country line at the end of the piece.(of course, the little blurb about the Phillips thing not being proven in 30 years gave me pause).
IMO, the ONE country, or even one continent, is the biggest problem(just like with real socialism), which is why I see the US as the common enemy of practically everyone, somewhere down the line, if the Europeans are serious, and the left-ward political victories hold.
Please tear into these developments and counter-arguements, so that I'll feel secure in presenting the European model as "the alternative vision" to my fellow rubes.
Have fun-Paula
>COVER STORY
>
> WRONG SOLUTION FOR LONG-TERM JOB WOES
>
> Warwick Lightfoot and Eric Culp
>- Frankfurt
> Until last week there was consensus on how
>to reduce unemployment in the
> European Union. The European Central Bank,
>the Organisation for Economic
> Co-operation and Development, the
>International Monetary Fund and the
> Bundesbank all agreed on the need for
>structural reform of the labour market in
> order to price people into jobs. It would
>mean the reduction of non-wage labour
> costs, the cutting of the relative value of
>benefits and general deregulation. All EU
> governments grimaced and bore it but only
just.
>
> Freed-up employment markets were to be
>supported by sound money and tight
> government budgets. Countries queuing up to
>join European economic and
> monetary union (EMU) were paring deficits
>and controlling public spending more
> carefully.
>
> That is now history. At the EU leaders'
>summit at Prtschach in Austria over the
> weekend of 24-25 October, spurred on by
>Germany's new left-wing leadership, the
> EU espoused an agenda of Keynesian
>economics and job-creation programmes.
> Any pretence at sticking to the previous
>policy was abandoned. Now Europe's
> hard-pressed jobless will have to swallow
>another dose of the medicine that has
> caused structural unemployment to ratchet
>up across continental Europe since the
> 1960s.
>
> Again, politicians think they can
>second-guess markets. Instead of focusing on
> lowering corporate tax rates and
>deregulation to attract investment, Europe's main
> policy-makers are bent on loosening
>monetary and fiscal policy, while interfering
> with labour markets.
>
> Lionel Jospin, the French prime minister,
>proposes a pan-European public-works
> scheme focusing on infrastructure
>investment; just the sort of plan that has failed
> before. In Germany the new hobby horse of
>the Social Democrats and Greens is the
> Alliance for Jobs. The priority of IG
>Metall, Germany's other big unions and Oskar
> Lafontaine, the country's influential new
>finance minister, is a jobs programme
> resurrected after being cut down by the
>former chancellor, Helmut Kohl. It has
> ill-defined targets, including job training
>for "all young people" and a reduction of
> overtime in the hope of creating jobs. The
>new government intends to pursue a
> dirigiste agenda, fining firms that refuse
>to sign up to training programmes for
> young people and insisting on part-time
>work being offered to older employees
> instead of the sack.
>
> Lafontaine's simplistic "lump of labour"
>theory, assuming a constant quantity of
> work exists to be divided up between the
>workforce, is similar to the approach of
> the French government, which is trying to
>cut its 12.4 per cent unemployment rate
> through a reduced working week. Martine
>Aubry, the French minister for
> employment and solidarity, has embarked on
>a programme to cut jobless totals by
> between 500,000 and 700,000 through the
>introduction of the
>
> 35-hour week. Economists predict that no
>more than 100,000 jobs will be created
> and that the long-term negative effect on
>the rigidity of the labour market will far
> outweigh the benefits.
>
> Why will these often complex schemes fail?
>Look at the German part-time
> employment scheme for the explanations.
>German companies now employ
> workers, often young, who make DM620 ($376)
>a month or less because they fall
> below the threshold where employers pay
>social security and health insurance
> costs.
>
> The government wants these jobs to be part
>of the social insurance scheme, which
> makes them less attractive because
>employment costs soar. The government claims
> that it has the answer: ease the pressure
>on the bottom line with subsidies from
> forthcoming ecotaxes. But that still hits
>the company's bottom line.
>
> In Britain, while "lump of labour" theories
>are not endorsed, job creation through
> special schemes is a central tenet of
>Labour Party employment policy. The
> governments New Deal, a 3.5bn ($5.6bn)
>scheme with the target of putting
> 118,000 young people into work by offering
>subsidies to employers, was launched
> earlier this year. Almost immediately the
>scheme ran into problems, with critics
> saying it was failing to meet targets.
>
> Those EU countries which have succeeded in
>slashing their jobless rates are the
> smaller economies that use
>welfare-to-work-type schemes. Ireland, which has seen
> its unemployment rate fall from 15.6 per
>cent in 1993 to 10.1 per cent last year, has
> a Back to Work Allowance Scheme; Denmark,
>which has a Youth Employment
> Policies scheme, has seen unemployment fall
>from 10.1 to 5.5 per cent over the
> same period; Spain has a Social Partners'
>Agreement and a rate of joblessness that
> has fallen by 1.6 per cent in a year.
>
> The fall in unemployment, however, is
>probably accounted for as much by rapid
> economic growth as intervention. The Irish
>economy has grown by an average of
> six per cent annually over the past decade,
>largely due to its successful drive to
> attract investment by offering low
>corporate tax rates. This approach is not favoured
> by the European Commission, which regards
>Irelands low tax rates as a form of
> unfair competition.
>
> The United States, a job-creation success
>story, adopts a contrasting approach.
> Between 1991 and 1995 90 per cent of the
>six million jobs created in America came
> from start-up companies and small and
>medium enterprises (SMEs), an approach
> which could work in Europe too.
>
> The EU has launched a co-ordinated
>job-creation plan which aims to cut through
> red tape and target funding at SMEs. But
>while those at the sharp end welcome the
> increased profile for entrepreneurs, they
>question whether the Commission's plans
> have translated into concrete results. 3i,
>Europes largest venture-capital company,
> claims to have funded companies that have
>employed more than a million people to
> date but claims start-ups and investors
>still suffer from an array of legal barriers
> such as double taxation in some countries.
>To bring these down, the industry says,
> action has to be taken at a national rather
>than European level. More than Ecu20bn
> ($24bn) was ploughed into starting up and
>developing new companies in the EU
> last year but the figure was dwarfed by
>investment in America. Venture-capital
> investment in the EU represents only about
>0.1 per cent of GDP, compared with
> one per cent in the US. EU figures are also
>skewed by the maturity of the British
> market, which accounts for almost half of
>total EU investment.
>
> The global financial crisis is threatening
>the impact of the EU's efforts. Venture
> capitalists are looking for high returns on
>their investments typically 20 per cent a
> year or more which are usually realised
>from floating the start-ups on the
> stockmarket. While the growth of secondary
>markets such as the Neur Markt in
> Frankfurt has produced a useful outlet for
>investors, the slowdown in initial public
> offerings has temporarily closed the exit
>strategy for many investors. This is likely
> to delay further the entry of mainstream
>investors and pension funds to the
> job-friendly venture-capital market.
>
> The evidence that job creation schemes
>usually fail is compelling. So too is the
> evidence that the EU's return to Keynesian
>economics will fail. For most of the
> postwar period unemployment has been
>regarded as a macroeconomic issue. The
> key to jobs was to ensure that an economy
>has sufficient aggregate monetary
> demand to employ fully all its factors of
>production, both labour and capital. If
> there was insufficient demand the
>government should step in to ensure that the
> deficiency was remedied.
>
> Fiscal as well as monetary policy had a
>crucial role to play. An unemployment
> problem could be avoided by loose monetary
>policies and cuts in short-term interest
> rates and by expansionary fiscal policies
>and an increasing budget deficit. Budget
> deficits stimulated demand and had few
>malign consequences. There may be debt
> service charges but these were of little
>consequence because they represented
> merely a transfer from one set of economic
>agents taxpayers to another investors. In
> so far as there were concerns about the
>implications such transfers might have on
> the distribution of income, they could be
>addressed through a progressive income
> tax system which took notice of unearned
>income and capital.
>
> The Keynesian, or, as Joan Robinson, John
>Maynard Keynes's distinguished
> collaborator, called it, the bastard
>Keynesian, approach to creating jobs and holding
> down unemployment was based on the
>assumption that changes in monetary
> balances would produce changes in
>employment and output. In practice, while
> monetary and fiscal growth could in the
>short term lead to higher output and more
> jobs, in the long term they could not.
>
> In the medium term, output and employment
>are governed by real influences such
> as productivity and the level of wages and
>non-wage costs arising out of social
> security contributions and employment
>protection legislation. Increasingly,
> macroeconomic growth was accompanied by
>progressively rising levels of
> structural unemployment across Europe
>because the costs of employment went up.
> Higher wages and rising regulatory burdens
>put up the cost of hiring labour. Where
> the cost of labour is permanently higher
>than the marginal productivity of a
> significant proportion of the population of
>working age, the consequence is
> unemployment. Any attempt to get
>unemployment down by boosting demand
> results in a higher price level as wages
>rise in response to higher demand.
> Governments across Europe are now preparing
>to repeat these failures of the 1960s
> and 1970s.
>
> High levels of macroeconomic demand will
>not guarantee full employment if labour
> market institutions set employment costs
>above peoples productivity. Moreover, the
> inflation that results from such policies
>transforms the role of government deficits.
> Far from being benign transfer payments
>that are relatively easy to finance, they
> become a problem. Investors notice both
>taxation and inflation and refuse to buy
> government bonds without extracting higher
>real interest rates to compensate for the
> risks involved. Higher interest rates mean
>that government borrowing crowds out
> private-sector investment and higher debt
>service charges raise long-term public
> expenditure, increasing the tax burden.
>
> In the 1960s it was assumed that there was
>a trade-off between unemployment and
> inflation and that governments could choose
>to trade a given level of inflation for a
> chosen level of unemployment. A New Zealand
>economist, AW Phillips, in 1958
> gave this relationship its best- known
>formulation, the Phillips Curve. Over the past
> 30 years no such trade-off has been proved
>to exist.
>
> By the end of the 1970s most advanced
>industrial countries had abandoned both full
> employment as a policy objective and
>Keynesian demand-management policy as the
> tool of delivering it because of the
>inflationary problems it created. Since then most
> macroeconomic policy effort has been put
>into re-establishing price stability and
> using micro-economic measures to improve
>the supply performance of economies.
>
> The most dramatic ditching of Keynes was in
>Britain. First, during the International
> Monetary Fund crisis of 1976, the Labour
>prime minister, Jim Callaghan, told his
> party conference that the country used to
>think it could spend its way out of
> recession but now knew that it only creates
>inflation. Any lingering neo-Keynesian
> heresy was expurgated from British public
>policy during Margaret Thatcher's 11
> years in power.
>
> The last gasp of Keynesian policy on the
>grand scale was in France between 1981
> and 1983. Francois Mitterrand's intention
>was to speed recovery in a sluggish
> domestic economy and insulate France from
>the world recession. Initially the
> government gave a strong boost to domestic
>private consumption. It legislated to
> reduce working hours, increase paid holiday
>time and the minimum wage and to
> raise social security benefits.
>
> Public finances swung from a surplus of 0.3
>per cent of GDP in 1980 to a deficit of
> 2.9 per cent in 1982. Monetary policy was
>also loosened. Domestic credit increased
> by 16 per cent in both 1981 and 1982. The
>result was a relative inflation problem, a
> balance of payments crisis and devaluation.
>
> What happened to unemployment? The rate
>rose from 6.3 per cent in 1980 to 8.6
> per cent in 1982. In 1983, after several
>downward currency realignments in the
> exchange rate mechanism,
>Keynesianism-in-one-country was abandoned for an
> austerity programme. Higher taxes and cuts
>in government spending were
> announced equivalent to two per cent GDP.
>France returned to the orthodox fold
> and the successful franc fort policy was
born.
>
> Instead of learning that lesson, the EU now
>seems set to follow the example of
> France's last great error.
>
>
>
>-----
>Sven Robert Larsson
>Address: Roskilde University
> Department of Social Sciences, Bldg 22.1
> Pb 260
> DK-4000 Roskilde, Denmark
>Telephone: +45 4674 2910
>
>
>