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U.S. SMUGNESS MAY FINALLY PROD EUROPEANS TO REFORMS: Deficit reduction did not prevent job growth

Marie-Josee Kravis

(Ed. note) Marie-Josee Kravis is a fellow of the Hudson Institute Inc.

Financial Post, Daily edition, Wednesday, June 25, 1997

The U.S. irritated a number of European participants at the G7 summit in Denver last week with its repeated gloating about its economic performance of steady growth, low unemployment and price stability. U.S. President Bill Clinton was an ebullient host who reminded European leaders they have a tough job ahead. For many Europeans, fearful of economic structuring and corporate downsizing, this confirmed their views of U.S. insensitivity to their social concerns. To others, however, Clinton and his cabinet colleagues may have provided just the necessary prodding and display of success to force further reforms in these economies.

For years, European governments have provided their voters social protection to the point of excluding an array of workers from the workforce. Not only is Europe losing the technology battle, it has 18 million unemployed, many of whom have been without work for more than a year. Meanwhile, in the U.S., where people are condemned to take initiative and responsibility, job creation has not ceased to grow in well-remunerated as well as low-paying sectors. Whether or not the Europeans like to admit it, there are lessons to be drawn from the U.S. experience.

Unfortunately, just before coming to Denver, the 15 members of the European Union had shown at their own summit in Amsterdam they were rather impervious to the U.S. experience. Challenged by French Prime Minister Lionel Jospin, the European countries reached a compromise agreement on employment and the stability pact. Member nations would not abandon the deficit targets set out in the pact, but Europe would proclaim its concern for its 18 million unemployed and design measures to create jobs. Incantations, however, have never created jobs. One would think the French would know this by now. By the way, deficit reduction in the U.S. did not prevent vigorous job growth.

Jobs cannot be created by decree. In the early 1980s, newly elected French President Francois Mitterrand opted for economic stimulation to create jobs while the rest of the world sought to tackle inflation. France was left behind. Recently, French President Jacques Chirac sought to mobilize the local prefects in a job creation effort. The record speaks for itself. Now Jospin believes he can resort to the state and the EU to fuel job creation. Why should the results be different?

At the Amsterdam summit, Jospin extracted a promise that the European Investment Bank would take equity positions in small and medium-sized businesses involved in promising high-tech ventures. This smacks of industrial policy and past failed efforts to choose winners and losers. Governments ought to have have learned that revision of bankruptcy laws, competition policies, hiring and firing practices and access to private capital would be more effective than almost anything the EIB can do to support new business creation and growth.

The Amsterdam summit also called for a job summit to be held in Luxembourg later this fall, a process that provides little reassurance for all those Europeans excluded from economic activity. Reiterated promises of better macroeconomic co-ordination may ease the qualms of political leaders, but are insufficient for dealing with a precarious job market. Besides, what good is it when the government promises greater fiscal responsibility while shifting social costs to the private sector? Europe is saddled with huge payroll costs, yet that did not prevent Jospin, for example, from announcing his government will raise the minimum wage by 4% on July 1 to the equivalent of $6.76 an hour.

Is French policy an aberration? Granted, the Germans have begun to acknowledge the erosion of their competitive position, and recent agreements struck with chemical and auto workers have tackled some restructuring issues. In Britain, Prime Minister Tony Blair has, at least, acknowledged that a number of unskilled workers and trainees might escape his minimum-wage proposals. Yet all Europe needs to be exposed more forcefully to U.S. gloating, not because it has all the job creation answers -- far from it -- but because 18 million unemployed cannot be assuaged much longer with good intentions, fudging and ineffective policies. If prodding from the U.S. helps to push Europe along the path of restructuring, deregulation and dynamism, the medicine may not be as distasteful as it seemed in Denver.

Source: This information is provided by the Financial Post.

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