A further difference between the European Union and the United States not captured in such calculations—or, indeed, by standard measures of productivity—is the widening gap between the amount of time Americans work and the amount of time West Europeans work. According to a recent OECD study, the average American in employment works just under 2,000 hours a year (1,976). The average German works just 1,535—fully 22 percent less. The Dutch and Norwegians put in even fewer hours. Even the British do roughly 10 percent less work than their transatlantic cousins. The extraordinary thing is how much of this divergence has occurred in the past twenty years. Between 1979 and 1999 the average American working year lengthened by fifty hours, or nearly 3 percent. But the average German working year shrank by 12 percent, and the average Dutch year by 14 percent.49 It is a relatively new state of affairs that Americans get ten days of holiday a year, and Europeans thirty.
TABLE 11. EFFECTS ON EUROZONE UNEMPLOYMENT OF “AMERICANIZING” THE LABOR MARKET
Source: International Monetary Fund, World Economic Outlook (April, 2003).
In fact, these figures understate the extent of the European “leisure preference,” since they take no account of the fact that a much larger proportion of Americans actually work. Between 1973 and 1998 the percentage of the American population in employment rose from 41 to 49. But in Germany and France the equivalent percentages fell to, respectively, 44 and 39. The overall employment rate for the working-age population in the United States is 73 percent; in the EU it is just 64 percent.50 Unemployment rates in most European countries are also markedly higher than in the United States—over 10 percent in Belgium and Spain, more than twice the American rate. And then of course there are the strikes. Between 1992 and 2001 the Spanish economy lost, on average, 271 days per thousand employees as a result of industrial action. For Denmark, Italy, Finland, Ireland and France the figures lie between 80 and 120, compared with less than 50 for the United States.51
This, then, is the main reason why the U.S. economy has surged ahead of its European competitors in the past two decades. It is not that Americans are markedly more productive. It is not about efficiency. It is simply the fact that Americans work more. It is the fact that Europeans take longer holidays and retire earlier. It is the fact that so many more European workers are either unemployed or on strike. Europe’s political leaders are belatedly waking up to this problem. In June 2003 a German politician took his career in his hands by daring to suggest that if Germans made do with fewer holidays, their economy might grow faster. Such views are no longer taboo in France either. But a century of European social democracy has created habits of mind that are extremely hard to break. From almost its very inception in the late nineteenth century, the German Social Democratic Party campaigned for shorter working hours and, more recently, shorter working lives. For their French counterparts, securing a maximum working week of thirty-five hours was one of the great achievements of the recent past. This tradition dies hard. A striking feature of the proposed EU constitution is that it seeks to enshrine as “fundamental rights” a number of the things that make the European population so much less active than their American counterparts. It alarms British business leaders that Article II-27 enshrines the right of workers to be consulted by the management about the running of the companies that employ them. But just as significant is Article II-31: “Every worker has the right to limitation of maximum working hours, to daily and weekly rest periods and to an annual period of paid holiday.”52
THE COMMON AGRICULTURAL POLICY
Europe may be running a trade surplus, but part of the reason is the relatively slow growth of domestic demand. Another relevant factor is the European Union’s continued protectionism, which is most evident in the agricultural sector. At the time of writing (June 2003), an agreement had belatedly been reached to reform the Common Agricultural Policy, which at present accounts for nearly half the EU budget. The system whereby the subsidies paid to farmers are linked to the volume of production is to be partly dismantled.53 The prices at which the EU commits itself to buy farm produce are to be reduced, though not entirely scrapped. CAP payments to farmers in the ten new member states will be paid at just a quarter of the level paid to existing members.54 But these reforms do nothing to reduce the tariffs currently imposed on agricultural imports to Europe. American proposals to the World Trade Organization prior to the abortive Cancún conference included the phasing out of agricultural export subsidies over five years as well as the reduction of subsidies to 5 percent of the value of farm production and of tariffs to a maximum of 25 percent. Before Cancún the EU indicated its willingness to reduce subsidies, which prior to last year’s reforms were around 33 percent of the value of production, compared with around 21 percent in the United States. Without a global trade agreement, however, these subsidies will continue.55 This state of affairs is simply indefensible—and politically almost incomprehensible given that barely 4 percent of the EU workforce is now employed in agriculture.
The United States is not significantly more virtuous in these respects.56 But Europe’s addiction to agricultural subsidies and tariffs nevertheless needs to be borne in mind when judgments are being made about the EU’s positive contributions toward developing countries. Europe may be more generous in its aid policy than the United States. But so long as the Common Agricultural Policy remains in existence—even in its reformed incarnation—the EU will be giving with one hand while taking away with the other. Worse, it will be offering dependence on aid as a substitute for economic development based on agricultural exports. Were the EU to break the stranglehold of what are now numerically weak protectionist lobbies, the benefits—not least for developing countries around its Mediterranean and Slavic periphery—would be immense. There would be real benefits for West European consumers too. Only a relatively small number of inefficient farmers, notably in France, would lose out. And those who protest that the French countryside benefits aesthetically from subsidized agriculture should think again. If what is at issue is the look of the Gallic landscape, then farmers can quite easily be paid to act as glorified gardeners, charged with the task of keeping France pretty, but not paid to produce food that could come more cheaply from outside the EU.
THE EUROPEAN CENTRAL BANK AND GERMAN DISINFLATION
The Common Agricultural Policy also makes food expensive for European families, reducing their disposable income twice: by taxing their incomes and by inflating their food bills. But it is not the principal cause of Europe’s recent economic underperformance. Of far more importance is the mismanagement of Eurozone monetary policy since the creation of the single currency in January 1999.
The success of the euro as a substitute for the dollar in some international transactions masks a deeper failure. This failure has consisted in systematically underestimating the disinflationary and perhaps even deflationary pressures on the German economy of a monetary policy devised to achieve price stability in twelve quite different economies.57 Between 1999 and 2001 the Economic and Monetary Union meant higher interest rates for Germany, compensated for by exchange rate depreciation.58 In 2002 and 2003 it meant belated and insufficient interest rate cuts and a real monetary tightening through exchange rate appreciation. Some symptoms of deflation have already manifested themselves in Germany. Although the official consumer price inflation rate remains (just) positive, there is reason to think that this may conceal actual deflation. The main producer price index fell in 2002, and agricultural prices have been falling since mid- 2001.59 Uniquely among the major Western economies, Germany’s real estate prices have fallen—by as much as 13 percent in real terms—over the past decade. 60
The problem has been compounded because German fiscal policy is also circumscribed by European rules. The misnamed Stability and Growth Pact—ironically, demanded as a sine qua non of monetary union by the Germans themselves—implied that Germany could be fined by the EU if, as seemed likely, Berlin ran deficits in excess of 3 percent of GDP for three years running
(2002–04). In large measure, these deficits merely reflect the operation of automatic stabilizers in a recession or near recession. The idea that they could be made larger by the imposition of fines (a mechanism that was designed to elicit good fiscal behavior from Italy and other historically profligate member states) is among the most grotesque of the unintended consequences of monetary union. Small wonder the Stability and Growth Pact was hastily suspended in November 2003.
One way of seeing where the European Central Bank has gone wrong is to ask where German interest rates would be today if the German central bank, the Bundesbank, had not been emasculated. Given the Bundesbank’s record—which includes at least five episodes when rates were cut quite steeply in response to a recession (in 1967, 1975, 1982–83, 1987 and 1994–96)—it seems reasonable to assume that rates would be lower. Were it not for the ECB’s need to target inflation not just in Germany but also in Greece and Ireland, German base rates in 2003–4 would very probably have been closer to American rates—i.e., nearer to 1 percent than to 2 percent.61
Under the circumstances, it is scarcely surprising that after much circumlocution, the British government has avoided committing itself to joining the Eurozone in the near term. Although one study in the voluminous June 2003 Treasury report on the subject suggested that euro membership might boost British economic growth, it was only by a modest amount—at best, 0.25 percent of GDP per annum; at worst, 0.02 percent.62 Even these calculations (which assumed that switching to the euro would boost cross-Channel trade and that this in turn would raise productivity) must be viewed with skepticism in view of the dismal performance of the Eurozone since its creation.63 The ten countries that have just joined the EU should also think twice about converting to the euro. They could lose more than they gain if, in order to qualify, they are required to spend two years of purgatory in a second-generation exchange rate mechanism, given the volatile flows of speculative capital such a system would tend to attract.64 The government deficits of Poland, Hungary and the Czech Republic all were in excess of 4 percent in 2002; indeed, the Hungarian deficit was close to 10 percent. It is fortunate for these countries, too, that the Stability and Growth Pact is in abeyance.65
If enlargement turns out to mean that the low-productivity economies of Eastern Europe acquire both a West European welfare system and a West European currency, its macroeconomic effects could conceivably be like a slow-motion replay of German reunification, which threw millions of East Germans out of work. Productivity levels in the Czech Republic, Poland, Slovakia and Hungary are around a third of the French level. Put crudely, what this means is that unless wages in those countries are set at around a third of French levels, their workers will not be able to compete with their West European counterparts. Unfortunately, European Union labor legislation is designed to prevent what the West Europeans disingenuously label “social dumping,” a pejorative term for competition from low-wage economies. East Europeans are currently able to compensate for their low productivity by working longer hours even than Americans. The average Czech worker does more than two thousand hours of work a year, a figure that has been steadily rising since the collapse of communism, even as working hours in Western Europe have been declining. EU accession is likely to reverse that tendency, obliging Czechs to work less or not at all by giving them legal entitlements to shorter working weeks, longer holidays, stronger unions, higher minimum wages and, of course, generously funded unemployment when their employers go bust because of all this. Joining the EMU would remove the last vestige of economic flexibility, the possibility of currency depreciation.
THE RESCUE OF THE NATION - STATE CONTINUED
What, then, of Europe’s steps toward a federal constitution? Here, as always, there is a need to distinguish between rhetoric and reality. Some French and German politicians have been using the language of European federalism for years. Yet the reality has always lagged far behind, for the simple reason that the very same politicians—when it comes to actions rather than words—have consistently defended their countries’ respective national interests. Alan Milward’s dictum that the first phase of European integration had more to do with the rescue of the nation-state than the construction of a federation still applies today.66 There is little reason to think this will cease to be true even if Giscard’s constitution is eventually adopted. Indeed, a close reading of the constitution—and of comments made by the convention’s president during its deliberations—suggests that the real point of the exercise was to prevent an irrevocable swamping of the four biggest West European countries by the smaller states in the wake of eastward enlargement.
A cynic might say, for example, that the new offices of president of the European Council and EU foreign minister are the perfect jobs for a certain kind of French elder statesman—not unlike the post of president of the constitutional convention. Giscard envisaged freezing the number of European commissioners at fifteen, in other words scrapping the rule that gives each member state at least one commissioner. If that did not happen, so his argument ran, the seven smallest countries in an enlarged EU— accounting for less than 2 percent of the union’s GDP—would provide more commissioners than the six largest countries, despite the fact that the latter group’s share of total EU output exceeds 80 percent. Giscard also raised the idea of making representation in the European Parliament more proportionate to national population sizes. “You have to take the populations into account because we operate in a democracy here,” he declared in April 2003.67 Perhaps most important, changes to the system of qualified majority voting on the Council of Ministers would mean that EU legislation could be passed if it had the support of just half the member states, provided they represented at least 60 percent of the European Union population—a much better deal for the big four than the system agreed to at Nice in December 2000.
TABLE 12. THE EUROPEAN UNION IN PERCENTAGES
*System before the Nice Treaty of 2001.
Source: John McCormick, Understanding the European Union; OECD.
Giscard had a point. EU institutions as presently constituted do substantially overrepresent the smaller countries, as table 12 shows. For many years, this overrepresentation of the small and underrepresentation of the large has had a fiscal dimension too. Almost from its genesis in the European Coal and Steel Community (1951), the European Union has been predicated on transfers of resources from the larger, wealthier countries to the smaller, poorer countries. In the 1950s the inefficient Belgian coal industry received tens of millions of dollars from the other members of the ECSC, principally Germany. After the Treaty of Rome, Frances former colonies (which the French ingeniously managed to slip into the Common Market) received $380 million in development assistance from the other five signatories, again principally Germany. The Common Agricultural Policy, which by 1969 accounted for 70 percent of the European Economic Community’s budget, also effectively obliged German consumers to pay for dearer French and Dutch produce.68 According to German budgetary data, the total amount of unrequited transfers from Germany to the other member states some years ago exceeded in nominal terms the celebrated 132 billion marks demanded of Germany by the victorious powers after the First World War.69
FIGURE 12
Germany’s Share of European Union Resources and Institutions (Percentages)
Source: John McCormick, Understanding the European Union; OECD.
Yet it is inconceivable that this system can survive for very long. Apart from anything else, EU enlargement brings into the fold a number of countries markedly poorer in relative terms than any previous new members. In past enlargements the per capita GDP of the richest existing member—invariably Luxembourg—has been roughly two or two and a half times that of the poorest new member (Ireland in 1974, Greece in 1981, Portugal in 1986 and Finland in 1995). But the accession of the former Communist economies of Eastern Europe is an altogether bigger challenge. The average Luxembourgeois is roughly five times better off than the average Lithuanian. At Copenhagen it was agree
d that the “maximum enlargement-related commitments” for the ten new states would not exceed 40.8 billion euros in the three years 2004–06. But who exactly is going to finance these transfers? It is very hard to see how German politicians can continue to justify paying the largest net contributions to the EU budget at a time when the German economy is growing so sluggishly. Clearly, German altruism has played an important role in the history of European integration since 1945. Still, there must be limits to how much more “tacit reparations” German taxpayers are willing to pay to the rest of Europe.
One little-noticed finding of recent Eurobarometer surveys is that there are significant discrepancies between the numbers of people who think the European Union is a “good thing” in general and the numbers who think it is good for their own country. There may well be a connection between these discrepancies and the workings of the EU budget. In countries that are net recipients of substantial sums—Greece, Ireland and Portugal, all of which received sums greater than 2 percent of GDP between 1995 and 2001—the proportion of voters who regard the EU as good for their specific country is significantly larger than the proportion who regard it as a good thing generally. Conversely, a larger number of voters in a number of the big donor countries—Germany, Belgium and Luxembourg—regard the EU as a good thing generally than regard it as good for their own country.70 If nothing else, that suggests a recognition on the part of voters in some, if not all, member states that there is a distinction between the European interest and the national interest.
THE LIMITS OF “EUROPEANNESS”
While it is tempting to represent “European” attitudes as increasingly “anti-American” and more self-consciously European, this is at best a caricature. First, as the Pew Center data clearly show, most Europeans draw a sharp distinction between Americans in general and the Bush administration. No less than 74 percent of French people with a negative view of the United States regard “the problem” as being “mostly Bush,” compared with just 21 percent who think it is “America in general” and 4 percent who blame both. The proportions are very similar in Germany and Italy. Secondly, and somewhat ironically, there are at least some aspects of President Bush’s foreign policy that Europeans support. Three-quarters of French, Italian and German respondents to the Pew survey agreed that the Iraqi people are better off without Saddam Hussein. Clear majorities in all the major European countries continue to favor the U.S.-led war against terrorism. More generally, there are no real transatlantic differences in attitudes toward economic and cultural globalization. It should also be noted that anti-American sentiment is not deterring young Europeans from learning the English language. Excluding Britain and Ireland, 92 percent of secondary school students in the EU are studying English—nearly three times the number studying French and seven times the number studying German.71
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