A revolution dawns in the east of Europe

I suspect that in 20 years' time newspapers will be celebrating the intellectual influence of the Baltic states

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`Thatcherismo", shouted the headline in yesterday's La Repubblica, the left-of-centre Italian newspaper. Three pages followed about the legacy of the "Lady di ferro", complete with quotes from such luminaries as Amartya Sen, Anthony Giddens and JG Ballard, plus some words of praise from Tony Blair.

Why Italy's sudden interest? Well, this Friday marks the 30th anniversary of her becoming head of the Tory party, but that has not been a date that seems likely to be so widely marked here in Britain. We take for granted the changes that followed her rise to power - some people regret them, others celebrate them, but everyone recognises the scale and durability of the Thatcher revolution. The place was turned round, the economy is now booming and that is that. We are not really interested any more.

On the Continent it is different. The big three economies are all in trouble. I got a call yesterday from the people from the Invest in France campaign. This seeks to promote the string of 35 measures just introduced to try to make France more competitive. These include modification to the 35-hour-week, easier dismissal of employees, tax incentives for non- residents and so on. But why the need to promote these changes? Well, I was told, "We really need to turn things round."

On some measures, France is not doing too badly. It is managing some economic growth, living standards are rising, albeit slowly, and it has an enviable productivity record. But unemployment is stuck at 9.9 per cent, with all the social misery stemming from that.

What is most troubling to France is the impact of unemployment on the young. Getting a job is difficult for the highly-skilled as well as the less-skilled, hence an exodus of talent, mostly to the UK. A French minister pointed out last week that Britain gave France her old while she gave us her young. A similar exodus of the young is happening from Italy, and a proportionately smaller but still considerable one from Germany. Official levels of unemployment in Italy are slightly lower than in France (though still nearly 9 per cent), while the German count of more than 5 million unemployed, reached last month, is equivalent to 12 per cent of the workforce.

We in Britain are worrying about the tensions created by economic migrants - people coming in to take these jobs - and are seeking to ensure that we get the migrants we need. On the Continent they are worrying about the outward movement of economic migrants - the loss of the skilled young. The irony is that the very people we most want are just the people that France, Italy and Germany want least to lose. Hence the chagrin, costernazione and Angst felt by our European partners on this issue.

The formal recognition at a European level that the continent had to do something to lift its economic performance came last week with the acknowledgement that the Lisbon Agenda had failed. The plan, first produced in March 2000, was to make the EU "the most competitive and dynamic knowledge- driven economy by 2010". The key idea was that by investing more in R&D, encouraging entrepreneurship and innovation, and increasing the proportion of the population in work, the EU could catch up with the United States. As it has turned out, the gap, at least in terms of GDP, has widened. Had it not been for the UK, which has grown overall at much the same rate as the US, the gap would have widened further.

Now the European Commission is seeking to refocus the Lisbon process: to make Europe a more attractive place to invest and work, to promote knowledge and innovation and to create jobs. It may seem a bit carping to dismiss this initiative before it has even begun, but I did find my heart sinking when I saw some of the ideas that the Commission is advancing. It wants countries to "define national Lisbon action plans" and nominate a "Mr or Mrs Lisbon" who will presumably oversee these.

When you see this sort of stuff emerging from Brussels you understand why a left-of-centre Italian newspaper is so intrigued by the lessons of "Thatcherismo". But the reality is that the UK model is unlikely to be adopted, except at the margin, in the big European economies. The German labour market reforms, which came in at the beginning of the year and had the incidental effect of pushing those unemployment numbers above 5 million, are tiny compared to Thatcher's labour market reforms. And the French investment reforms are largely designed to undo the damage caused by earlier legal and tax changes in the opposite direction.

This is trimming and tweaking, not radical change. True, since economic change happens at the margin, trims and tweaks should not be dismissed as pointless. At the margin they are likely to improve economic performance. But if you do want to see revolution, you either have to look backward to Thatcherism in the 1980s or - to see one taking place at this moment - to the flat taxes of Europe's Wild East.

The flat-tax revolution started with Estonia in 1994, which pioneered a single rate of income tax at 26 per cent. It was quickly followed by the other Baltic states, Lithuania and Latvia, and since then the flat- rate tax has been adopted in Russia, Serbia, Ukraine, Slovakia, Georgia and, most recently, Romania. Rates have trended downwards, with Romania just last month setting the rate at 16 per cent. If Poland and the Czech Republic adopt flat taxes - and the main opposition parties in both countries are in favour - what started as a fringe idea in a tiny Baltic state will have moved to the frontiers of "old Europe".

In round numbers, the new EU member states are growing at two or three times the rate of the eurozone. It would be wrong to attribute eastern Europe's faster growth to flat taxes but the speed at which the idea has spread is analogous to the speed at which privatisation spread in the 1980s.

The big question about all reform - and this explains the fascination outside the UK in Margaret Thatcher - is: what gives an idea legs? Why should one idea or set of ideas sweep the world? Britain in the 1970s and 1980s was an unlikely source for new economic ideas. Its economy was regarded in the rest of the EU with some contempt right through to the late 1990s, which was why the Bundesbank refused to help when the pound was ejected from the ERM in 1992. Now it is German economic management that is in the dock.

So I suppose the question that matters most to Europe's future is whether, and how, its economic performance might be improved. Or more starkly: what does Europe do when Lisbon mark two is seen to have failed?

If the UK's good performance continues, and we need to keep our fingers crossed that it does, the UK will remain a model of sorts. In that sense the Thatcher micro-economic reforms, coupled with the macro-economic stability brought by Gordon Brown, can help the rest of Europe forward. But the most vibrant part of Europe, both in terms of growth and of ideas, lies to the East. I suspect that in another 20 years, European newspapers will be celebrating the intellectual influence of the Baltic states and the ways the new member states have changed the way the rest of the EU does its business.

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