TCS Daily

Why Growth Matters

By Jeremy Slater - October 1, 2002 12:00 AM

Poor economic growth is creating political problems in Europe's heartland. Not only does this mean that Germany and France will need to use much of their energies to mend their ailing economies, but that other major European projects such as enlargement could be adversely affected by priorities being placed elsewhere.

A new European Union quarterly report on growth in the eurozone shows that much of Europe is experiencing sluggish growth and is likely to record a rate of expansion lower than many economists predicted even at the beginning of this year. "Growth prospects for the eurozone economy have begun to look less rosy as a result of both external and internal factors," it reports. The European Commission has downgraded its growth forecast for the year from 1.4% to 1.0%.

Strange as it may sound, the re-election of the German government, under the chancellorship of socialist Gerhard Schroeder, offers a faint glimmer of hope for improving the outlook in the medium term for the rest of Europe. Despite the current conventional wisdom, the new administration has a chance to push through reforms that could put more flexibility into Germany's notoriously ossified labour market, and improve the prospects for investment in the economy. Whether it will actually do it remains to be seen.

Even the Greens realize the need for something to be done. But Schroeder's government will either have to work with an expected Christian Democratic majority in the Upper House or it will be able to do nothing except dig in its heels - which would be an economic disaster.

"We need to reform the present employment system, perhaps in a way that the Danish have liberated their market, which offers security and liberalisation," said Andreas Esche, expert for economic and social policy at the Berlin-based Bertelsmann Foundation. "But policy initiatives can be blocked, because we have local elections throughout the whole time a government is in power. There is not a single time when politicians in Berlin can act freely and take unpopular decisions."

The other big engine of the euroland economy, France, has also seen a new administration voted into power. President Jacques Chirac appointed Jean-Pierre Raffarin as prime minister soon after defeating his Socialist opponent, Lionel Jospin, in the first round of presidential elections in April. Rafarin and his party then went on to win the French senatorial elections in June, giving him a mandate to carry through reforms of the social and employment system.

One of Raffarin's first moves was to repeal the statutory 35-hour week, which had proved unpopular with working class voters as it stopped them from earning overtime that could increase their overall pay. However, much else remains to be done as France's unemployment rate is as nearly as high as that in Germany.

"We have a structurally high-level of unemployment because of social policies that have been in place for ages," said Antoine Laurent, analyst at Paris-based investment brokers KBC Securities. "With the current sluggish growth unemployment will rise and there will be less investment. I am not very optimistic that this government can push through many reforms as there are a lot of vested interests concerned. But this is the best chance since 1995 [when Chirac's party last won parliamentary power] to carry out such changes."

Such sluggish growth in Europe's heartland has not only economic repercussions that its citizens will have to deal with, but political ones too. The European Union has embarked on three major projects, enlargement to the east and a reform of the Common Agricultural Policy and the EU budget. Some commentators ask if Germany and France are struggling to deal with their flagging economies will they have time and energy to come up with successful solutions for these problems.

"Germany needs to take a lead on enlargement, the CAP and the EU budget, but there are worrying signs for the economy. What is worse, other countries have these problems too," said Fraser Cameron, a director of Brussels-based think tank European Policy Centre. "It is important that economic problems are tackled so that the momentum needed for enlargement is maintained."

Europe's two big mainland economies realise they need to reform themselves, but fear throwing out their 'social model' with the bathwater. Perhaps, they can be shown the way ahead by the reforms that Scandinavian countries and the Netherlands have put in place or maybe they could take a more laissez-faire approach, as exemplified by the Spanish and the Italians. But they each have to do something, and soon.



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