Europe between dirigism and liberalism

8/14/2019 Europe between dirigism and liberalism

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The world is in the midst of asevere economic crisis whoseeffects are still not totallyclear. Its social and political

impact (i.e. changes in labourmarkets, ruling classes, etc.)is beginning to be felt, thusreflecting the lag that usuallyexists between changes inoutput and changes in employ-ment (and political pre-ferences).

Despite this lag, a largedebate on the possiblewinning economic model inEurope after the crisis has

been already prompted.

To put it simply, two modelshave been confronting eachother in Europe so far: theliberal Anglo-Saxon model andthe social market economy ofcontinental Europe. One couldargue that this draws an over-simplified picture out of whicha much more complex situationexists. Indeed, significantdifferences can be detectedinside these two alternativemodels and each encompasses at least partially manypeculiar features of the other.For instance in continentalEurope, the State-centredFrench economic model (theso-called dirigisme) cannot befully matched with theGerman corporatist systemand includes many elementsof the typical Anglo-Saxon

model (if anything for theFrench participation in theEuropean Single Market). Inaddition, the relatively small

North European countrieshave tried to follow analternative path which putstogether a large welfare state

and free-market reforms.

Notwithstanding these differ-rences, the identification of twocompeting models (Anglo-Saxon and continental) can beread as a good approximation ofthe reality, especially for thebiggest European economies.This simplification can beextremely useful not only toevaluate the best economicmodel to cope with the current

economic crisis but also tocheck its ability to be thepreferred option for Europeancountries (and the EuropeanUnion as a whole) in the post-crisis era.

British laissez-faire?No, thanks

Despite the positive heritage

of Thatcherism in GreatBritain in the last decades,continental Europe has optedfor a social market economybased on a big-size State.On the one hand, this implieshigher taxes, heavy regulationof product and labour marketsbut, on the other, also agenerous social safety-net.

This continental approach hasalways been criticised by

orthodox liberals who havewarned that a minor emphasison free-market will lead sooner or later to less

N. 138 - MAY 2009

Carlo Secchi and Antonio Villafranca

Europe after the Crisis: Dirigismevs Liberalism

Abstract

The socio-economic model ofcontinental Europe seems to winover the Anglo-Saxon one during thecurrent crisis (at least according to

the British The Economist).

But one should also wonder if and towhat extent figures show that thiswould-be victory is really takingplace. Is this a completelyunexpected result? Is it in line witheconomic literature or a newdiscovery in economics?

The Policy Brief analyses thefunctioning of these two competingmodels during the crisis andhighlights their advantages andshortcomings to cope with the post-

crisis era. A mid-way solutionbetween them would represent asuccessful response but only if itcould be included in the frameworkof the European Union. The EUseems the ideal and inevitable placeto find a compromise but thesensitiveness of the futurecompetences and powers to behanded over to the EU and thegrowing differences in the politicalspace of the enlarged Europe arechallenging this view.

Is it possible to find a second best

solution not necessarily includingthe entire EU but at least in theshort-medium run a part of it?

Carlo Secchi is Vice President of ISPIand Professor of European EconomicPolicy at Bocconi University, Milan.

Antonio Villafranca is Senior ResearchFellow of ISPI.


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productivity of the economicsystem, less competitivenessin international markets and,ultimately, less economic growthand employment. Besides, theexpensive welfare state maygive rise to a debt-fuelledeconomy hampering the futuredevelopment of a country andposing problems of inter-generational equity. In fewwords, the sclerotic continentaleconomy appeared to beoverregulated and too depen-

dent on State interventions.This was the prevalentopinion on the continentalmodel until a US-generatedfinancial crisis turned itselfinto a full-blown global crisiswhich hit Europe last yearwith severe economic andsocial consequences un-evenly spread across itscountries.

The unparalleled intensity

reached by the crisis ischallenging this view andputting into question thesuccess of models ofeconomic development wehave been experiencing sofar.

In an increasingly uncertaincontext verging on real panic,some people have also raiseddoubts about liberalism itselfand its future sustainability(for instance in environmentalterms). As a result, the crisisrisks to engulf not only theinternational economy butalso the liberal approachitself, which is showingunexpected drawbacks in atruly globalised economy. Butthis criticism seems to be tooextreme. Rather, the crisis isbringing back to the surfacerecurring, if not old, questions

on the liberal economicsystem: the presence of theState in the economy; market

failures; proactive use of fiscalpolicies; participation in inter-national economic governance;the environmental sustainabilityof capitalism, etc1.

These questions are notparticularly original as theyhave been characterizing thecapitalist system since itsorigins, but the depth and sizeof the current crisis areplacing new emphasis on thebest model in the framework

of a liberal approach aEuropean State should optfor. In particular, the unevensocial impact of the crisis inEurope is stressing the limitsand drawbacks of the Anglo-Saxon model while sheddinglight on the benefits of thecontinental one.

The British The Economistfuelled the debate on the bestEuropean economic model

with an unexpected andpartial mea culpa whichtouched upon the very coreprinciples of the newspapersince its foundation in 1843:laissez-faire capitalism anddecreasing role of the State inthe economy. In particular, thenewspaper stressed the factthat a new Europeanpecking order has emerged,with statist France on top,corporatist Germany in themiddle and poor old liberalBritain floored2.

1 These issues are extensively

analysed in the volume Liberalismin Crisis? The European EconomicGovernance in the Age ofTurbulence, in C. SECCHI - A.VILLAFRANCA (eds.), to bepublished by Edward Elgar in July

2009.2See Europes new pecking order,

in The Economist, May 9-15,

2009.

Indeed, data show that all thebig European countries (withslight differences) have ex-perienced a severe economicdownturn in the last quarter of2008 leading to a modest0.9% of GDP growth for theEU as a whole on annualbasis. Things will be evenworse for the EUs GDP (-4.0%)next year. Clearly, no goodnews can be predicted for thethree biggest Europeaneconomies in 2009: -3.0% of

GDP in France, -5.4% inGermany, -3.8% in the UK. Inaddition, the severe economicdownturn will be inevitablymirrored by a dramatic rise in job losses. The averageunemployment rate for thethree countries is expected toincrease by 8.8% in 2009 and10.2% in 2010, with minordifferences among them.

Nonetheless, the social impact

of this downturn in 2009 (near-stagnation being the bestforecast for 2010) and thereasons behind it areconsiderably different in thethree countries just becauseof the adopted economicmodel.

In the UK, GDP reduction willbe determined to largeextent by a significant fall indomestic demand (-3.6%).Therefore, the limits of a smallsafety-net leading to a sharpdecrease of private consump-tions in times of crisis (-3.4%in 2009 and -1.5% in 2010)are crystal clear. In thiscontext, it comes as nosurprise that public con-sumptions will sharply rise inthe next two years (3.6% and2.9%, respectively, in 2009and 2010) as part of the huge

fiscal stimulus measuresannounced by the UKgovernment. These measures


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are estimated to account for aquarter of the forecastincrease in public deficit ratio(from 7.2% in 2009 to theimpressive 13% in 2010).Obviously, this needs to beread as the attempt of theBritish government tocounterbalance its modestwelfare state (and the ensuingincome squeeze for itscitizens during the crisis) withnew measures of publicspending. This will also lead

to an unprecedented increasein the UK debt ratio from 66%in 2008 to about 79% by2010.

The situation is rather differentin continental Europe. In thiscase, a strong welfare statealready exists and automaticstabilisers including unemploy-ment benefits (such asredundancy funds, mobilityallowances, solidarity contracts,etc.) are working at fullspeed, even if mechanisms,amounts and timing differ foreach country. As a result, thetrend of private consumptionsis not expected to be negativein France (+0.2% in 2009 and+0.3% in 2010), while amodest reduction is foreseenin Germany (-0.5% in 2009and -0.7% in 2010). Thisimplies a minor need for

increased public consumptionand fiscal stimulus (ifcompared with the UK) withlower pressures on publicaccounts. The French budgetdeficit is projected to rise to6.5% in 2009 and to 7% in2010, while Germany willreach 4% and 6%,respectively, in the next twoyears. These figures aredefinitely above the limits of

the Stability and Growth Pact(SGP) but they look low ifcompared with the skyrocketedBritish data.

The differences betweenGermany and France stemfrom the main source of theGDP fall: foreign balance(60%) for the export-orientedGermany and stockbuilding(40%) for France (the foreignbalance contributing for 33%)in 20093.

Therefore, the continentalmodel seems to prevail in thewake of a crisis as it can relyon existing safety-nets that

make the burden less painfulfor citizens.

On the political side, onecould easily predict thatpeople will clearly perceivethe potential superiority (andadvantages) of this model andtend to favour and vote forparties supporting it. As aresult, the policy recom-mendation for the UK wouldnot be simply to increase the

size of the State by spendingmore but to improve thequality of the State interventionby spending better throughconstant and efficientinvestments (as the Frenchhealth system demonstrates).

But in doing so, we are notcertainly making a newdiscovery in economics. It hasalways been clear that theAnglo-Saxon model wins in

times of growth but it makesthe social impact of the crisisharder. Conversely, thecontinental model hampersgrowth potentials but makesthe crisis less painful and itsexit smoother.

One should also note that thesystemic nature of the current

3Calculations by the authors on

data provided by the Economicforecasts - Spring 2009, EuropeanCommission, Directorate-Generalfor Economic and Financial Affairs,March 2009.

crisis is contributing to em-phasize the positive aspects ofthe continental model. Not-withstanding the unevensocial impact, the presence ofa symmetric external shock(as the crisis is hitting all theEuropean countries) allowedthe Council to ease theMaastricht criteria with norelevant complaint by memberStates. But in case of anasymmetric shock (hitting aState or group of States)

governments would berequired to get a specialexemption from the EU (alsounder the revised SGP) toovershoot the 3% deficitcriterion (and, in any case,respecting precise and narrowlimits)4. This would inevitablyreduce the available optionsof a single government and,ultimately, limit the benefits ofthe continental model since

automatic stabilisers wouldnot be allowed to work fullyand no transfer fromEuropean funds could beforeseen.

In sum, the debate over thebest model of economicdevelopment is anything butnew. Also todays crisis isstressing benefits and

4

In 2005 the Council has redefinedthe exception foreseen in TEC, art.104, par. 2a: any (temporary)excess over the reference valuewhich results from a period ofnegative growth rate (thus nolonger a recession of at least 2 percent, or 0.75 per cent), or evenfrom the accumulated loss ofoutput during a protracted period ofvery low growth relative to potentialgrowth, should be considered asexceptional, and therefore notsanctioned. See C. ALTOMONTE

et al., EU Fiscal Policy in the Ageof Turbulence: will the LisbonStrategy Survive It?, in C. SECCHI- A. VILLAFRANCA (eds.), cit., p.134.


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drawbacks in line with theeconomic literature. There-fore, the issue to be tackled isnot the validity of the Anglo-Saxon model and its potentialsubstitution with the con-tinental one but the ability tolimit its overindulgence insome fields (i.e. financialmarkets) and rigidities in others(i.e. welfare state and incomedistribution) by introducing somefeatures of the other model, andviceversa.

The State is obviously theactor which is supposed todraw the line between the twocompeting models and takeeconomic and political decisionsaccordingly. But The Eco-nomist fails to consideranother powerful tool in thehands of the States: theEuropean Union.

Adding Europeto the argument

In a recent article5, MarioMonti entered the debate overthe two European economicmodels by pointing out thatthe crisis can be seen as anunrepeatable occasion for theEU. Each European govern-ment may keep its preferredmodel but its shortcomings

could be toned down bysearching a mid-pointbetween the two competingmodels through a newEuropean Pact.

In this regard, there is roomfor a negotiation in Europebecause the supporters ofeach model have requests topresent to the others whichcan be inscribed in the

5See M. MONTI, Un patto (vero)

per lEuropa, in Corriere dellaSera, May 10, 2009.

inevitable (and, in many re-spects, ideal) EU framework.Indeed, countries adopting anAnglo-Saxon approach arekeen to reconsider somefeatures of their economicmodel in light of its drawbacksin the wake of the crisis. Butthey also complain about agrowing resistance of con-tinental Europe to free-marketoriented rules (especially onstate aids and completion ofthe Single Market).

Similarly, time would be ripefor the latter to adopt somefeatures of the Anglo-Saxonmodel. Continental Europecan overcome its traditionalsocial resistance to changesby trading the huge publicspending in times of crisis(including automatic stabilisersand fiscal stimulus plans) withstructural reforms whichpeople usually tend to reject.But it has also somecomplaints to present: theunavailability of countriessupporting the Anglo-Saxonmodel to further increase thecoordination of fiscal policies.This puts heavy constraintson the continental model sincecrises (and the inevitablecollapse in tax revenues) reduceits ability to mitigate thedownturn (especially in case of

asymmetric external shocks).

In other words, the Anglo-Saxon countries fear thereturn of the spectre ofeconomic nationalism, whilethe others highlight theconstraints of a limitedeconomic coordination leadingto a lose-lose situationaggravated by competitivenesson fiscal policies andgovernment bonds. According

to some calculations6, thehuge wave of governmentbonds at world level to repaythe increased national debtsmay range from 15 to 33trillion dollars (depending onthe future developments ofthe crisis). It is obviously animpressive amount (about 1/3of world GDP) that wouldinevitably imply competitivenesson interests rates, problems inredeeming bonds at maturity(not only in small countries)

and future inflation. Clearly,this situation is a big issue forthe entire world economy butits consequences (especiallyin terms of competition) maybe even worse for theEuropean Union and, parti-cularly, for the Eurozone. Thelimited scope of commonmeasures in the Eurozone toface this challenge is strikingand potentially very dangerous

for the stability of the Euro.In sum, the reciprocalcomplaints and requestscould be matched in aEuropean Pact searching fora mid-way solution betweenthe two competing modelsand including viable way-outsto the fiscal competition andoverabundant issue of govern-ment bonds. As a result,European governments could

take advantage of the positiveconditions (in terms ofnegotiation) created by thecrisis and pave the way to afurther step of the Europeanintegration process.

This would certainly be adesirable outcome. A sort offirst best solution in line withthe traditional integration

6

See K. ROGOFF - C.REINHART, The Aftermath ofFinancial Crises, NBER WorkingPaper n. 14656, January 2009.


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process of the EU. Butnotwithstanding these externalpositive conditions, one couldarguably note that it isrealistically difficult to reach acompromise in todays enlargedEurope for at least two negativeinternal conditions: number ofmember countries and type ofcompetencies to be given tothe European level.

In order to play a relevant rolein the post-crisis international

arena, the EU is requested totake decisive steps not onlytowards a stricter coordinationin the economic field(including finance, fiscalpolicy, welfare state), but alsotowards a stronger externalrepresentation (involving foreignand defence policies, energyand environmental policies,etc.). Evidently, a newEuropean Pact should alsoinclude agreements on these

fields.

This approach has theadvantage of being non-ideological and driven byconcrete needs. Unfortunately, itwould touch a raw nerve withmany European countriesbecause it would impact onthe very existence of theStates as independent entitiesand would push for a quasi-federal system.

In addition, the lastenlargement of the EU hasenormously widened thedifferences in the politicalspace of the European Unionand has made much moredifficult to find a mid-waysolution in the negotiationprocess. In a nutshell, thebargaining set (the cluster ofpolicy solutions that represent

Paretian improvements foreverybody) seems to bealmost empty in the enlargedEurope.

A clear example of thesedifficulties is represented bythe Lisbon Treaty. Thenegotiation process tookalmost 10 years (including theunfortunate European Con-stitution). When hopefullyIreland ratifies the Treaty, itwill be born old for it is wasnot drafted to face newchallenges (such as thecurrent crisis).

All in all, a second best

solution should be found toovercome the limits of thesenegative internal conditions(broad political space andsensitivities of the newcompetences). Therefore, thepracticability of another pathshould be taken intoconsideration: a multi-speedEurope better exploiting theopportunities of the enhancedcooperation foreseen by theTreaties7. This option is not

intended to be discriminatorysince each country would befree to decide whether andwhen to join the smallerclubs. But it would allow theother countries especiallythose with relevant commoninterests (i.e. the Eurozone forthe fiscal and financialcoordination) to find acompromise by reducing thepolitical space of the

bargaining. Besides, thisoption would be successfulonly if it started a processleading to the participation ofall the member countries inthe medium run. By followingthis approach, the traditionalEuropean integration process(first sign a Treaty and thenuse the competences) would

7See Articles 10, 280 (A to I) in the

Treaty of Lisbon emending theTreaty on European Union and theTreaty establishing the EuropeanCommunity.

be turned upside down. Threenew steps of the EUintegration process should befollowed. First, start aninformal cooperation in asmall club (including a betterunderstanding of the impli-cations for a multi-leveldecision-making context) bysharing new competencies onspecific issues. Second,highlight the positive pay-offsof the new cooperation andinvolve other member States

through a one-by-one-approach. Third, include thenew competences and powers whose benefits have beenalready tested by many States in a revised Treaty.

Should these steps be takenfully, probably ten years wouldnot be required to sign a newTreaty.

And the winner is

It is very unlikely that a one-fit-all model will emerge as afinal solution for all theEuropean countries in thepost-crisis era. Both the Anglo-Saxon and the continentalmodel show advantages indifferent periods. The latter isexpected to better deliver intimes of crisis, while the other

tends to prevail in times ofgrowth.

This article suggests that thewinner of the context betweenthe two competing model is amid-way approach. It allowseach country to keep itspreferred model but, at thesame time, aims at improvingit through a bargaining takingplace in the ideal andinevitable context of the

European Union. Therefore,this non-ideological approachwould lead to a new European


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Pact allowing for a furtherstep in the Europeanintegration process. La ricerca ISPI analizza le

dinamiche politiche,strategiche ed economiche delsistema internazionale con ilduplice obiettivo di informare edi orientare le scelte di policy.

I risultati della ricerca vengonodivulgati attraversopubblicazioni ed eventi,focalizzati su tematiche diparticolare interesse per lItalia

e le sue relazioni internazionalie articolati in:

Programma Africa Programma Caucaso e Asia

Centrale Programma Europa Programma Mediterraneo e

Medio Oriente Programma Russia e Vicini

Orientali Programma Sicurezza e

Studi Strategici

Progetto Argentina Progetto Asia Meridionale Progetto Diritti Umani Progetto Disarmo Progetto Emergenze e

Affari Umanitari Progetto Internazionaliz-

zazione della PubblicaAmministrazione

ISPIPalazzo ClericiVia Clerici, 5I - 20121 Milanowww.ispionline.it

Per informazioni:[email protected]@ispionline.it

ISPI 2009

Unfortunately, the broadpolitical space of the enlargedEurope and the sensitivenessof the new competences to behanded over to the EU risk tomake this approach unrealistic.A second best solution may beoffered by a non-discriminatorymulti-speed Europe in whichStates will decide whether

and when to strengthen theircooperation.
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Europe between dirigism and liberalism