The Foundering Continent

New York Sun, March 2007

IT TAKES ON average 62 working days, 16 separate documents, and the equivalent of $5,000 to acquire the permits to open a business in Italy. In France, it takes 53 days, 15 documents, and $4,000. In America, it takes a mere four days, four documents, and $166. In The Future of Europe (MIT Press, 172 pages, $24.95), economists Alberto Alesina and Francesco Giavazzi provide a wealth of such examples to buttress their argument that Europe is on a state-subsidized train to economic and political irrelevance, but as anyone who has tried to do business in Europe knows, those statistics alone are all you really need.

The 50th anniversary of the Treaty of Rome, the founding document of the European Economic Community, has occasioned festivities across the Continent — free beer and sausages on the streets of Berlin, a gala performance in Brussels by the stars of the Eurovision Song Contest, state-subsidized raves — accompanied by a great deal of self-congratulation. The editors of Newsweek’s international edition have declared this Europe’s “Golden Moment.” Europe, they write, is now “a global superpower of world-historical importance, second to none in economic clout … its values are spreading across the globe — far more attractive, in many respects, than those of America.” As for the gloomy pundits who keep insisting that Europe is in terminal decline, well, if only they would visit Europe, they would see this is “wrong, even absurd,” and if anything, “Europe’s trajectory is up, not down.”

Messrs. Alesina and Giavazzi have not only visited Europe but are, in fact, Europeans, albeit Europeans who, like many of their most talented contemporaries, have taken up residence in America. Mr. Alesina is a professor of political economics at Harvard University, where, he notes, Europeans who have fled their countries’ moribund universities comprise about a third of the economics department. Mr. Giavazzi is a visiting professor at the Massachusetts Institute of Technology. They are not persuaded by the vision of Europe’s trajectory as an infinitely ascending golden ladder. The extended postwar period of European economic growth is over, they argue, and barring “serious, deep and comprehensive reforms,” Europe will “inexorably decline, both economically and politically.”

Disputing the oft-asserted claim that Europeans work less than Americans because they have perfected the art of living, Messrs. Alesina and Giavazzi contend that European idleness is the predictable result of stultifying labor market regulations, high taxation, and the excessive power of Europe’s labor unions. In France, Germany, and Italy especially, shortened work hours are now coupled with diminished productivity and lack of technological innovation. In 1970, the authors note, Italy’s gross domestic product per capita was 68% of America’s; by 1990, it had reached 80%. Today it is back down to 64%. At current rates of relative decline, Italian GDP per capita will in 25 years time be one third that of America.

And why is this a problem? After all, a country with one-third the GDP per capita of America is still a rich country. It is a problem because relative decline tends to become absolute decline. Large social spending and low growth rates, along with the aging and shrinking of the European population, mean, among other things, that Europe cannot support a powerful military. China and India each have populations orders of magnitude greater than France, Britain, and Germany combined, and their citizens are willing to work more than 35 hours a week. It is inevitable that their leaders should ask why France and Britain have permanent seats at the U.N. Security Council when they do not.

Rather than meeting these challenges forthrightly, European insiders maneuver frantically to insulate themselves from the effects of economic integration and market globalization. Unions run by older, employed leaders have prevented the implementation of efficiency-enhancing labor reforms that would benefit younger entrants into the job market. In Germany, union representatives occupy half the seats on supervisory boards of large corporations. Volkswagen shareholders have been reduced to bribing union leaders with luxury trips to obtain agreements on working rules. No wonder German unemployment has now reached its highest levels since the Weimar Republic.

European governments, Messrs. Alesina and Giavazzi advise, should welcome the natural death of inefficient corporations and their replacement by more vigorous newcomers. Instead, they bathe struggling firms in subsidies. During the 1980s, when American corporations were reeling from the shock of massive restructuring, European ones were protected from competition, insulated from the discipline of the market. Case in point: For 50 years, the Italian government subsidized Fiat’s research and development. The Italian car company used the money to enter protected industries such as insurance and energy. Meanwhile, Japanese and Korean manufacturers were learning how to make better cars. By the time Fiat’s managers noticed, bankruptcy was at hand.

The problem is not limited to large corporations — regulations that increase the cost of entry for new firms create lack of competition across the board. “Just try to shop at 2p.m. in most European cities outside of major tourist centers,” the authors lament. “You will find that all shopkeepers are out to lunch.” I can confirm that this is so.

Lacking a strong tradition of independent regulatory agencies, European governments have failed to discourage cartels and monopolies. Judiciaries throughout Europe are ineffective in enforcing contracts. In America, it takes seven weeks to collect payment on a disputed check; in Italy, it takes more than a year to get a court decision.

“Reform or Decline” portrays a grim picture, but it is not a new one. This book is praiseworthy not so much for the originality of the thesis, but the detailed compilation of case studies, statistics, and evidence. The dull navy blue jacket and MIT Press imprint suggest the book will be displayed in university libraries, not airport waiting lounges. The authors will most likely not be promoting their thesis on the right-wing talk radio circuit. Still, the message will not come as a surprise to the talk radio faithful — and the message is right.

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