Hamish McRae: When flair matters more than competence

Merkel and Sarkozy will have to generate pizzazz, flair, risk-taking and buccaneering

Both will be hugely important, for, assuming they do indeed both make it to office, the economic future of core Europe will be determined by their actions. For several months, but particularly since the rejection of the European constitution by the French and Dutch voters, there has been a rising feeling that "we can't go on like this". It is analogous to the mood of Britain in the late 1970s, though not nearly as widely spread, for their economic situation is not yet nearly as grave. They just have double-digit unemployment; they don't also have double-digit inflation. The political parallel is the widespread acceptance that the old guard can't fix it.

To see Merkel and Sarkozy as Thatchers-in-waiting is far too simple but the long boom of the UK economy since the early 1990s makes too stark a contrast with relative stagnation on the Continent to be ignored. It may well be that our long boom is drawing towards its end but meanwhile the ability of the UK economy to generate jobs - and hire lots of young French and Germans - is changing perceptions. As Tony Blair told the European parliament in his 23 June speech, Europe has to confront the fact that social Europe had created 20 million unemployed.

If Germany has been more heavily smitten by economic stagnation than France, France has experienced another form of humiliation: that little matter of the 2012 Olympics. In the broad scheme of global economics this is a smaller matter but within France there is not just a "bad loser" syndrome.

The more thoughtful response has been to ponder what Paris did wrong and London did right. Objectively the Paris bid was better: the stuff is mostly there, whereas London was selling promises. Evidently we are in a world where marketing and public relations seems to be more important than technical competence.

That leads to a larger point. The difference between the economies of the UK on the one hand and France and Germany on the other is not the caricature of an Anglo-Saxon free-market one and a regulated continental one. If it were, the appropriate response would be simple in concept if tricky in execution. Continental Europe would have to decide the most acceptable way of deregulating its labour, product and capital markets and then wait for things to turn around. Or not, and carry on with 20 million unemployed.

Deregulation is part of the story but only part - and maybe quite a small part. It is more that being technically competent is not enough to compete in the new world economy. German companies are wonderfully competent at a technical level. France is wonderfully competent at high-ish-end engineering. It has, measured per hour worked, the highest productivity in the world. The UK by contrast is still losing industries (a bit humiliating to have Rover rescued by the Chinese, eh?). It is very dependent on two industries, financial services and to a lesser extent, oil production. And has gone from current account balance in 1997 to a deficit of 3 per cent of GDP.

So these are two countries that, compared with Britain, have in many ways much better-balanced economies: more order, better infrastructure and in many ways more competence. There are lots of things we can learn from France and Germany and we should never forget that.

Nevertheless, we do somehow seem to be coping better with the onslaught of competition from the giants of China and India in this ever-more-globalised world than do Germany and France. If it is right that being technically competent is not enough, then the challenge to Merkel and Sarkozy will be how to generate the sense of pizzazz, flair, energy, risk-taking, buccaneering and so on that America does so well, and the UK seems to do OK.

You need an element of disorder to do this. If the UK should learn order from Germany and France, they should learn disorder from us. Or rather they should accept that the world economy will become increasingly disorderly and learn how to make money in that sort of environment.

The hardest task for any government facing high unemployment is to predict where the new jobs will come from. It is tempting to think that clever people in the ministry of whatever will be able to spot changes in global competitiveness and realign workforce training to meet that demand. The trouble is that the world economy is moving too quickly. France has been quite successful at retaining a reasonably competitive motor industry in the face of Japanese and Korean competition. But China is already the lowest-cost manufacturer of cars in the world and will soon achieve western European levels of design competence. Germany still runs its excellent retraining system for displaced workers but, anecdotally at least, this seems to be increasingly ineffective because by the time someone has been retrained the skills needed are different. The job market has moved on.

The central concern for the forthcoming Merkel and Sarkozy governments should be how to nudge their respective economies away from a policy of planning and towards one of responding to market signals. This is the core of tackling unemployment. You cannot know where the new jobs will be. So what you do is see where the demand for labour is, and then try to remove any roadblocks that face people trying to get those jobs.

You cannot predict where investment opportunities will be but you can encourage a climate in which venture capital groups will have a punt at projects they think will come up trumps. The role of governments is not to plan their economies - or at least only to plan those big infrastructure projects that have to be planned - but to create a stage on which the economic players can dance.

You may have noticed an OECD paper last week that suggested that unless there was reform, the potential growth rate of the eurozone economy would slip back over the next generation so that by 2020-30 it would be growing at less than 1 per cent a year. In economic and social terms that would be a catastrophe. The challenge for Merkel and Sarkozy is to stop it happening. Both are outsiders: Angela Merkel was brought up in what was East Germany; Nicholas Sarkozy's parents came from Hungary. Western Europe needs outside thinking. It won't listen to us. Maybe it will listen to them, if they themselves understand the subtleties of what needs to be done.