Freeman

ARTICLE

European Malaise

European Countries Are Experiencing Surprising Economic Turmoil

FEBRUARY 01, 1997 by HANS SENNHOLZ

An American who looks upon the world perceives many forms of misery. Many are worse than his own. Looking upon Europe he may be surprised and dismayed about the economic difficulties some countries are experiencing and the political turmoil that is tearing them apart.

The countries of Eastern Europe continue to suffer the pains of transformation from communist tyranny to Western-style democracy and the private property order. They are straining to reshape their political and economic structures. With their public sectors dismally unproductive and in utter disarray, the governments are incurring huge budget deficits which cause them not only to inflate and depreciate their currencies but also to bleed the fledgling private sector. If it were not for the “informal sector,” that is, the underground economy in which people labor without license, permit, taxation, and political approbation, many would suffer grievously.

In Central and Western Europe the old welfare states are choking on their own “social progress.” They are transferring more income and wealth than ever before, bestowing costly favors and privileges on labor and extracting the means from entrepreneurs and capitalists. Business is forced to invest heavily in labor-saving machines and equipment, or seek economic survival abroad, or simply evade the social burdens by going under ground. Many employers are refugees in their own country, dismayed and frightened, and dreaming about escaping to the U.S.A.

According to a Morgan Stanley analysis, the hourly labor costs in manufacturing are calculated at $31.88 in Germany, $19.34 in France, $16.48 in Italy, $13.77 in Britain, and $12.70 in Spain. These rates compare with $17.20 in the United States. Yet, no matter how high the labor costs may be, they do not cause unemployment provided they do not exceed labor productivity. The soaring rates of unemployment in Germany, France, Italy, Spain, and other European countries clearly indicate that labor costs are excessive and taking their tolls. European unemployment rates are more than double the U.S. rate.

The root cause of Europe’s economic predicament is the oppressive burden of fringe benefit costs imposed on business during the 1970s and 80s. Social Security benefits were increased significantly, which is hailed as “social progress,” and employer extractions were raised accordingly, which is acclaimed as “social justice.” The new levies lifted marginal labor right out of employment; new regulations rigidified the labor markets and rendered adjustments painful and difficult. They caused the national economies to stagnate, which in turn aggravated the budget deficits and the capital consumption, which in turn aggravated the stagnation, etc.

Hope ever tells us that tomorrow will be better. But unless hope turns into delusion, it must be based on rational expectation, building on sound public opinion which after all shapes social policy. What the multitude says is so, soon will be so.

European public opinion fills us with deep pessimism. The Europeans we know proudly and defiantly cling to their notions of “social progress” no matter how many millions of workers they cast out. Guided by social compassion for the disemployed, they favor ever more “progress” which actually crushes the very people it is supposed to help.

A few European economists are vaguely aware that the labor mandates of the last two decades are the prime cause of the mass unemployment. They nevertheless are quick to defend the social policies as the greatest virtue of modern democracy well worth the social costs. They wax eloquent about democratic virtue while millions of working people walk the streets in idleness and despair. And they turn politicians vying for popularity when they oppose reforms for being tantamount to “political suicide.”

Most disturbing yet are a few old discredited economic notions which becloud the minds of many Europeans. These notions are akin to the ideas which guided the gangs of English workingmen who, early in the 19th century, destroyed knitting machines and power looms which they blamed for unemployment and low wages. Their intellectual descendents now condemn the computer technology for devouring millions of jobs. They would like to return to the old technology or at least compensate the workers for the loss of their jobs. The costs of compensation hopefully would discourage the modernization.

Other Europeans fall back on new versions of old protectionism. They blame cheap foreign labor for devouring domestic jobs. They never tire denouncing countries which, in their judgment, do not protect the environment, or worse yet, which exploit women and children. There is mass unemployment in France and Germany, they are convinced, because Chinese women and children earn low wages.

Radical youth is quick to blame poor immigrants for the loss of jobs. It’s the fault of immigrants who in more prosperous times were invited by the millions. While young people are demonstrating and rioting, the governments are enacting laws and regulations discriminating against immigrants or even expelling them under various pretexts. Yet, the rate of native unemployment continues to rise. It now exceeds 12 percent in France and Germany and 21 percent in Spain, the most socially progressive country of Europe.

Desperate politicians and labor leaders would declare “war on unemployment.” They are demanding fair and square “job sharing.” To make room for the unemployed they would force employers to allow their employees to work shorter hours, take longer vacations, take more sick-leave, and seek earlier retirement. In Germany, they already succeeded, in reducing the industrial work week to 35 hours; in France they managed to advance the retirement age to 55. All over Europe the workers are told: “Slow down, don’t work yourself out of a job. Leave some to the unemployed.” And middle-age workers are urged to retire: “Make room for the young!” They all are to live by a new theory according to which the demand for labor increases as labor output decreases.

Weary of the economic stagnation and fearful of the declines expected for 1997, many European commentators, finally, blame their “strong currencies” for the faltering economies. The expensive Swiss franc, French franc, German mark are said to price domestic products out of the world market. Tight monetary policies are blamed for shrinking exports and rising imports although the central banks are expanding their currencies at rapid rates. Switzerland and Germany, the two leading hard-currency countries, already reduced their discount rates to 1 percent and 2.5 percent respectively. They are inflating as fast as they can without raising apprehensions.

Many Americans who do not learn by inference and deduction have an opportunity to learn from European experience. Unfortunately, most people learn only from their own experience.

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February 1997

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