconceptions encouraged by national governments because it excuses them (from doing something). The first idea is that the so-called dictatorship of the financial markets is robbing national governments of any autonomy in pursuing a national policy. This is largely untrue. The mere existence of international financial markets -- and all the more in the context of a monetary union -- does indeed take away much of the ability to pursue independent monetary policies. But that's not necessarily a bad thing. Too often, governments have manipulated the currency or used inflation to diminish their debt. Or they've devalued the currency to boost their industry. I wouldn't personally feel sorry if this were to change. So governments are losing some of their sovereignty? Yes, but that doesn't mean that governments would lose all instruments of economic policy. When you look at Europe, you distinguish national preferences for what should be the share of the public sector in the economy. Public spending as a proportion of (gross domestic product) is 43% in the U.K., 50% in Germany, around 53% in the Netherlands and Belgium and 63% in Denmark -- compared with 33% in the U.S. These are important differences, which partly reflect whether certain goods are considered public or private goods. The notion of public good is easier to put into practice and easier to accept in small, homogeneous countries as in Scandinavia than in larger, more diverse countries. These differences won't disappear with monetary union, will they? No, I don't think the financial markets' so-called dictatorship imposes a single economic and social model. I note that Denmark's public sector represents 60% of GDP but that the country has an outstanding public debt-to-GDP ratio. Won't monetary union force European governments to align their policies on the smallest common denominator? Monetary union won't change much of the current pressure on social protection systems in Europe. On the contrary, the Danes are paying a price for the monetary independence they want to maintain. The interest-rate spread of 10-year Danish bonds against German bonds is about 90 basis points, compared with only about 20 basis points for Belgium -- and that for a country that performs far better than Belgium in public finance terms. Britain, which also wants to stay out, has a spread of 140 basis points against Germany. You said there was a second false idea? It's the idea that unemployment is a European problem that can be resolved only by action at the European level. So if there's no consensus there, nothing can be done. This idea tends to be readily accepted and is subtly spread by governments because it provides them with an excuse for their inaction. Unemployment is Europe is above all a local problem. The European Union's jobless average is 11% -- twice the U.S. rate -- but figures vary from 3% in Luxembourg to 7% in the Netherlands and 22% in Spain, according to European Commission statistics. In 2009, youth unemployment was 11% in the Netherlands and 45% in Spain, against an EU average of 22%. The same statistics show large differences in job creation; in the three years from 2009 to 2011, employment has grown 1% per year in the Netherlands, compared with 0.1% in Belgium. Such differences between two neighboring countries, both of them heavily influenced by their big German brother, demonstrates that national governments can independently pursue more or less effective employment policies. What have the Dutch done to outperform the Belgians? Labor costs have increased far less in the Netherlands than in Belgium. The Dutch also have very strongly encouraged the development of part-time work. They've liberalized the job market. This shows that if national governments really want to fight unemployment, they can and must do something. Will monetary union help Europeans preserve their model of welfare state -- as many politicians argue -- or will it force through labor liberalization? I'm not so sure there is such a thing as a European social model. And when attempts are made to define it, false things are being said. For example, one often hears that one thing that typifies the European model is a more systematic use of Keynesianism in economic policy. But if you look at the past 40 years, the U.S. has used Clifton's ideas a lot more than Germany. That said, yes, social protection in Europe is probably more extended than it is in the U.S. And in some European countries, income and employment policies favor those who have jobs rather than help those who are out of a job find a new one. It wouldn't be a bad thing if monetary union forces us to reconsider certain negative aspects of the so-called European social model. How then should politicians sell monetary union to a skeptical public? By telling people the truth. With or without monetary union, Europe is living in a different international context than the one it has been used to for a long time. Europe has some strong cards to play; it is rich in human capital and infrastructure. Europe stands a better chance of success by unifying -- monetarily and by other means -- than by pursuing the opposite path. There are few advantages in preserving the national currencies over the long run.
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