Why is Europe Stagnating?

I must confess --- I enjoy listening to NPR.  On Weekend Edition (Saturday April 15th), long-time commentator Daniel Schorr made a great observation about Europe.  When asked about the protests in France (in contrast to the recent demonstrations in the US), he said simply --- the old social contract in Europe with its elaborate health and pension benefits is incompatible with a vibrant economy.  Now Daniel Schorr may (or may not) lament this, but he recognized the fundamental point and also why Britain is escpaing the fate of the rest of the old Europe.  The European Union, he commented, promised so much with the common currency and policy harmonization. But the social contract upon which the welfare states of post WWII Europe was built are countering whatever positive impact the European Union might have had on economic growth.

A former colleague of mine at NYU, Jordi Galli, used to have a picture on his door demonstrating that the stagnation in Europe (with double-digit unemployment) was no mystery at all. The graph depicted the relationship between real wages and real productivity, and the wages in Europe were much higher than the productivity of the workers.  One of Dr. Sennholz's most practical lessons to his young students back at Grove City College was --- always make sure that your marginal productivity is greater than your wage rate.  Public policies which result in raising wages, but lowering productivity are a recipe for economic disaster and unfortunately for the people of too many European nations this has been the post WWII policy equilibrium.

One of the most sobering talks I have ever heard from a politician was by Maart Laar (former Estonian prime minister) and his message was simple --- the future of Europe will be determined by whether Europe followed the lead of New Europe as reprsented in the dynamic and free market policies of countries like Estonia, or the old Europe as represented by the protectionist and statist policies of countries like France.  France seems to be winning the day.

Comments

[Lab_Frog]

Yesterday a U of Michigan Econ Ph.D. argued that Europe’s high unemployment was due to monetary policy: http://beatthepress.blogspot.com/
in an apparent attempt to become the next Krugman. One of his arguments, that critics of Europe's welfare state say there are both too many workers (unemployment) and too few (social security) misses the time factor, as well as over-simplifying.

[Rafe]

The Brits were lucky to escape. Round about 1963 Arthur Koestler wrote an essay in a "Suicide of a nation" series. He reported that in the period 1950-55 British exports increased by 6 per cent while those of the Common Market grew by 76 per cent. The comparative figures for the following five years were 13 per cent and 63 per cent. Through the 1950s no industrial nation had a lower growth of per capita output than Britain and the growth of the national income of the Common Market countries doubled that of Britain.

The essay, titled 'The Lion and the Ostrich' explains how the spirit of enterprise in Britain was ground down between the millstones of trade unionism and the prejudices of the upper classes. He described the split personality of his adopted countrymen. "The Englishman strikes one as a hybrid between a lion and an ostrich. In times of emergency he rises magnificently to the occasion. In between emergencies he buries his head in the sand. [This] guarantees that a new emergency will soon arise".

Koestler escaped from Portugal, spent six weeks in Pentonville Prison as an illegal entrant and then joined the Alien Pioneer Corps to "dig for victory" on vital defence works. The foreigners in the Corps were "too keen" because they objected to the ritual tea breaks which involved marching back to barracks, losing hours of valuable digging time. The CO insisted that they would have to take the tea breaks, otherwise the British Pioneer Corps and the local trade unions would raise hell. This was a few months after Dunkirk, under the threat of German invasion.

In the course of digging for freedom and later in the Ambulance Service Koestler discovered a great deal about the lower strata of the working classes and he came to understand something of the cold class war that divided England.

"I soon learned that the world is divided into Them and us. The "T" is capitalised, the "u" is not. Politics hardly entered into this attitude; instead of the fierce class hatred which had scorched the Continent with revolutions and civil wars, there was a kind of stale, resentful fatalism. I learned to conform to our unwritten Rules of Life: Go slow; it's a mug's game anyway; if you play it, you are letting your mates down; if you seek betterment, promotion, you are breaking ranks and will be sent to Coventry. My comrades could be lively and full of bounce; at the working site they moved like figures in a slow-motion film or deep-sea divers on the ocean-bed. The most cherished rituals of our tribal life were the tea-and-bun breaks, serene and protracted like a Japanese tea ceremony."

Writing in 1963 he reported that the improved standard of living since the war had given the working classes the consumer goods and comforts of the middle class but the frontier between the two civilisations (he almost wrote two nations) remained in place. One side embraced a complex social pyramid with multiple subdivisions but a common commitment to some basic aims and values, mostly to do with gracious living or its outward appearance. The other side will have none of it, least of all aspirations for success.

In his view the British working class had become an immensely powerful, non-competitive enclave in a competitive society and most of that ethos derives from the culture and methods of the trade union movement.

"In 1956 a Merseyside dispute between joiners and metal-workers about who should drill the holes in aluminium sheets led to a strike which lasted six months and attracted national attention. It was regarded as a kind of music hall joke, an endearing quaintness of characters out of Dickens. Two years later,The Times reported that four hundred men had to be dismissed as redundant, eleven thousand were threatened with the same fate, that production on three vessels and a submarine had to be postponed indefinitely because the boiler-makers and the drillers could not agree who was entitled to use five stud-welding guns designed to weld nuts and thimbles to metal plates. It then transpired that the use of this quick and efficient method had been prevented by this dispute between the two unions for the last twelve years."

"Two vivid memories come to mind. First a scene in Modern Times where Charlie Chaplin, after several hours spent at the moving assembly belt going through the same sequence of three or four jerky motions, keeps repeating them like a wound-up automaton after the belt has stopped moving. The second is a television interview with two young Merseyside workers, occasioned by one of those demarcation disputes about who should drill the holes. Asked by the interviewer why they were opposed to young people learning more than one skill, to acquire more knowledge, flexibility and all-round understanding of the production process, the young lads rigidly, stubbornly, repeated: “Because that would lead to unemployment. We don't want to be pushed about. We remember 1929."

"They did not, of course, remember 1929, only what their elders had told them and their union leaders had taught them. It was the sacred doctrine that the man who lays the cold-water pipes must not be allowed to lay the hot-water pipes, the man who makes the cable must not be allowed to make the casing for the cable, a doctrine which holds up as an ideal the narrowing of a man's potentialities, his rigid specalisation in a single, mechanised, automatic routine - his reduction to a robot. Chaplin's nightmare has become the boilermaker's dream."

In 1980 Koester reprinted this essay in a collection titled "Bricks to Babel" with a short postscript.

"Since Suicide of a Nation?" was published in 1963, the downward trend has accelerated, while the underlying causes which it attempted to indicate have become more visible. The ostrich's tail displays an occasional nervous twitch – but there is no sign to date of the lion rising to the occasion."

He did not realise as he wrote that the lioness had arrived!

[Rafe]

Just in case anyone thinks that the EU nations got a big leg up from the Marshall Plan after WW2.
http://badanalysis.com/catallaxy/?p=1511