Bit of reasoned perspective on the silliness that has occupied France during the last couple of weeks.
OTB
Europe inside out
Mar 23rd 2006
From The Economist print edition
The reason why Europe finds reform so hard is that insiders are too protected
IF YOU want to know why Europe's governments have been so hopelessly slow at reforming their economies, waste no time assessing the platitudes about the “Lisbon agenda” at this week's European Union summit. Instead, ponder a few recent events around the continent.
The streets of France have been filled with huge protests against a new labour contract: the biggest so far is due on March 28th (see article). In Germany public-sector workers have staged a series of protest marches over pay. Even Britain, which has reformed its economy more than most, will next week see a big demonstration against public-sector pension changes. And in Italy's rancorous election campaign, both government and opposition have been too fearful of voters to talk about the radical reforms that the country needs.
What links all these things? In part, the perception that change is painful and that potential losers always shout louder than potential winners. This is, indeed, the classic explanation for the popular appeal of trade protection. In recent months, it has manifested itself in the vociferousness of Europeans who have been fighting not just against new labour laws but also against energy liberalisation, freer trade in services, the opening of markets to migrant labourers from central Europe and takeovers of favoured national champions.
But something else obstructs would-be reformers in Europe. This is an acute case of a particular economic complaint: the excessive protection of insiders at the expense of outsiders. In Europe, insiders have permanent jobs with nigh-impregnable security, high wages, guaranteed pensions and a still generous welfare state that they know how to exploit. They are more often male, middle-aged and white than female, young or from ethnic minorities. Many work in the public sector. Others, such as shopkeepers, taxi drivers, lawyers or pharmacists, are insulated from competition by a web of regulations. Outsiders have none of these benefits.
Worse, the few reforms that have been made have often left insiders largely untouched. France's new job contract is only for the young—and, if the government offers more concessions, it may not even help them much—while insiders will keep all their old job security. Too many labour-law changes have created two-tier markets, with an inner tier remaining protected but an outer one on temporary or short-term contracts. Pension reforms have often stopped when they reach sensitive bits of the public sector. And some governments have tried only to change welfare systems and labour laws, which is necessary if unemployment is to be reduced but can also create insecurity and drive down consumer spending. They have neglected the vital accompanying task of injecting more competition into protected industries and services, which would both create jobs and cut costs.
Besides the sheer inequity of perpetuating an insider/outsider divide through unreformed labour markets and a lack of competition, there are two big practical objections. The first is that it keeps economies so inflexible. One outcome is the high unemployment of France and Germany. But another case is Italy, where plenty of temporary jobs have been created, but protected insiders have continued to win big wage increases. Italy has reduced unemployment, but rising unit labour costs are squeezing firms out of markets, a big cause both of slow economic growth and of demands for trade barriers.
You can't buck the market for ever
That leads to the second, even bigger objection to the cosseting of insiders: in the end, it will not work. If it were possible always to insulate insiders, there might be a better argument for doing it. In Germany, for example, businesses have temporarily cut costs and regained competitiveness without ending the insider/outsider split. But they have done it without creating more jobs at home, so unemployment remains high. Thus, even in Germany the pressure of global competition is such that insiders cannot be protected from it for ever. The only real options are to accept change now, or to defer it until economies get into such straits that change is forced. The risk that much of Europe is taking by delaying reforms and appeasing protesters is that it ends up taking this second-best choice.
OTB
Europe inside out
Mar 23rd 2006
From The Economist print edition
The reason why Europe finds reform so hard is that insiders are too protected
IF YOU want to know why Europe's governments have been so hopelessly slow at reforming their economies, waste no time assessing the platitudes about the “Lisbon agenda” at this week's European Union summit. Instead, ponder a few recent events around the continent.
The streets of France have been filled with huge protests against a new labour contract: the biggest so far is due on March 28th (see article). In Germany public-sector workers have staged a series of protest marches over pay. Even Britain, which has reformed its economy more than most, will next week see a big demonstration against public-sector pension changes. And in Italy's rancorous election campaign, both government and opposition have been too fearful of voters to talk about the radical reforms that the country needs.
What links all these things? In part, the perception that change is painful and that potential losers always shout louder than potential winners. This is, indeed, the classic explanation for the popular appeal of trade protection. In recent months, it has manifested itself in the vociferousness of Europeans who have been fighting not just against new labour laws but also against energy liberalisation, freer trade in services, the opening of markets to migrant labourers from central Europe and takeovers of favoured national champions.
But something else obstructs would-be reformers in Europe. This is an acute case of a particular economic complaint: the excessive protection of insiders at the expense of outsiders. In Europe, insiders have permanent jobs with nigh-impregnable security, high wages, guaranteed pensions and a still generous welfare state that they know how to exploit. They are more often male, middle-aged and white than female, young or from ethnic minorities. Many work in the public sector. Others, such as shopkeepers, taxi drivers, lawyers or pharmacists, are insulated from competition by a web of regulations. Outsiders have none of these benefits.
Worse, the few reforms that have been made have often left insiders largely untouched. France's new job contract is only for the young—and, if the government offers more concessions, it may not even help them much—while insiders will keep all their old job security. Too many labour-law changes have created two-tier markets, with an inner tier remaining protected but an outer one on temporary or short-term contracts. Pension reforms have often stopped when they reach sensitive bits of the public sector. And some governments have tried only to change welfare systems and labour laws, which is necessary if unemployment is to be reduced but can also create insecurity and drive down consumer spending. They have neglected the vital accompanying task of injecting more competition into protected industries and services, which would both create jobs and cut costs.
Besides the sheer inequity of perpetuating an insider/outsider divide through unreformed labour markets and a lack of competition, there are two big practical objections. The first is that it keeps economies so inflexible. One outcome is the high unemployment of France and Germany. But another case is Italy, where plenty of temporary jobs have been created, but protected insiders have continued to win big wage increases. Italy has reduced unemployment, but rising unit labour costs are squeezing firms out of markets, a big cause both of slow economic growth and of demands for trade barriers.
You can't buck the market for ever
That leads to the second, even bigger objection to the cosseting of insiders: in the end, it will not work. If it were possible always to insulate insiders, there might be a better argument for doing it. In Germany, for example, businesses have temporarily cut costs and regained competitiveness without ending the insider/outsider split. But they have done it without creating more jobs at home, so unemployment remains high. Thus, even in Germany the pressure of global competition is such that insiders cannot be protected from it for ever. The only real options are to accept change now, or to defer it until economies get into such straits that change is forced. The risk that much of Europe is taking by delaying reforms and appeasing protesters is that it ends up taking this second-best choice.
