Carlo Secchi and Antonio Villafranca N. 138 - MAY 2009 Europe after the Crisis: Dirigisme vs Liberalism 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 welfare state current crisis (at least according to impact (i.e. changes in labour and free-market 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 economies. 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 economy 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 Thatcherism 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 market economy 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 regulation 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 2 ISPI - Policy Brief 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 economic growth the environmental sustainability perienced a severe economic and employment. Besides, the of capitalism, etc1. downturn in the last quarter of expensive welfare state 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 France, -5.4% in European State should opt This was the prevalent Germany, -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 unemployment 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: economic development 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 ISPI - Policy Brief 3 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.