How Europe responds

 

European Schadenfreude over the ills of American capitalism doesn't mean a shift from the free market

AFP

ONE by one, European leaders have lined up to hail the triumph of welfare over Wall Street. “The idea that markets are always right was a mad idea,” declared the French president, Nicolas Sarkozy. America’s laissez-faire ideology, as practised during the subprime crisis, “was as simplistic as it was dangerous,” chipped in Peer Steinbrück, the German finance minister. His Italian counterpart, Giulio Tremonti, claimed vindication for a best-selling book that he wrote about the dangers of globalisation.

It would be wrong to exaggerate Europe’s sense of self-righteousness over Wall Street’s fall. This week governments in Belgium, France, Germany, Ireland and the Netherlands all scrambled to bail out troubled banks, confirming how exposed Europe’s economies are to knock-on effects from America. Even left-wing editorialists in France, quick to sneer at degenerate American capitalism, have tempered their glee. “There would be something comical, even pleasurable, in watching the frenetic agitation of the banking world”, wrote Laurent Joffrin, editor of Libération newspaper, “if millions of jobs were not at stake, not to mention the economic balance of the planet.”

There is nonetheless a common thread in European responses to America’s troubles. It goes like this. We always knew that unbridled free markets were a mistake, yet we were derided for saying this; and now we are all paying the price for your excesses. In the face of popular consternation at capitalist decadence, the activist state is newly in fashion—and Europeans are taking the credit for it.

Yet there are doubts whether this will really alter any country’s policies. A good test is France. Judging by his recent declarations, the centre-right Mr Sarkozy has taken a decidedly leftward turn. In the space of two days, he twice laid into free-market capitalism. “Laissez-faire is finished,” he declared in Toulon. “The all-powerful market that is always right is finished.”

It is not just rhetoric. With unemployment climbing, Mr Sarkozy has launched a €1.5 billion ($2.1 billion) yearly welfare-to-work scheme, based on state subsidies to supplement low pay, and paid for by an extra 1.1% tax on capital income—a measure that dismayed many of his own party’s deputies. All talk of tax cuts has been shelved. And Mr Sarkozy has failed to cut public spending to keep his promise of balancing the government’s budget by 2012.

But does this imply a genuine shift of economic policy? In the past Mr Sarkozy has been labelled l’Américain, but in truth Sarkonomics has always defied classification. In industrial policy, he has a long record of supporting state bail-outs. As finance minister in 2004, he fought off European Commission disapproval to use state money to rescue Alstom, an engineering firm. In campaign speeches in 2007, he declared that “free trade cannot be a dogma” and called for financial capitalism to be “moralised”.

Yet Mr Sarkozy has also gone out of his way to press on the French the need to respond to, not deny, globalisation. He has implored the country that invented the 35-hour week to work more, take more initiative and expect fewer hand-outs from the state. He has exempted overtime work from taxes and social charges. He is tightening welfare rules to cut benefits if the jobless refuse more than two reasonable offers of work. He has strengthened the competition watchdog, and made it easier for discount retailers to set up shop. Mr Sarkozy was elected because French voters knew, however reluctantly, that they had to adapt to global capitalism.

In this respect, a close reading of Mr Sarkozy’s Toulon speech is revealing. Alongside the tirades against financial capitalism, he also recalled that “capitalism is the system that has enabled the extraordinary development of western civilisation”. He argues not for blind state intervention but for a new balance between the state and the market: one that tightens the state’s role as regulator and enforcer of competition, but not—except in extremis—as owner.

Where does this leave Mr Sarkozy’s liberalising reforms? He has said that “the crisis calls for an accelerated rhythm of reforms, not a slow-down.” On financial regulation, he wants EU leaders to tighten accounting rules, and has called for a meeting of G8 leaders to rethink the global financial architecture. On domestic reform, he is urging more restrictions on executive pay and golden parachutes. But such measures are unlikely to derail Mr Sarkozy’s parallel, liberalising efforts to trim the bureaucracy, encourage entrepreneurship, discourage welfare dependency, undermine the unions and boost competition.

The French, like most Europeans, know that the old high-tax, state-heavy model had hit the limits in terms of jobs and growth. In a recent poll for Le Parisien newspaper, 60% said that Mr Sarkozy should continue or speed up his reforms; only 30% said he should slow them down. Some Americans may fret that French-style socialism has arrived on Wall Street. But the last time the French picked a real Socialist to lead their country was 20 years ago.