Goodbye Europa – reform or die

Last night I attended a lecture hosted by Policy Exchange at which Alberto Alesina launched his new book, co-authored with Francesco Giavazzi. The English title is The Future of Europe: Reform or Decline but it’s more exciting Italian title is Goodbye Europa?

In light of yesterday’s speech by Sir Menzies Campbell about Europe, and my own comments about the need for humbler, more liberal European Union, Professor Alesina’s comments were particularly germane.

He began by noting that between 1945 and 1985 Europe’s economy outperformed that of the USA as it emulated American technology and methods, eventually averaging 75% of American GDP. However, most of this was due to the high relative productivity of European workers – our Continental cousins may not work as long as Americans, but they are more productive when the do – and since 1985 Europe has begun to lose its edge. In future, as total productivity is further eroded by high unemployment (including the effect of demographics), short working weeks (that pesky Working Time Directive) and long holidays, Europe will begin to slip back. He observed that in 1950 Italy’s GDP per capita was 30% that in the USA, whereas in 1990 it had reached 80%; it is now back at 1970s levels and he predicts by 2030 Italy’s relative GDP will be back down to its level in the 1950s.

Professor Alesina was clear about what was needed – and what was not! European economies must liberalise trade in goods and services as a means of liberalising their labour markets. They should allow immigration, especially from areas with “high human capital” (i.e. educated Eastern Europeans), promote (but not subsidise) research, reform welfare and enhance competition. They should steer clear of pumping extra cash into universities, or obsessing about infrastructure, the Growth and Stability Pact, or further integration – especially in social policy.

This will not be easy, for some of our European neighbours are not natural liberals. He cited a University of Maryland study that noted that whereas 73% of Americans and 67% of the British said that they believed the market was the best way to structure an economy, in Italy this was only 59% and in France only 36%! (Interestingly, the highest level of support for the market, at 75%, was to be found in nominally-communist China).

Professor Alesina and the other speaker, Ludger Schuknecht of the ECB, both argued that gradual, piecemeal reform was ineffective. Mr. Schuknecht provided evidence that “timid reformers” had seen little or no change in their GDP growth rates, whereas “bold reformers” had seen GDP growth rise by more than 50%.

The message was clear. European economies need bold, liberalising reform. Whether they get it, however, is another matter.