February 27, 2003

February 27, 2003 | Commentary on Europe

Thatcherism Triumphant? The New Business Climate in Europe

European politicians may not agree on much, but -- from Brussels to Berlin -- one sentiment seems depressingly common: "I'm not Margaret Thatcher."

They may not put it quite that bluntly, but they come close. Germany's Guido Westerwelle, for example, has assured voters he's "no Thatcherite." Belgium's prime minister, Guy Verhofstadt, became known as "baby Thatcher" early in his political career; he wants no part of it today. Trade union officials in Spain have denounced their prime minister for pursuing "the reactionary policies of Margaret Thatcher." French Socialists have informed President Jacques Chirac that by "destroying public services," he's acting like "the Iron Lady."

All economic hardship is attributed to her policies. Virtually every European Union politician promises his constituents that Thatcherism will never come to their country. But considering how many of them govern, you'd think Lady Thatcher was the most popular figure on the continent. From the Baltic to Barcelona, her policies prevail.

What were the economic policies pursued by Thatcher? In the broadest sense, she restored the spirit of enterprise to Britons by lowering marginal tax rates, deregulating the economy, and disposing of state-owned assets through a process that came to be known as "privatization." This pretty well describes the policies being implemented across Europe.

Once viewed as largely socialist, the economies of Europe have changed. True, the European economy as a whole continues to struggle under the weight of subsidies, taxes and regulation. (1) But many European countries have implemented -- and continue to implement -- market-oriented reforms. These countries range from Ireland ("the Celtic tiger") and the Scandinavian nations in the West, to little Estonia and even the Russian Bear in the East. And the changes range from tax cuts to pension reform.

Take Ireland. Once known as a poor agricultural society, it's become a hotspot for foreign investment. Ireland receives nearly one-third of America's investment in the European Union. American companies investing in Ireland include Dell, Hewlett Packard and Boston Scientific. According to IDA Ireland, a government agency, "over 1200 companies have chosen Ireland as their base to serve the European market." The country's low corporate taxes have contributed to this phenomenon. The corporate tax rate was 16 percent in 2002 and is scheduled to fall to 12.5 percent this year.

Russia has lowered corporate and small business tax rates as well. The corporate tax rate fell from 35 percent to 24 percent in 2002.President Vladimir Putin has also enacted a flat 13 percent personal income tax. Tax revenues have been surging and the government's budget went into surplus in 2001. Much of this is due to higher oil prices, but it also reflects greater overall prosperity.

Across the border in Finland, a low regulatory burden appeals to investors. It was voted the world's best business environment in 2001 by the Geneva-based World Economic Forum. In other Scandinavian countries, change is also in the works. Iceland's Prime Minister, David Oddsson, has plans to turn his country into a tax haven. The government cut the corporate tax rate from 30 percent to 18 percent in a December 2001 tax reform. Mr. Oddsson wants to cut it further, to 15 percent by 2004, along with abolishing property taxes.

Taxes remain high in Denmark, but there are few restrictions on investment. In an attempt to attract more skilled workers, the Danish government recently implemented a "green card" scheme in which three-year work and residence permits can be issued. It's no wonder this Scandinavian country now has one of the most flexible labor markets in Europe.

Even little Estonia, a country once known as a mere Soviet replica, has privatized state-owned industries and lowered taxes. Estonia could have taken the comfortable route -- refusing to change and keeping the Soviet way. But that would have meant maintaining the failed Soviet system. Instead, Estonia today is a beacon of light in Eastern Europe and boasts one of the freest economies in the world. Estonia is essentially a duty-free country, the Hong Kong of Europe in that respect. It has a flat tax of 26 percent and there is no corporate tax on reinvested profits. Nokia handsets are assembled in Estonia and 44 percent of its exports are electronics.

Privatization, the most characteristic Thatcher policy, has spread all over Europe. Telecommunications companies, post offices, airlines, drug companies and state-owned banks have been privatized. This has happened in West and East alike.

And while most of Europe faces a pension crisis with large aging populations, several countries have taken steps to address the issue. In 1998, the Swedish parliament, the Riksdag, passed legislation to partially privatize the pension program. In Iceland, private pensions were introduced in 1999 and allow individuals to save 2 percent of their pre-tax income in an account that is matched with a 0.2 percent contribution from their employer. In 2001, Estonia's parliament, the Riigikogu, passed a law making investment in private pension funds compulsory. (Britain and several other countries privatized their systems long ago.)

Across Europe, social democratic rhetoric reigns, but free-market reforms are being implemented. Public officials may shrink from calling it Thatcherism, but it's clear that they're following in the footsteps of the Iron Lady.

(1) This burden continues to act as a brake on growth within Europe. Despite the recent appreciation of the euro against the dollar, the U.S. economy remains fundamentally stronger than those of Europe. As Maurice R. Greenberg observed two weeks ago, "The Euro has appreciated not because Europe's economy is doing better than that of the United States, but because of negative perceptions about the U. S. economy."

Gerald P. O'Driscoll, Jr. is a senior fellow at the CATO Institute. Sara J. Fitzgerald is a trade policy analyst in the Center for International Trade and Economics at the Heritage Foundation.

About the Author

Sara J. Fitzgerald Policy Analyst
Center for Trade and Economics (CTE)

Published in "In the National Interest" magazine.