Election Briefing: WHAT'S WRONG WITH THE EUROPEAN ECONOMIES?: Failure to reform takes its toll

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The Independent Online
It was in 1933, the year Hitler came to power, that unemployment in Germany was last as high as it is now. There are nearly 17 million people who cannot find jobs in the Continental EU countries, and two-fifths of them have been out of work for more than a year. Why isn't Europe working?

The British government's answer is that labour market deregulation over the past two decades has borne fruit in the United Kingdom, whereas workers on the Continent are still featherbedded if they have a job. Businesses do not want to make what could turn out to be a lifetime commitment to expensive employees - especially faced with the attractive alternative of a cheap and flexible labour force in Britain.

The intellectual justification for this triumphalism is provided by the Organisation for Economic Co-operation and Development. After an exhaustive five-year study of unemployment across the industrial world, its economists have concluded that the bulk of joblessness on the Continent is "structural" rather than a temporary side-effect of the business cycle. High taxes, rigid job demarcation and burdensome employment protection laws all could explain the high underlying level of unemployment.

European politicians recognise that the OECD's analysis has some force. This explains the recent announcement of tax reforms on the British model by the German government.

They admit, too, that the race to meet the limits on budget deficits set in the Maastricht treaty is providing both the excuse and the incentive to introduce painful structural reforms. Yves-Thibault de Silguy, the EU's Commissioner for Monetary Affairs, said as much in a speech last week: "There is no doubt that the Emu timetable is helping to maintain the pace of economic reform."

Equally, there is no doubt that the Continental economies can go further down this road. Assar Lindbeck, a professor at Stockholm University, estimates that non-wage items such as taxes, pensions and sick pay add 50-70 per cent to the cost of labour across the Channel. This size of tax and benefit burden will certainly scale back job creation. The Conservatives are right to claim some credit for chipping away at structural impediments to jobs growth in the UK. But, not surprisingly, they take the claim too far. In a recent study for the European Commission, Peter Robinson, a researcher at the Centre for Economic Performance in London, found that the British jobs market was already relatively lightly regulated in 1979. The statistics do not provide much evidence of a huge increase in flexibility since then.

Labour market statistics have become one of the fiercest electoral battlegrounds. Politicians choose dates and definitions that best suit their case.

The facts are these: Unemployment in the UK is lower than the rest of the EU but higher than the United States and Japan. This has been the pattern for nearly 20 years. Employment in Britain has grown at about 0.5 per cent a year on average since 1980, a slightly faster rate than the rest of the EU has enjoyed, but only one-third of the US rate of job creation. The fall in unemployment in Britain during this recovery has been two-thirds the result of job creation since the bottom of the recession in 1992, but one-third due to people withdrawing from the workforce. According to an assessment in Labour Market Trends, published by the Office for National Statistics: "The UK employment performance does not appear particularly impressive by international standards."

Finally, there is little evidence of an out-of-the-ordinary increase in "flexible" working patterns. Part-time working has been growing steadily since 1951, mainly because British women have wanted to join the workforce. Most part-timers are married women. The share of temporary work did not start to spread until the 1990s, and it remains low by comparison with most EU countries.

So the UK has done a little bit better than the Continent in terms of deregulation, and is a bit further ahead in its business cycle. Countries like Germany and France have had to catch up on deregulation and tax reform. The Government's triumphalism boils down to having had a deeper recession than Germany a decade ago.