Adair Turner: Europe need not be a slave to market forces

From a talk given by the vice-chairman of Merrill Lynch Europe, at the London School of Economics
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The fact that America's large and intensely competitive single market is one of the key causes of its absolute efficiency advantage provides strong support for European Union efforts to complete and deepen the single market, including via the single currency. Europe should aim to build a more market liberal variant of capitalism. But it's important to understand why it should do this

Europe should liberalise in order to seize opportunities, not as a response to threats. And the implication of this internal and opportunity-driven rationale for liberalisation is that the general case for more liberalisation should never be perverted to deny society's freedom and indeed responsibility to make trade-offs. We are liberalising to achieve specific economic objectives. But if those objectives conflict with other desirable aims we don't have to liberalise and in some cases we should not.

If the French wish to retain "cultural exception" to protect their French language film industry ­ they can and should do so without us condemning them as heretics from the free market creed.

European countries have developed a social approach to capitalism which is far less willing than American capitalism to accept the insecurities and inequalities that totally free markets produce, and have therefore sought to offset those insecurities and inequalities with two categories of intervention.

First; intervention in markets ­ in product and capital market to a degree, but above all in labour markets ­ and a refusal to accept the ultra-liberal assertion that these are simply "markets like any others". The second category of interactions has been through the provision of public goods and through more generous welfare nets performing a poverty prevention and redistributive function.

Europe's current liberalisation policy involves a much reduced intervention in markets. More liberal labour markets do carry implications even if that liberalisation does not mean making European labour markets carbon copies of America. The European labour markets which deliver full employment will be to a reduced extent expressions of desired social objectives. Minimum wage and collective bargaining constraints on wage inequalities will play a decreasing role as vehicles through which income inequalities are fought.

And that implies in turn that the second category of interventions ­ public goods provision and income support ­ will become more rather than less important. It implies that we cannot simultaneously liberalise our markets and radically reduce Europe's public expenditure levels without rejecting rather than reforming Europe's model.

But the good news is that I do not believe there is any economic imperative requiring us to pursue radical public expenditure and tax reductions. I can find no evidence to support the belief that there is any simple or powerful link between overall taxation levels and levels of economic growth, or between tax levels and employment rates, or tax levels and savings rates. Societies enjoy wide degrees of freedom to make distinctive social changes. The debate of those choices is the core of politics.

As for my own social preferences, they would be as follows: I am a market liberal who also believes in the important role of the state as the modulator and manager of the hard edges of capitalism and who believes that Europe can match America's current economic dynamism without copying its social approach.

Some people would call that philosophy the "third way". I don't, because it's not a "third way" between socialism and capitalism ­ it's a variant of capitalism. And because I don't think we need a new phrase for an old philosophy. To me this is simply the social liberalism of Lloyd George or Asquith brought up to date.