Hoover Daily Report

The European Revolt Against Reality

via Wall Street Journal
Thursday, May 10, 2012

Forget for a moment François Hollande, who sent Nicolas Sarkozy packing on Sunday. Set aside, too, the triumph of the radical left and the neo-Nazis in Greece who together captured one-third of the vote.

Look instead at Europe's real mess: the sickly state of the EU-15, the core of the Union, most of which today uses the euro: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Luxembourg, Portugal, Spain, Sweden and the United Kingdom.

In the 1970s, their average growth clocked in at 3.2%, in the 80s at 2.5%, in the '90s at 2.2%—and in the '00s, 1.2%. Yes, the 2008 crash was bad for everybody, but Europe is still heading down. This year, growth is likely to end up at an anemic 1%.

Europe has been falling back for decades, and this is the source of all its trouble. Yesterday's economic wonderland, with its ever growing list of benefits and privileges, is losing it. While the U.S. share of global GDP has held steady at around 26% for two generations, the EU-15's share has dropped to 26% from almost 35% in 1970.

Back to Dark Sunday's elections. You might have thought that the French and Greek parties would have hyped themselves as saviors: Anoint us, and we shall lead ye from debt and decline. Wrong. The winners were those who yelled: "Stop the world, we want to get off!" Cursed be the market, blessed be the all-providing state.

This is the message of those 52% who voted for Mr. Hollande in France. In the campaign, he had targeted "financial markets" as the enemy of the French social model, while offering to tax, protect and provide. No talk of the real reason those evil markets and their ratings agencies downgraded France: The national debt has surged to 90% of GDP, from 35% in 1990.

In Greece, the big winner was the Coalition of the Radical Left, or Syriza, which won nearly 17% of votes—almost four times its take in the 2009 elections. Together, the far left and far right have overwhelmed a government that had pledged to slash spending and cut into the bloated state sector. The pro-reform coalition of the moderate right and left has lost its parliamentary majority and may have to go into new elections in a few weeks. Hence, the "Nightmare of Anarchy," as Greek daily Ta Nea headlined its post-mortem on Tuesday.

Meanwhile, unemployment now averages close to 11% in the euro zone. The odd-man-out in this drama of decay is Germany. Joblessness, which stood at five million only a few years ago, has dropped to less than three million. The public budget deficit is heading toward zero. Why this Teutonic miracle? Germany had cleaned house before the crash struck.

Go back nine years, when Social Democratic Chancellor Gerhard Schröder launched his "Agenda 2010." He declared to the Bundestag: "We shall reduce social benefits, promote individual responsibility and demand more from each and all." True to his word, he loosened up labor markets, cut payroll, personal and corporate taxes, and enacted a "workfare" program that egged the unemployed off the dole. Angela Merkel is now reaping what her predecessor sowed—efforts for which he lost his job.

Today, elsewhere in Europe, leaders' attempts to change their economies' bad old ways have not met with political boons. Since 2008, a dozen euro-zone governments have fallen like the House of Lehman. Yet what is the alternative but to pursue the reforms? Where would the cash come from, when Germany is the last man standing among the large countries? Perhaps Europe is still rich enough to keep Greece on the dole indefinitely. But it does not have the resources to put France, Italy or Spain on euro-welfare.

Which brings us back to the new French president, who in 1981 was a young Elysée staffer when François Mitterrand enacted the very program Mr. Hollande has been hawking: buy now, pay later, tax forever. Two years later Mitterrand's Socialist Party was drubbed in local elections, Saul turned into Paul and Mitterrand started preaching discipline and markets. This time, the Socialist president won't even get his first 100 days.

For one thing, Mrs. Merkel will not relent. She will not allow Mr. Hollande to loosen the debt brakes enshrined in the EU's fiscal pact by inserting the kind of "growth" Mr. Hollande wants—a euphemism for spending Europe into insolvency. She knows that the euro, indeed the EU, is at stake—and that neither will be saved by Keynes-to-the-max.

"Growth" à la Mr. Hollande will not heal but feed Europe's disease. The country needs labor liberalizations, with youth unemployment topping 22%. The French job market tells a simple, sordid tale: high wages and lifetime job security are great for insiders and deadly for newcomers.

If core Europe does not regain competitiveness now, it will sink and fall apart. So what will it be: "Mitterrand for All" or "Schröder Does Europe"?

Watch the new French president in the coming weeks. My bet is that he will take a page out of "Casablanca" and sputter: "I am shocked, shocked to find out about the mess Mr. Sarkozy has left." Then he will blame Mrs. Merkel's brutishness for forcing him to deliver a "blood, toil, tears and sweat" speech in which he breaks all his campaign promises.

And if he doesn't yield to reality? The markets will speak.

Mr. Joffe is editor of Die Zeit in Hamburg, a senior fellow of the Freeman-Spogli Institute for International Studies and a fellow at the Hoover Institution, both at Stanford University in California.