I came to the US in 1991, shortly after Francis Fukuyama penned his famous “End of History and the Last Man” essay. Though much contested at the time, Fukuyama’s contention that there was only one option on the menu after the end of the Cold War – capitalism über alles – seemed, from my European social democratic perspective, worryingly prescient. After all, Europe’s immediate policy response was the Maastricht Treaty. Yet a moments reflection should have shown me that there was nothing inevitable about this victory of capitalism. As Karl Polanyi demonstrated, the establishment of capitalism was a political act, not a result of impersonal economic forces. And just as Lenin thought historical materialism needed his helping hand, it was reasonable to suppose that Fukuyama and those following him didn’t want to leave capitalism’s final triumph in Europe to the mere logic of (Hegelian) history. Post Cold War capitalism needed a helping hand in the form of reinforcing a new message: that while some kind of social democratic ‘Third Way’ between capitalism and socialism, the European Welfare State (EWS), was tolerable during the Cold War, now it was over, such projects were no longer desirable, or even possible.
As a consequence, following the Japan-bashing that was so popular in the US in the 1980s, Euro-bashing came to prominence in the 1990s. A slew of research was produced by US authors claiming that in this new world of ‘globalization’, time was up for the ‘bloated welfare states’ of Europe. Unable to tax and spend without provoking capital flight, EWS’s faced the choice of fundamental reform, (become just like the US) or wither and die. Fundamental reform was, of course, some combination of privatization, inflation control, a tight monetary policy, fiscal probity, more flexible labor markets, and of course, tax cuts. Some EWS’s embraced these measures during the 1990s, some did not, but interestingly, none of them died. In contrast to the dire predictions of the Euro-bashers, the ‘bloated old welfare states of Europe’ continued on their way. Such claims for the ‘end of the EWS’ were made consistently, in fact, almost endlessly, from 1991 until today, with apparently no ill effects.
Imagine then the sheer joy of the Euro-bashers upon finding the French (the bête noir of all things American and efficient) rioting the streets to protect their right not to be fired, and in the face of unemployment rates of almost 20 percent for those under 25. Was this not proof that the EWS has finally gone off the rails? John Tierney in the New York Times obviously thought so, arguing that “when French young adults were asked what globalization meant to them, half replied, “Fear.” Likewise Washington Post columnist Robert Samuelson opined, “Europe is history’s has-been. …Unwilling to address their genuine problems, Europeans become more reflexively critical of America. This gives the impression that they’re active on the world stage, even as they’re quietly acquiescing in their own decline.” Strong claims, but how the French employment law debacle was reported in the US was enlightening as the fact that it was given such coverage; not as the final proof of the EWS’s impending collapse, but as evidence of the strange myths, falsehoods, and half-assed reporting about Europe that is consistently passed off as fact in US commentary.
Consider the article by Richard Bernstein in the New York Times entitled “Political Paralysis: Europe Stalls on the Road to Economic Change”. In this piece Bernstein argues that Scandinavian states have managed to cut back social protections and thereby step-up growth, and that Germany under Schroeder managed to push through “a sharp reduction of unemployment benefits” that “have now made a difference.” Note the causal logic in both statements, if you cut benefits you get growth and employment. The problem is that both statements are flatly incorrect. Scandinavian countries have in many cases increased, rather than decreased, employment protections in recent years, and the German labor market reforms have indeed “made a difference.” German unemployment is now higher than ever, and the German government can cut benefits to zero and it probably will not make much of a difference to the unemployment rate. Unfortunately reporting things in this way wouldn’t signal the impending death of Europe. It wouldn’t fit the script. In fact, an awful of a lot of things about European economies are mis-reported in the US. The following are my particular favorites.
- Europe is drowning in joblessness
- Europe has much lower growth than the US
- European productivity is much lower than that of the US
Let’s take each of these in turn:
Unemployment: It is certainly true that some European states currently have higher unemployment that the US; Germany, France and Italy being the prime examples, and it is commonly held that this is the result of inflexible labor markets. The story is however a bit more complex than this. First of all, European unemployment, if you think about it, is an empty category. When seen across a twenty year period, US unemployment is sometimes lower, sometimes higher than averaged-out European unemployment, and varies most with overall macroeconomic conditions. Consider that modern Europe contains oil rich Norwegians, poor Italian peasants, and unemployable post-communist Poles. The UK was deregulating its financial sector at the same time as Spain and Ireland were shedding agricultural labor. As such, not only is the category of ‘Europe’ empty, to speak of European unemployment is misleading at best.
Moreover, contrary to what Euro-bashers argue, the relationship between labor market flexibility and employment performance appears to run in exactly the opposite direction to that maintained. As David Howell notes, historically, “lower skilled workers in the United States have had…far higher unemployment rates relative to skilled workers than has been the case in…Northern European nations.” If so, one can hardly blame European unemployment on labor market rigidities since no such rigidities applied to these unemployed low-skilled Americans.
Indeed, why the US has a superior unemployment performance may have less to do with ‘flexibility’ and efficiency of labor markets than the US itself admits. Bruce Western and Katherine Beckett argue that “criminal justice policy [in the US] provides a significant state intervention with profound effects on employment trends.” Specifically, with $91 billion dollars spent on courts, police and prisons in contrast to $41 billion on unemployment benefits since the early 1990’s, the United States government distorts the labor market as much as any European state.
Western and Beckett used Bureau of Justice Statistics data to recalculate US adult male employment performance by including the incarcerated in the total labor pool. Taking 1995 as a typical year, the official unemployment rate was 7.1 percent for Germany and 5.6 percent for the US. However, once recalculated to include inmates in both countries, German unemployment rises to 7.4 percent while US unemployment rises to 7.5 percent. If one adds in to this equation the effect, post 9-11, the effects of a half a trillion dollar defense budget per annum, and 1.6 million people (of working age) under arms, then it may well be the case the US’s own labor markets are hardly as free and flexible as its often imagined, or that the causes of low unemployment lie therein.
Growth: Germany and France in particular do have very real problems with unemployment, but it has very little to do with flexibility of labor markets and a lot to do with the lack of growth. Take the case of Germany, the unemployment showcase of Euroland. From the mid 1990s until today its unemployment performance was certainly worse than the US, but it had also just bought, at a hopelessly inflated price, a redundant country of 17 million people (East Germany). It then integrated these folks into the West German economy, mortgaging the costs of doing so all over the rest of Europe via super-high interest rates that flattened Continental growth. Add into this the further contractions caused by adherence by Germany to the sado-monetarist EMU convergence criteria, and follow this up with the establishment of a central bank for all of Europe determined to fight an inflation that died 15 years previously, and yes, you will have low growth and this will impact employment. And yes, it is a self inflicted wound. And no, it has nothing to do with labor markets and welfare states. Germany is not Europe however, and should not be confused with it. The Scandinavian countries have all posted solid growth performances over the past several years, as have many of the new accession states.
Productivity: It is worth noting that a high employment participation rate and long working hours are seen in the US as being a good thing. This is strange however when one considers that according to economic theory, the richer a country gets, the less it is supposed to work. This is called the labor-leisure trade off, which the US seems determined to ignore. That Americans work much more hours than Europeans is pretty much all that explains the US’s superior productivity. As Brian Burgoon and Phineas Baxandall note, “in 1960 employed Americans worked 35 hours a year less than their counterparts in the Netherlands, but by 2000 were on the job 342 hours more.” By the year 2000, liberal regime hours [the US and the UK] were 13 percent more than the social democratic countries [Denmark, Sweden and Norway], and 30 percent more than the Christian Democratic countries [Germany, France, Italy].” Indeed, thirteen percent of American firms no longer give their employees any vacation time apart from statutory holidays. The conclusion? Europe trades off time against income. The US get more plasma TV’s and Europeans get to pick up their kids from school before 7pm. But the US is still more productive – right? Not quite.
Taking 1992 as a baseline year (index 100) and comparing the classic productivity measure – output per employed person in manufacturing – the US posts impressive productivity figures, from an index of 100 to 185.6 in 2004. Countries that beat this include Sweden, the ‘bloated welfare state’ par excellence, with an index value of 242.6. France’s figure of 150.1 is 20 percent less then the US, but considering that the average Frenchman works 30 percent less than the average American, the bad news is that France is arguably just as productive, it just trades-off productivity against time.
Equality and Efficiency: Most importantly, such comparatively decent economic performance has been achieved without the rise in inequality seen in the US. To use a summary measure of inequality, the GINI coefficient, which gauges between 0 (perfect equality) and 1 (perfect inequality), the US went from a GINI of 0.301 in 1979 to a GINI of 0.372 in 1997, a nineteen percent increase. Among developed states, only the UK beats the US in achieving a greater growth in inequality over the same period. While the US and the UK have seen large increases in income inequality, much of Europe has not. France, for example, actually reduced inequality from a GINI of 0.293 to 0.298 from 1979 to 1994. Germany likewise reduced its GINI from 0.271 to 0.264 between 1973 and 2000, as did the Netherlands, which went from 0.260 to 0.248 between 1983 and 1999. Moreover, despite an enormous increase in wealth inequality in the US, redistribution has not been as dramatic in Europe. While wealth inequality has increased in some countries such as Sweden, it has done so from such a low baseline that such states are still far more equalitarian today than the US was at the end of the 1970s. Today, the concentration of wealth in the US looks like pre-war Europe, while contemporary Europe looks more like the post-war United States.
Given all this, why then is Europe given such a bad press? Given space constraints I can only hazard some guesses. The intellectual laziness and lack of curiosity of the US media plays a part, as does the sheer fun of saying “we’re number one!” over and over again, I guess. What is also important is what John R. MacArthur of Harper’s Magazine noted in his response to the Tierney column discussed above; “As Tierney’s ideological predecessor (and former Republican press agent) William Safire well understood, when things get rough for your side, it’s useful to change the subject.”
Given this analysis, Euro-bashing, like Japan-bashing before it, contains within it two lessons. The first that that the desire to engage in such practices probably signals more about the state of the US economy than it does about the economy being bashed. Second, that while Europe does indeed have some serious economic problems, the usual suspects accused of causing these problems are really quite removed from the scene of the crime.