Europe is about to make a dreadful mistake

Germany's new Chancellor is a chancer. He believes in nothing except getting elected

WHILE A British Cabinet minister went for a walk on the wild side of south-west London and lost his job, a quiet left-wing coup has been taking place in Germany whose primary purpose is to tackle Europe's appalling levels of unemployment. Sadly, the leftists who now run Germany and much of the rest of Europe are as likely to be as good at creating jobs as Ron Davies was at keeping his own.

Events in Germany merit far greater scrutiny than they have been given. They are moving the whole continent leftwards and, ironically, screwing up the Blair government's European pretensions in the process. The election of Gerhard Schroder as Chancellor of Germany was seen in Downing Street as an opportunity to build an Anglo-German relationship to rival the Franco- German axis which has dominated Europe for a generation.

Mr Schroder is regarded as a soul-mate of Tony Blair's Third Way, a centre- left moderniser who wants to break with a collectivist past. Several senior Blairites were even active, behind closed doors, in advising Mr Schroder how to run his campaign, which removed Helmut Kohl from power. The Prime Minister and his advisers licked their lips at the prospect of a Blair-Schroder alliance leading Europe in new directions, with Mr Blair, naturally, primus inter pares. Downing Street could not have been more wrong.

Germany's new Chancellor is a chancer. He believes in nothing except getting elected, which means he has far more in common with Bill Clinton than Tony Blair. Mr Schroder's opportunism has created a vacuum in government which is fast being filled by Oskar Lafontaine, the leader of the Social Democrat Party (SPD) and the country's new Finance Minister. He is the power behind the throne in the new red-green coalition that rules Germany.

"Red" Oskar, an unreconstructed leftist who controls the SPD machine, has already made it clear that he is the dominant figure in the new German government. Even before his feet were under his large new desk at the finance ministry, he had accumulated more power than any other finance minister in modern German history - so much so that the business-friendly Jost Stollman, an entrepreneur nominated by Mr Schroder to become Economics Minister, has declined to serve in his government because, as he says, there is a Lafontaine-dominated "group within this government which is determined to resist any modernisation".

The direction Mr Lafontaine intends to shove the Schroder government is illustrated by his appointment of Heiner Flassback as state secretary of the finance ministry, responsible for its day-to-day running: Mr Flassback is an old-fashioned believer in big government and state control of the economy who disparages the sort of supply-side reforms Mr Schroder is supposed to support and which have produced full employment in America. The Lafontaine-Flassback axis has produced a tax "reform" package which will add over $60bn (pounds 35bn) to the German business tax bill.

Mr Lafontaine has also been quick to make common cause with another unreconstructed socialist, Lionel Jospin, Prime Minister of France. They are united in calling for a massive Keynesian-style tax-borrow-and-spend programme across Euroland to boost jobs. This was the prevailing theme at last weekend's euro-summit in Austria. Though no hard (or costly) decisions were taken, one crucial development emerged: the relationship that really matters for the future course of European economic policy is Lafontaine-Jospin.

The Austrian summit echoed their ideological approach, with demands for multi-billion dollar infrastructure spending replacing the need for budget discipline and calls for more jobs drowning out plans for labour market and supply side reforms. No wonder Sweden's Prime Minister, Goran Persson, was able to remark with approval: "Europe has moved to the left."

Mr Blair was swept along in the wake of what happened by the Austrian lakeside, neither influencing Europe's new course nor laying down a marker that it was the wrong direction. Europe is about to take a massive wrong turn, with the Blair government being dragged along. If a huge dose of state spending created jobs, then what used to be East Germany would have full employment. The Bonn government has thrown billions of D-Marks at its eastern provinces since unification, yet the jobless rate remains at an unacceptable 20 per cent, far higher than other parts of eastern Europe which escaped from the Communist yoke and went for supply-side reforms rather than state spending.

I remain enough of a neo-Keynesian not to be frightened by extra borrowing or increased budget deficits during economic downturns. To the extent that Europe's new left-wing Establishment recognises that deflation rather than inflation is now the continent's biggest problem, the change in emphasis in Austria last weekend is to be welcomed. But throwing billions of taxpayers' money at unreformed economies with inflexible labour markets and penal taxes will not create a single new long-term job. That is the inescapable lesson from Seventies Britain, Eighties Sweden and Nineties eastern Germany.

It is a lesson the new powers-that-be in Europe seems determined to ignore. Despite the long-term disastrous impact of collectivist economic policies in the Sixties, the British people plumped for yet more of the same in the Seventies. It was only the pain of the Winter of Discontent and the shame of perennial economic decline that brought us to our senses. Europe's leaders are about to embark on the same mistake. The people of Europe will pay dearly. One in 10 Europeans are already on the dole. If the continent maintains its new course, that level is set to rise.

"If you pay people to be unemployed," said yesterday's Wall Street Journal, which pioneered the policies that have cut unemployment in Britain and America, "more people are going to chose unemployment. And if you make it difficult for would-be employers to hire people, they are going to do less hiring."

The failure to confront these simple truths is why, to Europe's shame, the unemployment rate among white French folk is now higher than it is among black Americans. The answer of Europe's new leaders to that statistic is: more of the same. So Europeans will have to suffer until the continent comes to its senses.

Andrew Neil is editor-in-chief of The Scotsman and The European