Commentary

RETHINKING EUROPE'S CUEI'URE

OF ENI'ITLEMENT
Scott B. MacDonald

' ~ n e of the biggest dangers to programs also lllcan inflexible h.l- Great Depression. and I simply
~ . J t h c elobal e c o n o m y IS tO0
cr 9 9
bor markets, higher business ex- thouoht that this was atrocious for
much dependence on the United penses, and heavy costs to natiomil our country."
States and China as locomotives of budgets. And then there is the de- Europe's dilemma over the lack
growth. This could be stated an- mographic isstie: in the future there of growth and maintaining the good
other w a y - - one of the biggest will be fewer younger Fxnopeans life was recently evident in the
weaknesses in the global economy to pay for the older, retired l:'uro- E u r o p e a n U n i o n ' s decision to
is the inability of continental Eu- pcans. As Europe ages, there will loosen the guidelines to the Growth
rope to contribute in a inealfingful bc lex~.er people it+ pay for the and Stability Pact. This was agreed
fashion to global growth. Why is costly system. upon in the early 199()s as the
that'? One of the results of this situa- flamework for a more unified F,u-
While Europe has one of the tion is deepening, t a . t l a t l o n - - l o w
S ~,._r " 9 ' ropean economy and prudent cri-
world's highest standards of living. economic ~elOVcth, hi,,ll~, unenlploy- teria for any new entnmts. In par-
sophisticated industrial sectors and ment, and ,~smg'
" " inflationary pres- ticular, it was decided to relax the
political stability, it also has big sures. For all the wonders of the budget deficit target of 3 percent
problems. The most significant of European way, Germany's unem- of GDP and public sector debt to
these is a well-entrenched culture ployment is now at a postwar high GDP ratio of 60 percent.
of entitlement. Many Europeans, of 5.22 million, close to 12.0 per- The European Union solution to
especially those in the West, expect cent. As P r o f e s s o r Michael low growth, high structural unem-
a comprehensive package of good- Tolksdorf of the Berlin School of ployment, and rising inflationary
ies fi'om the state. This encompasses Economics slated: "'The h.ist time pressures is to loosen state spend-
generous unemployment compen- thai we had such an ellornlous fig- ing. Instead of taking more diffi-
sation and pension programs, pro- tire was in the earl\' 193()s. the cuh and politically distasteful eco-
labor work markets, and a tradition
of an interventionist state. And if a Anglo-American and Euroland Econonlies
Real GDP
-q
finance mirlister seeks to rational-
ize state expenditures, there are tisu- 2005 (~7c) Unemph)ynaent Fiscal Balance
ally strikes. This culture of entitle- Forecast (~/() cA- of GI)P
ment is much more solidly A#tglo-Americ{m
entrenched in continental Europe, Ecommfies 20()4 2005
in particular, France, Germany and Australia 2.9 5.1 (May t 0.5 0.5
Italy. Canada 2.9 6.8 (April) 1.3 1.3
While we would not dispute Llnited Kingdom 2.5 4.7 (Marcht -2.9 -2.9
anyone's desire for a better life, we United States 3.5 5.1 (May) -4.7 -3.9
have concerns about the Big Three Euroland
sustainability of this situation. France 1.8 10.2 (April) -3.8 -3.6
S h o r t e n e d w o r k w e e k s (now a Germany (1.9 II .7 (May) -3.7 -3.4
modilied 35 hours in Francct, lav- Italy 0.3 8.0 (February) -3. I -2.9
ish state support for the unem- Euroland Area 1.4 8.9 (April) -2.8 -2.7
ployed and comprehensive pension Source: Aladdin Capitol Managment, LLC Research

RH'HINKING EUROPE'S ('UI.TURt'~ OF ENTITIs 7

nomic reforms, the option is to push
the state-spending button. It was no
big surprise that in March 2005 EU
finance ministers bowed to German
pressure to ease restrictions on bud-
-et deficits, seekine to boost an
economy that has lagged behind the
U.S. in growth for 12 of the last
13 years. The Germans have missed
the EU Growth and Stability Pact
target for the last three years any-
way. Indeed, of the 25 EU mem-
bers, I 1 countries were missing the
budget deficit target.
I,eadcrship remains one of the
largest problems. One need only
look at France and Jacqttes Chirac.
The Economist magazine recently
declared that Chirac is one of
Europe's most left-wing leaders.
Supposedly the leader of a center-
right coalition, the French leader
is opposed to new measures at fi-
nancial liberalization in Europe,
favors the creation of an "interna-
tional solidarity levy'" on interna-
tional financial transactions so as
to finance African development and
the fight against AIDS, and is one
of the most identifiable anti-Ameri-
can political leaders in the world.
As The Ecom)mist noted: "'More-
over, his Arabist forei-n= policy in
the Middle East, and his defiant
hostility to the war in lraq, he seems
to have a soft-left world outlook
that would fit well on any univer-
sity campus."
On the e c o n o m i c front, the
Chirac years are memorable for
very little, except the passage of the
35-hour workweek into law (when
he shared power with a Socialist
government). His government has
since tinkered with loosening the
rigid adherence to the 35-hour
workweek. He has resisted EU ef-
forts to liberalize the energy mar-
ket. He is also blocking the services
directive, which he said was "'un-
acceptable" and should be "'picked
apart." His years in office have also
8 SOCIETY 9 SEPTEMBER~OCTOBER 2005
wimesscd the reactivation of inter-
ventionist industrial policy.
The bottom line is that Chirac
has embraced a policy stance that
can be described as soft-left, stat-
ist, and anti-capitalist (especially
capitalism as practiced by the
Anglo-American economics). What
makes all of this even more dana-
a,zine is that the government lacks
any rectal(appropriate word?) for-
titude in standing up to strikes and
demonstrations. It has repeatedly
caved under pressure fl'om airline
workers, students, and public sec-
tor workers. In the last case, the
government held firm in its prom-
ise not to give in to more pay hikes
for a full three days. Even in the
aftermath of the "Non" vote in late
May referendum on a new EU con-
stitution--which reflected a mas-
sive discontent with the
government's economic misman-
agcment--Chirac's response was to
sack his prime minister and bring
aboard D o m i n i q u e de Villepin.
gillepin is a strong Chirac loyalist,
has never been elected to off'ice, and
is a major proponent of a major
state role in the economy (he be-
lieves in fostering "'national cham-
pions" in the corporate sector). He
is a walking symbol of everything
French w)ters rejected with the EL"
constitution--a non-elected elitist,
who thinks he knows what the un-
washed masses need.
France is hardly alone in its stew
of socioeconomic problems. Some
of Europe's largest companies, such
as l n f i n e o n T e c h n o l o g i e s AG,
Europe's second largest chipmaker,
and I)eutsche Bank AG are cutting
jobs or moving them elsewhere due
to slowing growth, rigid job mar-
kets, and rising costs. Germany's
embattled leader, Gerhard
Schroedcr, launched Iris reform
package "'Agenda 2010" two years
ago, but more structural reforlns are
needed if Germany is to regain
moderate economic growth and
keep its companies and jobs at
home. As the head of Germany's
opposition Christian Democrats
stated of Schroeder's reforms: "The
measures are well and good, but it
was clear that Mr. Schroeder did
not get to the heart of what Ger-
many needs." It is no surprise that
Schroeder is likely to be voted out
of office in October.
We mention Europe's problems
because it is important to under-
stand why one of the most signifi-
cant regions in the global economy
is not working despite substantial
advantages as political stability, a
developed industrial and commu-
nications infrastructure, and well-
educated populations.
The European economic ma-
chine needs to be upgraded, which
carries with it some degree of so-
cial cost. This means that the
political elite must assume the
responsibility of making hard de-
cisions -instead of spending more
money. The EU needs growth, but
it will not come with the current
leadership that allows the culture of
entitlement to continue, regardless
of cost. The dcfeats of the EU ref-
erendum in France and the Neth-
erhmds (on June 1) only deeper
Europe's malaise. The uncertainty
over Europe's future is likely to
reinforce the Fx.ro's weakness, and
make other currencies on the map
more attractive to investors.This
situation also reinforces one of the
major risk points in the global
economy, the imbahmce of a Eu-
rope without growth.
Scott B. MacDonald is the co-head
o fre,~earch and a partner at Aladdin
Capital Management LLC. He has
written e.rtensivelv on Eurol)ean a[-
fairs and has a Ph.D. in political sci-
ence front the University c)f Connecti-
cut. tie is currenth' working on a Iris-
tory o] :,,reat A m e r i c a n .[Tnancial
.s'canda[s.