Challenges Facing Europe in a World of Globalization

Thank you for inviting me to speak here today at Hanover College. I will be looking at one of the pro­found problems besetting Europe: the lack of eco­nomic liberalization among some of the European Union's biggest countries. Whether the EU has grand ambitions to become a superpower or not, whether it sees itself creating a new international order or wants to enlarge into Asia and North Africa, I think that without the willingness to tackle rigidity and stagna­tion in the major EU economies, the project will not have much of a chance.

Some of you may have received a surprise gift in the mail, as I did, from the Polish tourism office. As you may know, the French, Germans, and other Europe­ans have been deeply concerned about the invasion of Polish plumbers and nurses, who have been able to get around restrictions on their right to employment in other EU countries by setting themselves up as independent contractors. The invasion of cheap labor from Eastern and Central Europe as a consequence of EU enlargement earlier this year is, of course, one of the great worries of previously existing EU members. Actual numbers are minuscule compared to the fears they have engendered, as is so often the case.

But let no one accuse the good Poles of lacking a sense of humor. Playing on these fears, the Polish tour­ism office sent out a poster calling on other Europeans to go to Poland if they don't want Poles to travel to the EU. As you can see, it is quite a remarkable invitation.

The point is that many Europeans suffer great anx­iety over the loss of jobs, either due to internal com­petition in the EU or due to global competition from Asia, from Latin America, and even from the U.S., where some European carmakers have started opening plants. The private sector in Europe has almost stopped producing new jobs since the 1970s, and 20 million Europeans are unemployed, many permanently so. In Italy, 38 percent of respondents to a recent poll told the German mar­ket research firm GfK that unemployment was the most pressing social problem. In France, the figure was 58 percent, and in Germany, a soaring 81 per­cent felt the same way. The big countries at the heart of the euro zone are stagnating economically and yet seem unable come to grips with the liberal­izing changes needed in a world of globalization, competitive labor markets, and the mobile capital demands of our economies.

Let's compare the EU with the United States. Total employment in the EU stands at 63 percent. In the U.S. it is 75 percent as measured by 15-64-year-old members of households. Where the Unit­ed States has 5 percent unemployment, France has 10 percent and Germany has 11 percent. Between 1990 and 2003, the U.S. economy created almost 20 million new jobs. Italy, Germany, and France combined created 3 million. If current trends con­tinue, per capita income will go up in Germany over the next 20 years by 44 percent, while it will double in the United States.

The less regulated U.S. labor market is far better at integrating the workforce at the lower end of the scale, providing economic opportunity and upward mobility that particularly affects immi­grants, young people out of high school or college, and women. Immigrants, for instance have about the same unemployment rate in the U.S. as the gen­eral population, whereas in Germany and France the unemployment rate for immigrants stands at 25 percent.

Take a look at today's front page about the 10 days of riots among young, disaffected, and unem­ployed Muslims in France and you see one of the tragic consequences of a rigid and exclusive labor market. Without jobs, integration of immigrants fails, and so does their connection to the rest of society.

Much has been written-among others, by myself-about the issues of EU enlargement and EU integration and what it all means for EU trans­atlantic relations with the United States. However, I have come to conclude that the biggest question of all is how Europe deals with its comfortable labor force and extensive welfare states, which will need to get into fighting trim to face the challenges of the future.

Europeans love their six-week vacations-who wouldn't?-and they don't mind the fact that their secure job will not pay them enough to aspire to big houses or big cars. High taxes on income and sales give them free health care and free education, state pensions, and unemployment insurance. It is a comfortable life, but it is a life under threat.

If a European loses his job because the company sets up a plant in India, he is highly unlikely to find another one. And generous pension systems are under threat from a declining demographic base. Most countries in Europe are shrinking, failing to sustain their population. By 2050, for instance, the population of Italy will have fallen from 57 million to 45 million. By 2050, more than half of Germany's population will be over 55 years old. Immigra­tion is in Europe a deeply controversial way of expanding the labor force as fear of a rising Muslim population grows.

We have recently seen some stunning conse­quences of the discontent that besets many Europe­ans. In France and the Netherlands, voters rejected roundly the European Constitution (for which French politicians had been a driving force). The vote was a vote against an EU that the French con­sider a threat to their welfare state; for the Dutch, fear of losing their "tolerant" lifestyle under the influx of further Muslim immigration was a big fac­tor. Even the famous French 35-hour workweek is not putting a smile on people's faces. While pay­checks are not growing, the shorter workweek gives everybody more free time to shop and spend. The end result, inevitably, is less money to go around.

What France clearly needs is a more flexible job market and lower social costs that would allow for more competition, more labor mobility, and more job creation. But that's not how the majority of French workers see it. They like their job security; according to opinion polls, 70 percent say that their ideal job would be as a civil servant, which offers a job for life. Here the state is still considered the source of all things good and bad. Therefore, the French tend to blame the general economic malaise mainly on politicians simply not doing their jobs well enough.

But they also blame the EU. In particular, resent­ment focuses on competition (dirty word around here) from the new EU members in Eastern and Central Europe. As a conservative friend of mine notes, "We used to be afraid of invading Warsaw Pact troops. Now we fear an invasion of Polish plumbers!"

Independent contractors from Poland and other points east are setting up shop in France and Ger­many, everything from plumbers to tile layers to butchers; they offer their services at half the cost of local workers. What will happen to the labor mar­ket if and when Turkey eventually joins the EU is enough to send French workers off looking for the pastis bottle.

This fall's German elections were equally a symp­tom of major problems-as have been the chaotic efforts to cobble together a grand coalition under Chancellor Angela Merkel. Germans intensely dis­like uncertainly of any kind, having experienced enormous turbulence in the first half of the 20th century, including the crashing governments of the Weimar period, Nazi dictatorship, and defeat in two world wars.

Part of the problem Germany faces today is a deep and widespread yearning for security in a changing and unpredictable world. This makes German workers unwilling to accept cuts in their pensions and other generous welfare-state provi­sions and their guarantees of lifelong employment.

Both Gerhard Schroeder and Angela Merkel know these problems have to be tackled-which may be why the German electorate ended up dis­liking both. Just three days before the election, 30 percent of German voters remained undecided. During his time in office, Mr. Schroeder did attempt much-needed pension and labor-market reforms, and as a consequence become deeply unpopular.

There have been efforts at reform through the European Union. Particularly, the Lisbon agenda adopted at a ministerial summit in 2002 was designed to increase competitiveness. It was in fact meant to make Europe the world leader in industri­al and technological innovation-ahead of the U.S. by 2010. It has not been much of a success so far.

In many ways, the current British presidency of the European Union would seem an ideal time to take up the challenge. The British, after all, with the Irish, the Scandinavians, the Spanish (under Prime Minister José Maria Aznar), and the Central and Eastern Europeans, have all understood the need for reforms. As a consequence, Britain, Ireland, and Scandinavia generally enjoy lower unemployment, comparable to that of the United States, as well as higher growth rates. In a number of speeches to the European Parliament, British Prime Minister Tony Blair has identified the need for reform in the areas of unemployment, labor markets, energy depen­dency, innovation, falling demographics, and the need for balance between work and lifestyle.

In a speech before the European Parliament in June, before taking over the EU presidency, Mr. Blair rejected the idea that reforming the European welfare states would amount to "trampling on the poor and disadvantaged": "What type of social model is it that has 20 million unemployed in Europe? Productivity rates falling behind that of the United States? That, on any relative index of modern economy-skills, R&D, patents, informa­tion technology, is going down not up?"

Mr. Blair further deplored that the European Union spends 46 percent of its budget on subsidiz­ing farmers. He urged his fellow European leaders to fight unnecessary red tape: "Send back some of the unnecessary regulation, peel back some of the bureaucracy, and become a champion of a global, outward looking, competitive Europe." For these views, Mr. Blair was immediately attacked by French President Jacques Chirac.

In a nod to President Chirac, Mr. Blair has pro­posed an EU Globalization Fund. It was proposed at an informal EU conference at Hampton Court, London, and the idea is to set up a fund within the EU to mitigate the consequences of globalization, a proposal that has been unenthusiastically received by the countries that would be paying for it, prima­rily Germany.

The problem is, however, as noted in the Finan­cial Times by Wolfgang Munchau, that "the EU is the wrong institutional platform to deal with glo­balization. It has become too large and divided. The appropriate levels are the national govern­ments and the eurozone." In a number of important areas, such as economic and labor market reform, there is no EU-wide policy. These are matters for the member states. And even if there were imple­mentation, it rests with the individual govern­ments. It is, for instance, far harder to fire someone in France than it is in England. It is also far easier to set up a company. As a consequence, Britain has far less unemployment than does France.

Helle C. Dale is Deputy Director of the Kathryn and Shelby Cullom Davis Institute for International Studies and Director of the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Davis Institute, at The Heritage Foundation. These remarks were delivered at Hanover College in Hanover, Indiana.