Can a united Europe keep pace with the United States? The search for an answer to this difficult question is today a concern for all leading politicians of the Old World. Although, it would seem, the integration of the continent is proceeding by leaps and bounds, the single European currency has seriously challenged the dollar in world financial markets, and the European Union is expanding to include Eastern European states. But despite all this, economically the Old World is still far from America. Objective statistical data favor the latter. Last year, the US economy grew by 2.2%, while the economy of a united Europe grew by only 0.8%. On the debit side for Europeans, besides sluggish economic growth, are high unemployment and a lag in several advanced technologies. And there is no shortage of pessimistic forecasts regarding the future. Skeptics even speak of 'eurosclerosis,' using this term to describe the lack of will for reforms. And the need for transformation has long been ripe.
What then is the reason for the stalling of the European 'locomotive'? Experts on both sides of the ocean are unanimous: the Old World suffers from an excessive burden of government spending, its economic systems are over-bureaucratized, and the social sphere costs taxpayers incredibly much. The thesis that old Europe needs radical reform is disputed by no one. Differences exist regarding the pace and depth of changes. And here united Europe is divided: countries where the left is in power (socialists and social democrats) propose moving forward gradually and cautiously, professing the principle of 'do no harm,' whereas right-wing governments call for radical change. For example, in Italy, the government of Prime Minister Silvio Berlusconi recently radically changed the labor law, sharply limiting the rights of trade unions to interfere in the dismissal process. In France, pension reform has begun. True, the government of Prime Minister Raffarin has to overcome fierce resistance from trade unions.
In Germany, the 'left' cabinet of Chancellor Schröder has also set a course for change, but the fate of German reforms is a cause for concern. In the last two years, not a single European Union summit has passed without discussion of the so-called German disease. EU leadership has repeatedly warned Berlin that it is living beyond its means - Germany's budget deficit and high unemployment are having a detrimental effect on the overall economic situation on the continent. Indeed, many in Europe depend on the state of the German economy. Swedish Prime Minister Göran Persson gives the following example: if the German economy grows by one percent, the Swedish economy automatically gains 0.65%. With regard to Denmark, a German percentage point yields 0.8% growth. The recognized 'locomotive' of a united Europe, the world's third economic power (after the United States and Japan), significantly slowed its pace in the early 1990s. Economic growth, which in better times reached 4-5% of GDP, has recently fallen to one percent. And in the first quarter of 2003, Germany even recorded a decline - GDP contracted by 0.2%.
If in 1992 Germany's share of world trade was 12.5%, today this figure has dropped to 9.8%. The share of the shadow economy is growing rapidly - 16.5% of GDP: firms are escaping high taxes by any means into the sphere of unreported cash not controlled by the state. Envelope wages are today not only a specifically domestic phenomenon but also a German one. At the same time, the share of government participation in the German economy is 48%, whereas in the United States this figure is 35%.
Germany's Minister of Economics Wolfgang Clement emphasizes in almost every interview: business is being suffocated not so much by high taxes as by high social payments. Mandatory contributions for pension, medical, and other types of social insurance have reached 42% of earnings in Germany. In all, at present, for every euro that an employed person receives as wages, his employer contributes 81 euro cents in the form of deductions to various funds. In absolute figures, for a person earning 60-70 thousand euros, mandatory deductions amount to 12 thousand or more per year.
This system, which emerged in the late 1960s, when social democrats first came to power in what was then West Germany, led to a sharp rise in the cost of labor. At first, the economy could still cope with such a burden, but pensions and benefits increased, and healthcare services became more expensive, and now industry has become, in essence, a hostage of the excessively bloated social sector. In figures, this looks as follows: in the western regions of Germany, an hour of work in the manufacturing industry costs 26.16 euros, the highest figure among the 20 leading industrialized countries of the world. In the United States, the analogous figure is 22.99 euros, in France 18.93, and in Portugal only 6.75 euros. According to the president of the German Employers' Association, Dieter Hundt, an increase in the cost of labor by just one percent automatically means the elimination of 100,000 jobs.
Business, for which the competitiveness of products on world markets is important, reacts adequately: at the first opportunity it transfers production capacities to neighboring countries with low taxes and cheaper labor - Poland, the Czech Republic, Hungary, Slovakia (especially since very soon these countries will become full members of the EU) - or even cuts jobs and simply closes enterprises. The consequence is high unemployment - it is today in Germany
has come close to 5 million. But unemployment is a burden on federal and local budgets, because people need to be paid benefits. As a result, many municipal budgets are simply empty. An unheard-of case for prosperous Germany: the authorities of a number of cities in the state of North Rhine-Westphalia are forced to close children's playgrounds because there is no money to maintain them.
Faced with such a situation, the current German government is doomed to radical reforms. The transformation program announced by Chancellor Schroeder is designed for the period up to 2010. Its essence can be characterized by one thesis: the state is removing responsibility for many social programs, and now citizens themselves are responsible for their future. If you want to receive a decent pension, apply to private pension funds; the state can only guarantee the basic part. If you want quality medical treatment, buy, along with the compulsory health insurance policy, a voluntary policy as well, naturally at your own expense. To give people more available funds, the government is ready to lower taxes. During the 16 years of Schroeder's predecessor, Helmut Kohl, the maximum tax rate was reduced only once: from 56% to 53%. Soon it will be cut to 42%. The corporate tax will be reduced from 52% to 37%.
But low taxes are not a panacea. For example, Ireland has the lowest corporate tax rate in Europe. Of course, low taxes attract investors, but on the other hand, in Irish hospitals, complex surgeries have to be waited for up to a year and a half - the local healthcare system has no money.
Unemployment benefits are also losing their habitual automatic character for Germans. Today, regional labor offices require the unemployed to first spend their savings and only then apply for state assistance. The threshold here is 10,800 euros: that is exactly how much an unemployed person is entitled to have in their bank account. If a person's savings exceed the norm, then the officials distributing benefits oblige them to live on their accumulated money for a while, and only then apply for help. The 10,800 euro amount includes not only cash, but also stocks, bonds, and voluntary life insurance policies. Next year, at least 460,000 benefit recipients will fall under the new provision.
The history of Germany, France, Sweden, and a number of other countries of old Europe is a history of state subsidies. Today, almost everyone is "on the needle" of state financial support - from loss-making industries like coal mining or agriculture to firms developing high technologies. Rent, building your own house, going to the cinema, buying a bouquet of flowers, and even dog food - subsidies are present everywhere, albeit in different amounts. What is barely noticeable to the average person turns into astronomical sums when it comes to state and local budgets. For example, in Germany, various kinds of tax breaks and subsidies for certain types of goods and services amounted to 57.8 billion euros. The money came from budgets of all kinds, including the EU budget. According to other calculations made by the Kiel Institute for the World Economy, the volume of subsidies in Germany, taking into account areas such as public transport, healthcare, and the system of children's institutions, amounts to 156 billion euros, or 7.5% of GDP. But even this figure seems underestimated to many experts. In particular, it does not take into account such a form of hidden subsidization as providing a number of enterprises with land plots at reduced prices, which is widely practiced by local authorities. If subsidies were eliminated, taxes could be reduced by at least two-thirds. But that is in an ideal perspective. In the meantime, in order to compensate for the losses from tax cuts, the government will have to borrow 29 billion euros in 2004. Interest alone on the new state debt will amount to 600 million euros per year.
Sweden, which was called "socialist", faced similar problems in the early 1990s. In 1996, having become prime minister, Social Democrat Göran Persson began a fundamental reform of the social sector. The government reduced unemployment benefits and social assistance to the poor, and in the pension system placed emphasis on voluntary participation of citizens. Now the Swedish government is trying to convince its citizens to retire not at 65, but at 67. At the same time, Persson sharply cut spending on the administrative apparatus. The result was positive: the unemployment rate fell from 15% to 4%, and direct foreign investment flowed into the country. Nevertheless, Sweden is still at the beginning of the road - the traditions of "socialist" leveling proved to be very strong. The state still spends 5% of its budget on paying for temporary disability of its citizens, which remains one of the highest rates in the world. Swedes still receive 90% of their earnings for temporary disability. To this day, all polls show that when choosing between high taxes or cutting the social sector, 70% of Swedes choose the former.
France is carrying out the largest pension reform since 1945. If today 20% of French people are over 60, then by 2040 such people will make up a third of the population. Therefore, the principle of a "generation contract", where workers finance pensioners, will no longer be able to function under such demographic conditions. The government wants to raise the length of service required for a pension to 42 years. By 2008, public sector employees will be equalized with workers in commercial structures. Today, public sector workers must accumulate 37.5 years of service to receive a pension, while other categories of workers need 40 years. The reform will put everyone in the same position. For now, the official retirement age in France is 60, but many people retire earlier - at 55, having accumulated the required service.
Most likely, Europe will change greatly in the coming years. Whether the new model will be a "third way" or a variant of Anglo-Saxon neoliberalism, no one can predict yet. But one thing is clear - the European version of "market socialism" does not have long to live.