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Home , Dirigisme, Social market economy

Carlo Secchi and Antonio Villafranca N. 138 - MAY 2009 Europe after the Crisis: vs

Abstract The world is in the midst of a North European countries severe economic crisis whose have tried to follow an The socio-economic model of effects are still not totally alternative path which puts continental Europe seems to win over the Anglo-Saxon one during the clear. Its social and political together a large state current crisis (at least according to impact (i.e. changes in labour and free- reforms. the British «The Economist»). markets, ruling classes, etc.) Notwithstanding these differ- But one should also wonder if and to is beginning to be felt, thus rences, the identification of two what extent figures show that this reflecting the lag that usually competing models (Anglo- would-be victory is really taking exists between changes in Saxon and continental) can be place. Is this a completely output and changes in employ- unexpected result? Is it in line with read as a good approximation of ment (and political pre- economic literature or a new the reality, especially for the ferences). discovery in economics? biggest European . The Policy Brief analyses the Despite this lag, a large This simplification can be functioning of these two competing debate on the possible extremely useful not only to models during the crisis and winning economic model in evaluate the best economic highlights their advantages and Europe after the crisis has model to cope with the current shortcomings to cope with the post- been already prompted. economic crisis but also to crisis era. A mid-way solution check its ability to be the between them would represent a To put it simply, two models successful response but only if it preferred option for European have been confronting each could be included in the framework countries (and the European other in Europe so far: the of the European Union. The EU Union as a whole) in the post- liberal Anglo-Saxon model and seems the ideal and inevitable place crisis era. to find a compromise but the the social market of sensitiveness of the future continental Europe. One could competences and powers to be argue that this draws an over- handed over to the EU and the British laissez-faire? simplified picture out of which growing differences in the political No, thanks a much more complex situation space of the enlarged Europe are exists. Indeed, significant challenging this view. Despite the positive heritage differences can be detected Is it possible to find a “second best” of in Great inside these two alternative solution not necessarily including Britain in the last decades, models and each encompasses the entire EU but – at least in the continental Europe has opted short-medium run – a part of it? – at least partially – many for a social peculiar features of the other. based on a “big-size” State. For instance in continental On the one hand, this implies Europe, the State-centred higher taxes, heavy French economic model (the of product and labour markets so-called dirigisme) cannot be but, on the other, also a Carlo Secchi is Vice President of ISPI fully matched with the and Professor of European Economic generous social safety-net. German corporatist system Policy at Bocconi University, Milan. and includes many elements This continental approach has Antonio Villafranca is Senior Research of the typical Anglo-Saxon always been criticised by Fellow of ISPI. model (if anything for the “orthodox” liberals who have French participation in the warned that a minor emphasis European Single Market). In on free-market will lead – addition, the relatively small sooner or later – to less

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productivity of the economic failures; proactive use of fiscal Indeed, data show that all the system, less competitiveness policies; participation in inter- big European countries (with in international markets and, national economic governance; slight differences) have ex- ultimately, less the environmental sustainability perienced a severe economic and . Besides, the of , etc1. downturn in the last quarter of expensive may 2008 leading to a modest These questions are not give rise to a debt-fuelled 0.9% of GDP growth for the particularly original as they economy hampering the future EU as a whole on annual have been characterizing the development of a country and basis. Things will be even capitalist system since its posing problems of inter- worse for the EU’s GDP (-4.0%) origins, but the depth and size generational equity. In few next year. Clearly, no good of the current crisis are words, the sclerotic continental news can be predicted for the placing new emphasis on the economy appeared to be three biggest European best model – in the framework overregulated and too depen- economies in 2009: -3.0% of of a liberal approach – a dent on State interventions. GDP in , -5.4% in European State should opt This was the prevalent , -3.8% in the UK. In for. In particular, the uneven opinion on the continental addition, the severe economic social impact of the crisis in model until a US-generated downturn will be inevitably Europe is stressing the limits financial crisis turned itself mirrored by a dramatic rise in and drawbacks of the Anglo- into a full-blown global crisis job losses. The average Saxon model while shedding which hit Europe last year rate for the light on the benefits of the with severe economic and three countries is expected to continental one. social consequences un- increase by 8.8% in 2009 and evenly spread across its The British «The Economist» 10.2% in 2010, with minor countries. fuelled the debate on the best differences among them. European economic model The unparalleled intensity Nonetheless, the social impact with an unexpected – and reached by the crisis is of this downturn in 2009 (near- partial – mea culpa which challenging this view and stagnation being the best touched upon the very core putting into question the forecast for 2010) and the principles of the newspaper success of models of reasons behind it are since its foundation in 1843: we considerably different in the laissez-faire capitalism and have been experiencing so three countries just because decreasing role of the State in far. of the adopted economic the economy. In particular, the model. In an increasingly uncertain newspaper stressed the fact context verging on real panic, that a «new European In the UK, GDP reduction will some people have also raised pecking order has emerged, be determined – to large doubts about liberalism itself with statist France on top, extent – by a significant fall in and its future sustainability corporatist Germany in the domestic demand (-3.6%). (for instance in environmental middle and poor old liberal Therefore, the limits of a small terms). As a result, the crisis Britain floored»2. safety-net leading to a sharp risks to engulf not only the decrease of private consump- international economy but tions in times of crisis (-3.4% also the liberal approach in 2009 and -1.5% in 2010) itself, which is showing are crystal clear. In this 1 unexpected drawbacks in a These issues are extensively context, it comes as no truly globalised economy. But analysed in the volume Liberalism surprise that public con- in Crisis? The European Economic this criticism seems to be too Governance in the Age of sumptions will sharply rise in extreme. Rather, the crisis is Turbulence, in C. SECCHI - A. the next two years (3.6% and bringing back to the surface VILLAFRANCA (eds.), to be 2.9%, respectively, in 2009 recurring, if not old, questions published by Edward Elgar in July and 2010) as part of the huge 2009. on the liberal economic 2 fiscal stimulus measures system: the presence of the See Europe’s new pecking order, announced by the UK in «The Economist», May 9-15, State in the economy; market 2009. government. These measures

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are estimated to account for a The differences between crisis is contributing to em- quarter of the forecast Germany and France stem phasize the positive aspects of increase in public deficit ratio from the main source of the the continental model. Not- (from 7.2% in 2009 to the GDP fall: foreign balance withstanding the uneven impressive 13% in 2010). (60%) for the export-oriented social impact, the presence of Obviously, this needs to be Germany and stockbuilding a symmetric external shock read as the attempt of the (40%) for France (the foreign (as the crisis is hitting all the British government to balance contributing for 33%) European countries) allowed counterbalance its modest in 20093. the Council to ease the welfare state (and the ensuing Maastricht criteria with no Therefore, the continental income squeeze for its relevant complaint by member model seems to prevail in the citizens during the crisis) with States. But in case of an wake of a crisis as it can rely new measures of public asymmetric shock (hitting a on existing safety-nets that spending. This will also lead State or group of States) make the burden less painful to an unprecedented increase governments would be for citizens. in the UK debt ratio from 66% required to get a special in 2008 to about 79% by On the political side, one exemption from the EU (also 2010. could easily predict that under the revised SGP) to people will clearly perceive overshoot the 3% deficit The situation is rather different the potential superiority (and criterion (and, in any case, in continental Europe. In this advantages) of this model and respecting precise and narrow case, a strong welfare state tend to favour and vote for limits)4. This would inevitably already exists and automatic parties supporting it. As a reduce the available options stabilisers – including unemploy- result, the policy recom- of a single government and, ment benefits (such as mendation for the UK would ultimately, limit the benefits of redundancy funds, mobility not be simply to increase the the continental model since allowances, contracts, size of the State by spending automatic stabilisers would etc.) – are working at full more but to improve the not be allowed to work fully speed, even if mechanisms, quality of the State intervention and no transfer from amounts and timing differ for by spending better through European funds could be each country. As a result, the constant and efficient foreseen. trend of private consumptions investments (as the French is not expected to be negative In sum, the debate over the health system demonstrates). in France (+0.2% in 2009 and best model of economic +0.3% in 2010), while a But in doing so, we are not development is anything but modest reduction is foreseen certainly making a new new. Also today’s crisis is in Germany (-0.5% in 2009 discovery in economics. It has stressing benefits and and -0.7% in 2010). This always been clear that the implies a minor need for Anglo-Saxon model wins in increased public consumption times of growth but it makes 4 In 2005 the Council has redefined and fiscal stimulus (if the social impact of the crisis the exception foreseen in TEC, art. compared with the UK) with harder. Conversely, the 104, par. 2a: any (temporary) excess over the reference lower pressures on public continental model hampers which results from a period of accounts. The French budget growth potentials but makes negative growth rate (thus no deficit is projected to rise to the crisis less painful and its longer a recession of at least 2 per 6.5% in 2009 and to 7% in exit smoother. cent, or 0.75 per cent), or even 2010, while Germany will from the accumulated loss of One should also note that the reach 4% and 6%, output during a protracted period of systemic nature of the current very low growth relative to potential respectively, in the next two growth, should be considered as years. These figures are exceptional, and therefore not definitely above the limits of 3 Calculations by the authors on sanctioned. See C. ALTOMONTE the Stability and Growth Pact data provided by the Economic et al., EU Fiscal Policy in the Age (SGP) but they look low if forecasts - Spring 2009, European of Turbulence: will the Lisbon compared with the skyrocketed Commission, Directorate-General Strategy Survive It?, in C. SECCHI for Economic and Financial Affairs, - A. VILLAFRANCA (eds.), cit., p. British data. March 2009. 134.

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drawbacks in line with the inevitable (and, in many re- to some calculations6, the economic literature. There- spects, ideal) EU framework. huge wave of government fore, the issue to be tackled is Indeed, countries adopting an bonds at world level to repay not the validity of the Anglo- Anglo-Saxon approach are the increased national debts Saxon model and its potential keen to reconsider some may range from 15 to 33 substitution with the con- features of their economic trillion dollars (depending on tinental one but the ability to model in light of its drawbacks the future developments of limit its overindulgence in in the wake of the crisis. But the crisis). It is obviously an some fields (i.e. financial they also complain about a impressive amount (about 1/3 markets) and rigidities in others growing resistance of con- of world GDP) that would (i.e. welfare state and income tinental Europe to “free-market inevitably imply competitiveness distribution) by introducing some oriented” rules (especially on on interests rates, problems in features of the other model, and state aids and completion of redeeming bonds at maturity viceversa. the Single Market). (not only in small countries) and future . Clearly, The State is obviously the Similarly, time would be ripe this situation is a big issue for actor which is supposed to for the latter to adopt some the entire but draw the line between the two features of the Anglo-Saxon its consequences (especially competing models and take model. Continental Europe in terms of ) may economic and political decisions can overcome its traditional be even worse for the accordingly. But «The Eco- social resistance to changes European Union and, parti- nomist» fails to consider by trading the huge public cularly, for the Eurozone. The another powerful tool in the spending in times of crisis limited scope of common hands of the States: the (including automatic stabilisers measures in the Eurozone to European Union. and fiscal stimulus plans) with face this challenge is striking structural reforms which and potentially very dangerous people usually tend to reject. for the stability of the Euro. Adding Europe But it has also some to the argument complaints to present: the In sum, the reciprocal unavailability of countries complaints and requests In a recent article5, Mario supporting the Anglo-Saxon could be matched in a Monti entered the debate over model to further increase the European Pact searching for the two European economic coordination of fiscal policies. a mid-way solution between models by pointing out that This puts heavy constraints the two competing models the crisis can be seen as an on the continental model since and including viable way-outs unrepeatable occasion for the crises (and the inevitable to the fiscal competition and EU. Each European govern- collapse in tax revenues) reduce overabundant issue of govern- ment may keep its preferred its ability to mitigate the ment bonds. As a result, model but its shortcomings downturn (especially in case of European governments could could be toned down by asymmetric external shocks). take advantage of the positive searching a mid-point conditions (in terms of In other words, the Anglo- between the two competing negotiation) created by the Saxon countries fear the models through a new crisis and pave the way to a return of the spectre of European Pact. further step of the European economic , while integration process. In this regard, there is room the others highlight the for a negotiation in Europe constraints of a limited This would certainly be a because the supporters of economic coordination leading desirable outcome. A sort of each model have requests to to a lose-lose situation “first best solution” in line with present to the others which aggravated by competitiveness the traditional integration can be inscribed in the on fiscal policies and government bonds. According 6 See K. ROGOFF - C. 5 See M. MONTI, Un patto (vero) REINHART, The Aftermath of per l’Europa, in «Corriere della Financial Crises, NBER Working Sera», May 10, 2009. Paper n. 14656, January 2009.

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process of the EU. But A clear example of these be turned upside down. Three notwithstanding these external difficulties is represented by new steps of the EU positive conditions, one could the Lisbon Treaty. The integration process should be arguably note that it is negotiation process took followed. First, start an realistically difficult to reach a almost 10 years (including the informal cooperation in a compromise in today’s enlarged unfortunate European Con- “small club” (including a better Europe for at least two negative stitution). When hopefully understanding of the impli- internal conditions: number of Ireland ratifies the Treaty, it cations for a multi-level member countries and type of will be born old for it is was decision-making context) by competencies to be given to not drafted to face new sharing new competencies on the European level. challenges (such as the specific issues. Second, current crisis). highlight the positive pay-offs In order to play a relevant role of the new cooperation and in the post-crisis international All in all, a “second best involve other member States arena, the EU is requested to solution” should be found to through a “one-by-one- take decisive steps not only overcome the limits of these approach”. Third, include the towards a stricter coordination negative internal conditions new competences and powers in the economic field (broad political space and – whose benefits have been (including finance, fiscal sensitivities of the new already tested by many States policy, welfare state), but also competences). Therefore, the – in a revised Treaty. towards a stronger external practicability of another path representation (involving foreign should be taken into Should these steps be taken and defence policies, energy consideration: a multi-speed fully, probably ten years would and environmental policies, Europe better exploiting the not be required to sign a new etc.). Evidently, a new opportunities of the enhanced Treaty. European Pact should also cooperation foreseen by the include agreements on these Treaties7. This option is not fields. intended to be discriminatory And the winner is… since each country would be This approach has the free to decide whether and It is very unlikely that a one- advantage of being non- when to join the “smaller fit-all model will emerge as a ideological and driven by clubs”. But it would allow the final solution for all the concrete needs. Unfortunately, it other countries – especially European countries in the would touch a raw nerve with those with relevant common post-crisis era. Both the Anglo- many European countries interests (i.e. the Eurozone for Saxon and the continental because it would impact on the fiscal and financial model show advantages in the very existence of the coordination) – to find a different periods. The latter is States as independent entities compromise by reducing the expected to better deliver in and would push for a “quasi- political space of the times of crisis, while the other federal” system. bargaining. Besides, this tends to prevail in times of In addition, the last option would be successful growth. enlargement of the EU has only if it started a process This article suggests that the enormously widened the leading to the participation of winner of the context between differences in the political all the member countries in the two competing model is a space of the European Union the medium run. By following mid-way approach. It allows and has made much more this approach, the traditional each country to keep its difficult to find a mid-way European integration process preferred model but, at the solution in the negotiation (first sign a Treaty and then same time, aims at improving process. In a nutshell, the use the competences) would it through a bargaining taking “bargaining set” (the cluster of place in the ideal and policy solutions that represent 7 See Articles 10, 280 (A to I) in the inevitable context of the Paretian improvements for Treaty of Lisbon emending the European Union. Therefore, everybody) seems to be Treaty on European Union and the this non-ideological approach almost empty in the enlarged Treaty establishing the European would lead to a new European Europe. Community.

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Pact allowing for a further step in the European La ricerca ISPI analizza le integration process. dinamiche politiche, Unfortunately, the broad strategiche ed economiche del political space of the enlarged sistema internazionale con il Europe and the sensitiveness duplice obiettivo di informare e of the new competences to be di orientare le scelte di policy. handed over to the EU risk to make this approach unrealistic. I risultati della ricerca vengono A second best solution may be divulgati attraverso offered by a non-discriminatory pubblicazioni ed eventi, multi-speed Europe in which focalizzati su tematiche di States will decide whether particolare interesse per l’Italia and when to strengthen their e le sue relazioni internazionali cooperation. e articolati in:

9 Programma Africa

9 Programma Caucaso e Asia Centrale 9 Programma Europa 9 Programma Mediterraneo e Medio Oriente 9 Programma Russia e Vicini Orientali 9 Programma Sicurezza e Studi Strategici

9 Progetto Argentina 9 Progetto Asia Meridionale 9 Progetto Diritti Umani 9 Progetto Disarmo 9 Progetto Emergenze e Affari Umanitari 9 Progetto Internazionaliz- zazione della Pubblica Amministrazione

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