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ANALYSIS
EUROPES SLOW LANE
TRANSCRIPT OF A RECORDED DOCUMENTARY
Presenter: Frances Cairncross
Producer: Innes Bowen
Editor: Nicola Meyrick
BBC
White City
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020 8752 6252

Broadcast Date: 13.11.03 2030-2100

Repeat Date:
16.11.03 2130-2200
Tape Number:
PLN343/03VT1045
Duration:
Taking part in order of appearance:
Charles Wyplosz
Professor of Economics, Geneva
Kenneth Rogof
Professor of Economics, Harvard University
Former Chief Economist of International Monetary Fund
Katinka Barysch
Chief Economist Centre for European Reform, London
Jonathan Fenby
Author and Journalist
Philippe LeGrain
Chief Economist of Britain in Europe
Stephen King
Managing Director of Economics for HSBC
David McWilliams
Economist and Broadcaster

CAIRNCROSS:
Rich, middle-aged and
comfortable: Europe seems a continent that has everything its people
need for a good life. Its economy is almost as big as Americas, and its
people are almost as wealthy yet they lead more secure and leisured
lives. But some of Europes economies seem to have turned sour
recently. Is the continental economic model now under threat?
WYPLOSZ:
We have low growth, we have
high unemployment, we have rising public debt and not much to hope
for in the next year or two, so it doesnt look too good.
CAIRNCROSS:
Charles Wyplosz is a Frenchman
who holds a chair in economics at the Graduate Institute of International
Studies in Geneva. He has been much involved in discussions about
French economic policy. Frances economy, in the first half of this year,
was shrinking. So too were the economies of Germany, Belgium, the
Netherlands, Denmark, Italy, and indeed the Euro area as a whole. Not
many people in Britain, still entangled in the debate on Euro
membership, have noticed this, or thought about its glum implications
for Britains trade.
Kenneth Rogof is an economics professor at Harvard University, but
until a few weeks ago, he was chief economist at the International
Monetary Fund. What does he think of the outlook?
ROGOFF:
Well theres no question that
Europe is the laggard in the global recovery and especially the core
economies Germany, France and Italy in the Eurozone. I dont think
theres any question that its a structural crisis, not a cyclical dip. There
are ageing populations in Europe, there is a very sclerotic labour and
product markets in Europe and this has made it very difficult for Europe
to deal with todays more globalised, faster moving world. The fast
changing technological scene means you have to be able to reorganise,
labour has to move, stores have to be able to open and close, businesses
have to be able to open and close and Europe simply hasnt been well
positioned to handle that.
CAIRNCROSS:
In his final days at the International
Monetary Fund, Professor Rogof said tartly that if the Europeans
wanted to see an economic recovery, they would have to watch it on
television. Germanys economy seems to have begun a fragile upturn.
But are Europes problems structural, as Professor Rogof argues in
other words, is it caused by deep-seated factors that are unlikely to alter
soon? Or are they cyclical, and caused by the economic downturn from
which many economies around the world have sufered and from which
the United States now seems to be briskly emerging?
Germany is Europes economic giant: what happens to its economy
therefore has a disproportionate influence on its neighbours. But since
reunification, the country has been carrying an immense burden.
Katinka Barysch is chief economist at the Centre for European Reform
in London. She returns frequently to her native Germany.
BARYSCH:
Merging two countries is a huge
undertaking under any circumstances, but the way it was done in
Germany was utterly disastrous. They swapped the Ostmark to the
Deutschmark one for one; they gave all East European workers West
European wages basically overnight. Up to the present day, the East
European workers arent as productive as the West Europeans. So they

basically priced the entire East German workforce out of the market by
giving them higher wages. Thats why unemployment is so high. And
then they tried to privatise the entire East German industry in one go.
They gave it all to a holding company and threw it all on the market.
Now if you take every single building in London and put it up for sale at
the same time, obviously prices collapse. The economy in East
Germany is down on its knees and its living of transfers from the
West. And because the West still has to transfer these billions and
billions of Euros every year, they have to keep taxes very high and that
makes the economy very uncompetitive.
CAIRNCROSS:
Do you think people in Germany
feel as though theyre living in the sick man of Europe?
BARYSH:
There is a certain amount of panic
nowadays in Germany, which is probably required to get things moving,
but they certainly dont feel that they live in a disaster zone.
CAIRNCROSS:
Prodded by this new anxiety,
Germany has begun, tentatively, to introduce reforms. But its people are
not alone in feeling that foreigners exaggerate the structural problems
they face. Jonathan Fenby is an author and journalist who published a
book a couple of years ago, called On the Brink: The Trouble with
France.
FENBY: It strikes me in France that while
you do get a political discourse about the need to create jobs, among a
lot of French people its almost as if nine, ten percent unemployment
has now become an accepted fact of life. The French are very keen on
thinking they have a model which defends workers and workers rights
better than is the case in Britain or America. In fact in quite a number of
cases they have the worst of both worlds because companies are
downsizing, are shedding workers so youve got the downside there.
On the other hand, the rigidities in labour laws means that there is less
and less job creation.
BARYSCH:
The Germans dont have the hire
and fire mentality and they actually have quite strict laws prohibiting
employers from firing employees, especially those that have worked
there for a bit longer. But still there is a rather large amount of job
insecurity. Even those that have jobs are now fearing that they might
lose them, and with more than four million unemployed it is actually
it seems to be very difficult to find a new job. And that isnt actually
the case in a country like Britain where you can be fired from one day to
the next, but its also much easier to find a new job because the labour
market is more flexible. And thats something the Germans should take
into account; that especially for the younger generation that wants to
take more responsibility for their own life, they should allow them to
make their own decisions and not give them all these rules and
regulations and nurture them, and the state should basically retreat a
little bit and let people do what they want to do.
CAIRNCROSS:

Katinka Barysch.

Unemployment in Germany these days is 10.5%, compared with less

than half that - 5% - in Britain. In France, the figure is almost as high.
But are young Germans like Katinka Barysch right to feel so
disconsolate about their economy? After all, visitors to Germany find it
wealthy and well organised. Homes are comfortable, cities well run,

public services magnificent by comparison with Britains. Philippe

LeGrain is chief economist of Britain in Europe, a pressure group that
wants to see Britain abandon the pound and adopt the Euro.
LEGRAIN:
I think at the moment there is
certainly a crisis of confidence in Europe, just as there was a crisis of
confidence in the United States ten years ago; and just as the Americans
were too pessimistic then, I think were being too pessimistic now.
Despite the fact that the internet boom has crashed and the American
economy is not doing that well, most Americans are convinced that
their economy is still a world beater. And partly for ideological
reasons, they think that Europe with its high taxes and its big state
spending and its regulation of things which they oppose for ideological
reasons, they therefore make the leap and say well that condemns it to
becoming a basketcase. But that simply isnt true; its contradicted by
the facts.
CAIRNCROSS:
But that explains why America
looks down on Europe, but it doesnt explain why Europe looks down
on itself at the moment.
LEGRAIN:
I think its clear that both France
and Germany need to reform their labour markets and their product
markets, but I think that people exaggerate the impact that their
regulations have on growth. If you actually look at the performance of
the European economy over the past five or ten years, you see that its
doing as well as the United States, which is much less regulated, and
you actually see that many of the economies that are doing well, best,
are actually the most regulated ones. So I think yes it has an impact, but
I think its impact is exaggerated and it certainly is not to blame for the
cyclical downturn we have now.
CAIRNCROSS:
And on some important indicators
Europe has been doing better than the United States. Over the past
three years, for example, living standards, as measured by output or
GDP per person, have risen nearly 50% faster in the Eurozone than they
have in America. Stephen King is managing director of economics for
HSBC, a big bank. What does he make of this argument?
KING:
If you measure things on the basis
of total output per person or per head, then on that basis it can be shown
that in some European countries, on that measure productivity is better
than is the case in the US. But I think that misses the point in one sense
because what really matters is output per person employed rather than
output per head, and on that basis the US would still score favourably
compared with Europe. The reason why the GDP numbers look rather
more depressed in the US is because there are a lot of babies being born
in the US. Now of course they have to be fed, but ultimately those
babies will go into the workforce and imply that over the medium term
the US will expand at a faster rate than is the case as far as the
Eurozone is concerned. And most of the demographic projections that
you can look at for the US compared with the Eurozone make it
absolutely crystal clear that over the course of the next few years the US
will have a significant advantage in terms of population growth and,
perhaps more importantly, will have a significant advantage in terms of
feeding its elderly population because as they get older therell be more
workers available to feed them as well. So I think the demographics
certainly favour the US compared with Europe, but also help to explain
why on a certain specific measure of productivity in other words GDP
per head the US somehow comes out worse than Europe.

CAIRNCROSS:
The most important diference
then between Europe and America may not be productivity but
demography. Europe is aging much faster than America, because
Europeans are having fewer babies . On top of that, Europeans
undoubtedly work less than Americans. They start their working lives
later Germans on average dont even graduate from university until
they are 28 years old. They take much longer holidays. More of them
are unemployed. And they retire earlier.
And France the Eurozones second largest economy now has a
compulsory 35-hour week. With what efect? Jonathan Fenby.
FENBY: Some particularly big companies
have actually been able to use it to change working patterns in a way
they probably wanted to do in any case, and to that extent its helped
them. In other sectors, particularly small companies, its been much
more difficult restaurants famously youll find in France are now
often closed on Tuesday as well as on Monday and Sunday, which
makes sometimes eating rather difficult in the country when youre
travelling through the countryside. In the public sector its been
difficult to bring in - particularly in big areas like health, education, the
railways and so on and of course the public sector is not always
known for the long hours that people work. And theres a saying
attributed to the former socialist finance minister Dominic Strauss-Kahn
who, when asked about bringing in the 35-hour week, said Well weve
already got them up to 30 and were hoping to get them to 31 next
year.
CAIRNCROSS:
Joking apart, some Europeans
defend the 35-hour week. It has probably forced companies to introduce
a flexibility into their labour practices that was not there before. And
there are other arguments advanced in its favour in France, says Charles
Wyplosz.
WYPLOSZ:
Unemployment came down when
the economy went through the upswing part of its cycle. It is also true
that the number of jobs which have been created during this period it
was 2000, 2001 was unusual, and the explanation is that to give the
impression that the 35-hour week is helping with unemployment, the
government has ofered huge subsidies to firms and firms have of
course rushed to create or pretend to create jobs to get the subsidies, and
now the subsidies have deepened the budget deficit. What we have
seen of course is when the downturn came around, unemployment
started to go up again.
CAIRNCROSS:
But lots of Britons and probably
lots of Americans who now work full time would love to do a 35-hour
week. Think of all that time of. Some French women argue that the 35hour week has been good for family life, because their husbands now
have no excuse not to spend time looking after the children. Philippe
LeGrain sees other advantages.
LEGRAIN:
Europeans work much fewer hours
than Americans do, so in a sense Americans prosperity is based on
harder toil rather than greater efficiency. And its a perfectly valid
lifestyle choice if you think about it as you get richer that you decide
to spend more time with your family and more time playing tennis,
more time on holiday rather than more time in the office.
CAIRNCROSS:
But over the long run making
those choices will ultimately make Europe poorer, wont it, relative to

the United States?

LEGRAIN:
It depends what you think the
point of life is. I mean at the end of the day few people get up in the
morning thinking that they want to maximise GDP. They think that
they want to maximise their happiness. And if they choose that they
wish to spend more time enjoying leisure rather than more time at the
office, I think thats a perfectly valid lifestyle choice.
KING:
It is perfectly reasonable and I
think most of us would probably say its quite a nice thing to be doing
in many ways.
CAIRNCROSS:

Stephen King from HSBC.

KING:
I suppose the longer-term issue is
whether this is consistent with a competitive Europe; that if you have a
situation where people are enjoying themselves through their leisure
time, is there a danger that eventually capital will flow out of Europe to
other parts of the world where people simply work harder.
CAIRNCROSS:
So the danger is that Europe is
choosing a lifestyle that ultimately it cant sustain?
KING:
Yes, I think its something which
has changed quite significantly over the course of the last ten or twenty
years that as capital has become much more mobile, it becomes more
difficult to actually choose the labour conditions you want to have; you
simply end up having to have the conditions which will ensure that the
capital remains in that particular country or region. And I think the
evidence would suggest that capital has generally perhaps flown out of
Europe rather than going into Europe over the last few years.
CAIRNCROSS:
Do Europeans realise the
consequences of their choices? Standing still is not an option. If
Europeans decide that they prefer more leisure to extra wealth, they may
ultimately lose both their wealth and their leisure.
But something is clearly changing in the big countries of Europe. They
do appear to understand the need to make changes. When Jonathan
Fenbys gloomy book first appeared, the French hated it. But now?
FENBY: Theres a kind of manic-depressive
tendency in France, which ones seeing at the moment. When things go
well, everybody is absolutely cock-a-hoop, theyre saying we have
discovered the way to run an economy, weve discovered a diferent
model from the Anglo American model. Then things start to go badly
and what youre getting in France at the moment is a whole series of
books, bestselling books, one of thems called The France Which
Falls and saying everything is terrible. Thats an exaggeration, but
certainly theres an awareness that things are not as the French would
wish them to be.
CAIRNCROSS:
But at least the perception of the
precipice is a great spur to action. As the British government knows, its
extremely hard to reform education, health or other public services. In
France, says Charles Wyplosz, who sits on a council that advises Jean
Pierre Rafarin, the French prime minister, the government at the
moment hopes to manage one big reform a year. This summer, it
tackled pensions.

WYPLOSZ:
The strategy of the government is
to spend the winter and spring negotiating with other political parties or
with trade unions, and by June they announce what they want and by
July they have it voted by parliament. Of course it means in June you
have strikes all over the countries, but come early July the strikers pack
up and go by the sea. Whether the trade unions will be able to figure
out a way of preventing that from happening again every summer is
another question.
CAIRNCROSS:
Do you think that the French as a
people understand the need for reform and share the governments
desire to see it happen?
WYPLOSZ:
Well its very interesting. You
take, for example, the pension reform that happened this year. All
public opinion polls were showing that the French clearly understood
that the system was bankrupt, but there is a very important segment of
the population that wants reforms but kind of keep dreaming that there
can be reforms that will not hurt them personally.
CAIRNCROSS:
happen?

What happens if the reforms dont

WYPLOSZ:
Well I think we would see a slow
decline of the French economy. It makes me think of pre-Thatcher
Britain in the seventies.
CAIRNCROSS:
Margaret Thatcher seems much in
vogue in the Eurozone these days. A German author has attracted
enormous interest with a new book arguing that the Christian
Democrats need to see her as their model. Her popularity is a sign that
Germany and France are taking seriously the need for structural reform.
But both countries have another bond: the Euro. Does Philippe LeGrain
think the common currency will make economic recovery harder or
easier?
LEGRAIN:
I think in the long run it will have
an incredibly positive efect. If you look at what happened after the end
of the Civil War in the United States when Americas disparate regional
markets were tied together by the railroad and by the adoption of a
single US currency, you see an explosion of growth a boost to trade, a
boost to investment, a boost to growth and I think that we can
anticipate similar gains in Europe as the Euro ties together Europes
national economies.
CAIRNCROSS:
at the moment?

Is there any sign of that happening

LEGRAIN:
There is plenty of sign of that
happening. You see a huge rise in cross border trade and you see a huge
rise in cross border investment. At the moment the impact of that is
muted because were going through a cyclical downturn where demand
is low in some countries. But I think that as demand picks up, as it
most likely will next year, we will see the gains from the Euro
beginning to be realised.
CAIRNCROSS:
As Philippe Le Grain works for a
pressure group that supports Euro entry, his enthusiasm is not entirely
surprising, although there are important diferences between the
economies of America in the 19th century and of Europe today. Even
without a common currency, America would probably have boomed.

What does Kenneth Rogof, fresh from the International Monetary

Fund, think of the diferences today?
ROGOFF: The United States has labour
mobility. If you have a recession in one region and a boom in another,
people can move easily to get work. That can happen in the Eurozone,
but because of diferent regulations on housing and of course
diferences in languages, its less smooth. And there isnt the sharing of
taxes the way there is in the United States. When Texas is booming,
they pay a lot of taxes. It ends up mostly in the pockets of other states.
So the Eurozone is less well suited to have one currency.
CAIRNCROSS:
But the Euro does seem to be
bringing some surprising benefits. Charles Wyplosz.
WYPLOSZ:
In the good old time when you
would have a lot of trade union pressure, it would be customary to give
in to raise the wages and then to quickly raise the prices and depreciate
the currency. There is now, I think, a keen understanding that this game
is over.
CAIRNCROSS:
So you think the Euro has really
encouraged trade unions to moderate their demands in France?
WYPLOSZ:
Well they understand. They
understand that if you raise price in the car industry, for example, you
wont be able to export those cars; and, as they understand that, they act
accordingly.
CAIRNCROSS:
And it isnt just French trade
unions that have become more responsible: the Euro has also had that
efect on some big-spending governments, such as Italy.
But the most striking consequence of the Euro has been the need for a
single interest rate for all the Eurozones economies, set by the
European Central Bank in Frankfurt. That one-size-fits-all interest rate
applies both in sluggish Germany and France and in booming Spain and
Ireland. David McWilliams is an economist and broadcaster. What
efect does he think the Euro has had on the Irish economy?
MCWILLIAMS:
Theres no doubt that the
Eurozone pushed credit through the roof and drove the economy quite,
quite rapidly, and it has created a housing bubble and this is our biggest
problem. The Irish and the British do two things: they borrow at the
short end and they borrow hugely above their wages for mortgages and
they like owning their own houses. And we are in a nonsensical phase
when it comes to house prices. House prices on average are three
hundred and ninety thousand Euros in Dublin. The average wage here
is thirty two grand. You dont have to be a genius to work out that
somebodys overlending. You also dont have to be a genius to work
out that this will end in tears.
CAIRNCROSS:
So for Ireland, the one-size-fits-all
interest rate prolonged the boom and has helped to sustain a housing
bubble. But what about Germany? What does Stephen King think that
the Bundesbank, the German central bank, would be doing if it were
still in charging of setting German interest rates?
KING:
If you had the Bundesbank in
charge of German policy rather than the European Central Bank

currently, under current circumstances its very, very likely that interest
rates for Germany itself would be quite a lot lower than they are today
and its also quite likely that the Bundesbank would have been quite
happy to steer the currency down to lower levels than is the case today.
Whereas in the Euro system those options simply are unavailable.
CAIRNCROSS:
And if they were available, how
much faster might Germany be growing than it is today?
KING:
Well Germany could be growing by
maybe half or one percent more per year than its achieving so far.
CAIRNCROSS:
Thats an astounding claim. At
present, German economic growth is forecast to be flat this year, and
just over 1% next year. So if Stephen King is correct, the cost of the
Euro to Germany is crippling. And how does he think Germany can
adjust in the long run?
KING:
Well there are I suppose two
possible ways, one of which is that Germany simply goes through the
hard slog of trying to lower its prices and wages, but thered be
tremendous resistance, it would be very, very painful and it would be
something that wouldnt really achieve any significant results for a
number of years. In fact it may never achieve those results because you
might end up in a kind of deflationary spiral. The other way is rather
than pushing prices and wages down in Germany, you push prices and
wages up in the other European countries, so the relative position of
Germany improves even though German prices and wages themselves
are not actually falling. Now to achieve that youd need to have a
Europaen Central Bank that is basically less fearful of inflation than it is
currently simply to avoid that risk of downward spiral for Germany
itself.
CAIRNCROSS:
And if Germany got sucked down
into this deflationary vortex, might it drag other economies in Europe
with it?
KING:
There are clearly some countries
which are very dependent on Germany for their own trading
performance and they would be directly hit by this, so youre talking
about Austria, Belgium, the Netherlands, maybe some of the Central
European countries. And so a problem in Germany does begin to
spread to other parts of the Eurozone potentially quite quickly and I
think what youd end up with is a Germany which is very, very weak,
with other countries perhaps doing a little bit better. But generally
speaking for the Eurozone as a whole, it would be a picture really of I
think quite grim news.
CAIRNCROSS:
Is this really the fate that the
Eurozone faces? After all, America, the worlds most successful
economy, has a single currency and it undoubtedly encourages trade and
investment to flow freely across that giant continent. As Philippe
LeGrain points out, Europe will gain those benefits. But the Euro will
also make it harder in some ways to sustain a European recovery.
Kenneth Rogof.
ROGOFF: The Euro forces one monetary
policy for Europe, so Irelands growing like gangbuster, Spain was
doing well, France was doing better, although today its slowed down,
so when you have a very diverse region its hard to have one currency.
Im not saying that overall its a bad idea and of course its a dynamic

project - theyre trying to have Europe grow, the Euro is a start but at
the moment there have been growing pains and the Euro has been a part
of the problem, not a part of the solution so far.
CAIRNCROSS:
If you imagine that Europes
economies never share taxes on the scale that American states share
taxes and that you never achieve quite the degree of labour mobility
among countries in Europe that you have in the United States, is this
going to make the Euro project a source of continuing tension among
Europes countries, do you think?
ROGOFF:
I personally think yes. I dont
think the Euros going to disappear as a bone of contention for quite
some time because its going to take many years, maybe even
generations in order to integrate Europe the way that I think the
planners of the European project anticipate. And until its substantially
more integrated, the Euro is going to be a bone of contention.
CAIRNCROSS:
If the Euro is to help with Europes
recovery, Europe needs to become more like the United States. Thats
not just a question of acquiring some of Americas habits of flexibility
and hard work, important though that is. In addition, Europe may need
to be far more willing to pool tax revenues. What does David
McWilliams think this means for the Euros durability?
MCWILLIAMS:
I dont think the Euro will blow
apart. I think it will deepen in terms of political union and I think fiscal
federalisms probably on the cards at some stage down the line, but as
long as there are national parliaments that have some serious sense of
sovereignty and some of them still do fiscal federalism will be kept
in the long finger. But, clearly, there is no point in the European Union
if it doesnt become a more cohesive political force.
CAIRNCROSS:
Europe may therefore face
uncomfortable choices. It must decide how to tackle its structural
problems. But managing that decision may well be made harder, not
easier, if the single Euro interest rate suppresses growth in some parts of
the continent. If the Euro is to bring benefits rather than handicaps,
Europe will need to become more federal, and in particular countries
will need to be willing to transfer large sums of money across borders.
But Europes citizens are growing increasingly restive about ever
deeper union, as is clear from the reaction to the continents draft
constitution. Do not be surprised if, for the foreseeable future, the
economies of the Eurozone countries remain firmly stuck in the slow
lane.

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