IMF Book Forum—
Should Europe embrace 'Cowboy Capitalism' or go its own way?

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Transcript of an IMF Book Forum
"Should Europe Embrace 'Cowboy Capitalism' Or Go Its Own Way?"
International Monetary Fund
Thursday, March 24, 2005
Washington, D.C.

MR. KREMERS: Should Europe adopt cowboy capitalism? I think it is a really interesting title about an interesting subject, and I'm very pleased that the IMF External Relations Department has asked me to be your moderator today. We have three very distinguished speakers. There are two books—I think we also have a bit of marketing here—on the table, one book there and one book here. If you like the discussion, then you can buy the book afterwards if you don't already have it. I've read both, and I think they're both very interesting books.

So what I would like to do is to jump right into two presentations, each of about 20 minutes, so that then after that we have also about 40 minutes or so for questions from you and also for discussion between the speakers.

Given the size of the room, which is not really very conducive to informal discussion, I would suggest that even clarifying questions are kept until after the presentations. So if that's okay with the speakers and with the audience, I would like to introduce the first speaker, Mr. Olaf Gersemann. Mr. Gersemann is the author of this book, "Cowboy Capitalism: European Myths, American Reality." It has a big bull on the front, and actually it also, if I may say, has a big bull on the back, namely, Milton Friedman. So I think it's very courageous to write a book about Europe and to have it recommended by Milton Friedman. So Mr. Gersemann is a courageous man, I think.

He is the Washington correspondent for Wirtschafts Woche, and I think there is another bit of evidence for his courage because he will be soon moving to the Financial Times, I believe, to the competition in Germany, Financial Times Deutschland. He also was awarded the Ludwig Erhard Prize for excellence in economic reporting. So may I ask your attention for Mr. Gersemann.

Use the free Adobe Acrobat Reader to view Mr. Gersemann's presentation (310 kb PDF file).

 

Olaf Gersemann, Jeroen Kremers

MR. GERSEMANN: Thank you very much. Actually, being here today is a bit like going to the Vatican and telling the Pope and his people about the Bible, because there are so many professional economists here, whereas I am only a reporter.

However, that being said, we reporters tend to be overly self-confident, first of all; and, secondly, what I did was not exactly rocket science. What I did was looking at the perception about cowboy capitalism in Europe and what politicians say about what we call in Germany "American conditions", and then compare that to what I can find in the statistics. And I think even to you some of my findings might be rather surprising.

To cut this a bit short, I'll just try to answer the questions that were posed in the invitation. I can only give very broad answers, but maybe we can discuss this further in the discussion later. So the first question was in the title of the event today: Should Europe embrace cowboy capitalism? And my answer to that in the book is yes, because the gains are potentially large while the losses are surprisingly small.

First, look at per capita incomes. On a PPP basis, right now U.S. per capita income is about 40 percent higher than in the big continental European countries. I choose here France, Italy, and Germany, and I did that throughout my book because, I mean, when you compare performances, you surely do not want to compare the U.S. with formerly communist countries like Poland. Also, you surely do not want to compare the U.S. with countries that, at least up until recently, were emerging economies, like Ireland or Portugal. Also, you do not want to compare the U.S. with countries such as the U.K., which, arguably, is more American in its economic system than European. So I choose to compare America with France, Italy, and Germany. Those certainly are the three—sorry for that, but those certainly are the three heavyweights in continental Europe. They alone are responsible for about 60 percent of the euro zone's GDP.

What I'm not claiming when I say, yes, Europe should become more American in its economic system, what I do not say is that the performance of the U.S. economy is great or that American cowboy capitalism doesn't produce social or economic problems. The only thing I'm saying is that relative to countries such as Germany, Italy, and France, the U.S. is doing great, and it's almost no matter where you look, at what social or economic indicator you look that defines this. I mean, there are exceptions, like in health care, but the broad picture is that the U.S. is outperforming those European countries.

Today's per capita income gap of 40 percent is atually a larger gap than 25, 30 years ago. Back then the same gap was between 13 and 27 percent. So why is that? Why is there a big gap nowadays? You can't really say anymore that countries such as Italy and Germany are in the same class of countries income-wise than America. So why is that? One factor certainly—and I think Martin Baily will talk about that—is productivity. Productivity growth I think was about twice as high in America over the last eight or nine years than it was in Germany, for instance. And certainly that's a big story.

But the bigger story over the last 25, 30 years is that Europe has stopped working or has, to be more precise, chosen to stop working. Look at that. Here we have in those four countries the actual hours worked per year and per person in employment. We hear lots of talk about how Americans have to work harder and harder and harder, and if you look at that, you see it's not really true because back in 1970, Americans worked 1,900 hours. This dropped during the '70s to about 1,800 hours, and it has remained the same ever since.

In European countries, you had 1,900 hours as well in 1970, but this then dropped and continued to drop. So part of that is that we in Europe, we like our six weeks of vacation, and this is actually the one feature of the European state I really love. But also we had shorter working weeks. We had full-time jobs being replaced by part-time jobs on a very large scale. So this trend really continued. So nowadays per capita incomes are 40 percent higher in the U.S. than in France, Italy, or Germany. It's not only because the U.S. is more productive, but because Americans work more per year than Europeans. It is not the case that Americans work more per year than they used to, but because Europeans work less than we used to in the past.

Then if you take into account employment ratios, you see that the employment ratio since 1970 in the U.S. rose from a rather high level, mainly because the female participation rate rose. In Germany and France it dropped, and in Italy it rose, but from a very low level.

So if you take this into account, you actually see that per person and per day—per person employment age and per day—the working time actually slightly increased in the U.S., but it dramatically decreased in France and Germany. And is this sustainable? Maybe. But only if we have productivity.

If you assume constant employment ratios and constant annual hours worked, then you see here the demographics kicking in. So, for instance, Italy would by the year 2050 end up with 80 minutes worked per day and per capita. Eighty minutes. Certainly you can have a very high living standard, but then you really have to be very, very productive.

The title of my book in German is really a code word used by every single major politician in Germany. You have politicians in Germany and other European countries who would say, yeah, we need a whole lot of reform, and then there are those who say we need a bit of reform, and then there are those who say we need no reform at all. But they all agree on we do not want to have "American conditions".

First I'll give you one quote from Gerhard Schroeder: "I do not want American condition on the labor market." Quite astonishing to say that in a situation where you have a three times higher unemployment rate effectively in Germany than you have in the U.S. Nevertheless, he says that, and he says that again and again and again. He continued: "Social Democrats are convinced that it has to be possible for people to live in decency and dignity without having to do three jobs a day and without having no protection against dismissal." Three jobs a day. That's actually a stereotype very, very popular—and I'll come back to that—not only popular certainly in Germany, but it's also popular on this side of the Atlantic.

Here's what John Kerry said during the convention in Boston: "People are working weekends, they're working two jobs, three jobs, and they're still not getting ahead."

And there are many stereotypes like that. For instance, living standards are declining. Living standards are financed by debt. Poverty is increasing. Families need two incomes to make a living, or new jobs are just McDonald's jobs. A very funny one is that new jobs are just bad jobs. Joe Stiglitz some years ago said: You Europeans are funny. You say, well, you Americans created jobs, but they were bad jobs. We Europeans didn't create any jobs, but if we would have, they would have been good ones.

[Laughter.]

MR. GERSEMANN: But actually this stereotype lost its popularity during the '90s because at one point people in Europe sensed that 140,000 people working at Hewlett-Packard weren't all flipping burgers. So this stereotype was in its popularity replaced by the multiple job-holding stereotype, the claim that people have to work two jobs, three jobs, or as one German trade leader would have it, they would have to work three to four jobs just to survive.

Actually, I heard this stereotype so often that I believed it myself. I thought like one in three or at least one in four people in America would have two jobs. Well, it's not one in three or one in four but, rather, one in 20. The official number was 5.4 percent for 2004. This is about the long-term average. The number of multiple job holders in the U.S. rose in the '80s, came down since the mid-'90s, but this one in 20 has been that way for like 30 years. So you can say it's 5.4 percent, it's a big, big problem, but certainly it's not as big as it's portrayed by people like Gerhard Schroeder or John Kerry.

However, what is true, apparently it's higher than Germany. The most recent number available for Germany was 2.4 percent. However, there's some caveat. First of all, the shadow economy is estimated to be about twice as big in Germany than it is in the U.S. So if you take this into account, probably the real numbers will be very close together. So it's very much in doubt that actually there's more multiple job holding in the U.S. than there is in Germany.

Secondly, let's just take the official numbers and accept the fact or accept the claim that there's more multiple job holding in the U.S. than there is in Europe. It's important to see certainly why could the number be higher, and there I think opportunities and incentives play a role—incentives because if you do take on a second job and you have an effective marginal tax rate of about 65 percent as we used to have in Germany up until recently, you might think twice about taking a second job. Also, here in America we all could, after we left our offices, go and moonlight at Wal-Mart. That's not really possible in a country such as Italy or Germany where shops are forced to close down at 6:00 or 8:00 or aren't even allowed to open Sundays.

Then also, if you look at the statistics, the American statistics, the people at the Bureau of Labor Statistics, I think every three years they go around and ask people why do we have two jobs or three jobs. And certainly we all have the impression, after we've seen "Bowling for Columbine," that it's mainly those single mothers, African American mothers with three kids and two jobs who are doing these moonlighting jobs.

Well, it turns out that most of the people who do have two jobs in America do it because they say they want to start a business, they do it because they think it's fun, they do it because they want to buy a second car or a third home. And only 28 percent are saying I really have to do this, I really have to do this to make ends meet, to pay for current expenses, or to pay back debt. And if you take 28 percent of 5.4 percent, you end up with just 1.6 percent of employed people in America who have actually two jobs to make ends meet. So you can still say it's a very high number, 1.6 percent. It should be much lower. It's a scandal that almost 2 percent of Americans have to have two jobs. Well, we can discuss this. But certainly it's far lower than the impression given by people like Mr. Schroeder or Mr. Kerry. And this is reinforced if you look at who actually is doing those two jobs or three jobs. And what you typically see, it's teachers, professors, accountants, psychologists. Actually, the incidence of multiple job holding among high school dropouts is about 3 percent. Among people with PhDs and master's degrees, it's more than 9 percent.

Let me get to the next question. Why have many European countries failed to generate job growth? I do not really want to go into details here, just one thing: services. The big difference between Europe and the U.S. is in services.

If you look at employment in manufacturing over the last 25, 30 years, it's been more or less stagnant. At least there's been no sustainable growth in the U.S. The same is true is those European countries. The big difference was in services employment. And here certainly the U.S. by far outperformed those European countries, as those numbers show here. Also, what we have in Europe is that the old economy, the old manufacturing companies, they might be going away, but they're not replaced by new services companies. For instance, in the IT 100 ranking compiled by Business Week, there's only one German company. And this point is reinforced if you look at the stock market.

In the United States, in 1967, of the 20 companies with the highest market capitalization, just 11 were still even in the top 60 in early 2004, and there were many more—and many new companies in the top 20s, like Home Depot, Intel, et cetera, et cetera, companies that didn't even exist in 1967.

In Germany, by contrast, of the top 20 companies of 1967, by early 2004 only one had gone under, 15 were still in the top 20, and the remaining four were still in the top 60. So the structure has basically been the same, the same companies that were at the helm decades ago are still there.

I will answer the next two questions—the last two questions together. Is cowboy capitalism needed to overcome high unemployment? Should Europe scale back its protections for individuals to restore strong work incentives?

My point here would be yes, cowboy capitalism in the sense that we should become much more American, and there really is a need for comprehensive reforms in Europe, and that piecemeal strategies might be counterproductive. The best example for that are the recent Schroeder reforms. I'll get back to that in a minute. Just to highlight the problems we are having now in Europe, it's not only that we have high unemployment. The big—very big and it's getting bigger—problem is long-term unemployment, that we shut off people from the labor market long term or permanently. The experience is that once people are unemployed for a year or two, it's very, very hard for them to get back.

The situation is very different across the Atlantic. In Italy, 60 percent of people who get unemployed need more than a year to find a new job. In the United States, by contrast, more than 60 percent find a job within three months. So that's a big, big difference. And I mention this statistic because it plays a big role in the German public discussion right now because the government is trying to reform the labor market. And there are certainly many things you could reform about the labor market, like payroll taxes, the wage level, but let me focus here on three features, that is, A, employment protection legislation; B, collective bargaining; and, C, unemployment benefits.

So far, the German system has the following features: high benefits, very strict hire and fire laws, and a very centralized bargaining system. It even goes so far that as the employee you may not accept lower wages than prescribed by the collective bargaining agreement, not even if that's the only way to save your own job or to save the whole company. The company, rather, has to go under before it's allowed to pay lower wages.

So what the Schroeder government did about it are the reforms that were just enacted on January 1st. And what he did was he left A and B untouched and reduced C. And then Schroeder said, okay, now my political capital is spent and I'm going to do nothing anymore on this front before the election in the fall of 2006.

So what did he do here? I mean, this is a typical non-comprehensive reform package. What he did—and most economists in Germany would certainly agree it did make some sense to reduce unemployment benefits because what you have is pockets of eastern Germany where effectively the unemployment rate is like 35 percent, and then you have big regions in south Germany or southwest Germany where you have only 5 percent or 8 percent. So people don't move even if they get unemployed because we give them such generous benefits.

So it makes sense to pressure them, but on the other hand, people are very reluctant to hire new people because you can't fire them anymore. So it's actually very problematic, from my point of view, to have policies that increase the pressure on people who get unemployed without giving them more and new opportunities. And you can only give them more and new opportunities if you also reform A and B. And so getting fired becomes a more—even more—tragic event. It already is because of long-term unemployment and the threat of it, and it's only getting worse if you just cut unemployment benefits, as the Schroeder government chose to do.

But certainly you might think there's an upside to it. We do not have, as Schroeder once called it, "the laws of the jungle", the hire and fire system the Americans have, as Schroeder said. Well, yeah, but look at surveys of what people actually think. Here's the number for 2003. Back then 32 percent of Germans said that they might lose their job in 2004, but only 19 percent of Americans. You get the same picture for France and Italy as well, and also for other years. Actually, Americans feel safer. So where's the benefit? I mean, you have a clear downside of the system we have, but you don't really have an upside there.

It's actually getting that bad that aside from the macroeconomic implication—or aside from creating this problem of long-term unemployment and high long-term unemployment, you also have that people—and you can really feel that right now. They get very scared. The German system is not producing economic security anymore. Quite to the contrary. I mean, they're very scared to move. Nobody is moving anymore in Germany, and you can very clearly see that in car sales. Car sales certainly are very important in Germany. First of all, we are very proud of our cars. We invented the cars. We have our autobahn. We have those great producers like Porsche and Mercedes and BMW, et cetera. And it's a big part of the economy. We usually say that one in six jobs directly or indirectly depend on the car industry, and so we simply love our cars.

But on the other side, it's certainly true that you only buy a car if you have a sense that you might be able to afford it or to pay for it when you have a leasing contract. And this I think is a very telling statistic about Germany. These are the car sales, new motor vehicle registrations in Germany and new passenger cars. And you see that we reached a high in '99, and since then it fell, and it's not coming back. Actually, last year we had a slight increase of 0.9 percent, but actually it turned out to be something like a blip because right now in February of 2005 we are at minus 3 percent year over year again. So the point is really here. Who's creating more economic security? Clearly, the German system isn't doing that.

Thanks a lot.

[Applause.]

MR. KREMERS: Well, thank you very much. I think we've learned a lot, not that Germans love cars but perhaps that the U.S. is not as bad as we thought to begin with.

Let's move on to the second presentation. This is about a book called "Transforming the European Economy," or at least that's the basis. The book has been written by Martin Baily and Jacob Kirkegaard, and Mr. Baily is going to do the presentation. Mr. Baily is senior fellow at the Institute for International Economics here in Washington. He was chairman of the Council of Economic Advisers in the Clinton administration and also a senior adviser to McKinsey. And let me just add that Mr. Kirkegaard is also in the Institute for International Economics, and before that he worked in Denmark in government and also with the United Nations.

So, Mr. Baily, the floor is yours.

Use the free Adobe Acrobat Reader to view Messrs. Baily and Kirkegaard's presentation (412 kb PDF file).

MR. BAILY: It's a pleasure to be here. I appreciate the opportunity. We like to get a chance to talk about the work that we did, and we hope you'll all buy the books as well. And let me just say that in the presentation there's a fair amount of overlap between what I'm going to say and what Olaf said. Partly because of that, I'm going to maybe go relatively fast over the parts that simply duplicate things that he said and focus on the things that are a little bit different.

There is a clear difference in emphases in the two books. I think from our point of view, we do not come out and say Europe should necessarily adopt an American model. There's no question that the recommendations that we propose, many of them, are market-oriented reforms, and in many cases the U.S. has more of the sort of right market incentives in place. But we would sort of much rather phrase it, I think, particularly if one wants to sell this in Europe as being contributing to the debate on reform, as really trying to improve the incentive structure in Europe while at the same time preserving some of the values that Europe has and in some cases does better than the U.S. does.

I think I agree with Olaf that the extent of relative insecurity is exaggerated, the difference between the U.S. and Europe. The U.S. does provide more employment opportunities than Europe, has substantially lower unemployment rates, and that's a big deal. In other areas, health care, for example, or the incidence of extreme poverty, I would say that the U.S. does worse than Europe. And so we are looking for ways in which Europe can enact reforms that improve its incentives, improve its productivity growth, improve its employment rate, but maybe preserve some of those features where it does better. Notably, I'm a supporter—we're both supporters—of some kind of universal health care system, but also I think there are ways in which the U.S. could do better on the safety net.

Now, I don't want to take too much time, but I was struck by the fact that—of course, I've worn the hat of being in the Clinton administration, and we did issue a couple of reports. I was a member of the council in the mid-1990s and then went back as chairman at the end of the Clinton administration, and we did issue two White Papers that actually stressed the points that Olaf made, which is that there aren't a huge number of multiple job takers, a lot of the service jobs that are around are pretty good jobs, and the job growth was pretty good. So I guess I've in that sense overlapped even more with what he's doing.

But I think in terms of this book, we want to emphasize where we think Europe should go. We also want to emphasize that within Europe there's a good bit of heterogeneity and that there are plenty of examples of successful economic reform of industries and economies that have adopted reforms that have worked quite successfully in Europe. And so if you want to try and push the reform program through in Europe, one way to sell it is to say look at best practice within Europe and adopt some of those programs because they've been proven to work within a European context.

Yes, of course, it's right that the European economies do face a catch-up. Their GDP per capita is substantially lower, and the gap has been widening in the last few years. And we do think that Europe should embrace a fairly comprehensive reform. In other words, we're not saying the status quo is going to work. We think there's a great deal that could be done to improve the economic situation in Europe. We think that there's a lot of urgency around that because the world is not standing still. Demographics are changing in Europe. New countries have entered the EU. We're seeing the emergence of China and maybe India, too, as global competitors. So the idea of just kind of preserving the status quo, even if you like the status quo in Europe, I think is not a possibility.

The other thing that's a little different between what we talk about and what Olaf talked about is we stress the issue of improving productivity growth. Now, one of the reasons to be concerned about that is productivity growth has slowed down. It's much slower than it certainly was in the catch-up period, '50 to '73. It's even slowed some since the '73 to '95 period. Whereas, productivity growth has become more rapid since 1995 in the U.S.

Now, there are numbers about the level of productivity that suggest that the European economies, some of them, have pretty high levels of GDP per hour. That's true. That doesn't in our view mean that there's not a productivity problem. Probably I think for me the most persuasive evidence that Europe can raise its productivity growth comes from the industry case studies that I've been part of in my work with McKinsey and the McKinsey Global Institute.

We have studied France, Germany, the Netherlands, the U.K., Sweden, Portugal, and in all of those country case studies, we found that the great majority of individual private sector industries demonstrated a substantial gap between the level of productivity in that industry case study within the European economy and the corresponding industry in the U.S.

GDP per hour is a problematic measure. It includes a lot of things—the government sector, education, health care, which are obviously very important but very hard to compare levels of productivity. We find that evidence from those private sector case studies to be quite persuasive that there's room to close those productivity gaps.

Now, they don't exist in all industries. There are some industries where Europe is substantially ahead of the U.S. in terms of productivity, mobile telephony, for example, where in 2000 France had twice the labor productivity of the U.S. and Germany had about 50 percent higher than the U.S. But we don't think that contradicts the overall story because, in fact, in that particular industry, the Europeans did a better job of regulating that industry than the U.S. did. The U.S. created a very fragmented industry with too many small players and suffered a significant productivity penalty. Fortunately, I think that's beginning to change now, but it really helped to illustrate, I think, the main thesis of what we're saying, which is that if Europe gets the story right, gets the regulation right, gets the incentives right, then there's no reason why it can't perform as well or even better than the U.S. in these cases.

Now, reforms are obviously needed to improve employment, and this is where we're going to see a little bit of overlap, so let me go quickly through these slides.

This one I think is pretty dramatic, though. This shows if you wanted to reach the Lisbon goals—and the Lisbon goals have fallen into some disrepute because it doesn't look like they're going to be even close to being met by 2010—that would have required about three million jobs per year. And as you can see, only in two years, if you count 1998, has Europe achieved the goal of creating three million jobs. So it really is not getting anywhere close to and has not over the 1990s achieved anything close to the goal it set for itself. So that certainly is a reform.

This was also something that's mentioned. Hours worked are much lower. Six weeks of vacation is great. You know, one loves to have it. But at some point, if the number of working hours gets too lower, you're really undermining the economic base of your economy, and you have to ask whether you're really creating the right incentive, whether people are really making an appropriate choice between labor and leisure just based on their preferences, or whether somehow the incentive structure that you've set up is encouraging people to work less.

I've already mentioned this part. Because of the changes that are taking place around the world, not only do we think that Europe needs to improve its performance, but we think that because of changes around the world there's a good bit of urgency. This also illustrates the point that Olaf mentioned, that there's a great deal of diversity within Europe and even within the European economies.

Now, the fact that you have countries like Netherlands and Austria and Ireland on the left-hand side is maybe a little bit deceptive because they're obviously very small economies, so it's not surprising that the variance is smaller in a smaller economy. But if you look at Italy, Germany, France, Spain, particularly Greece, you see that there are these huge discrepancies in unemployment rates, which, as Olaf noted, points to the lack of mobility, lack of flexibility as being one of the key reasons for the lack of overall job growth. People are not willing to move to where the jobs are, and they're not willing in large part because of the incentives.

Some people say, well, Europeans don't like to move anyway, that's just somehow a given, a cultural thing, they don't want to move. Well, maybe so, but there are lots of Italians in London, there are lots of Italians in San Francisco. I don't know that it's necessarily true that this is an intrinsic preference thing. I think it's much more that if you're willing to subsidize southern Italy to the point of several percentage points of GDP, then you're going to end up with persistently high unemployment in southern Italy even though unemployment in northern Italy is very low.

Also, the demographics are changing. That's going to put pressure. If you believe, as we do, that a reason for the lack of employment and the lack of hours worked is because of the incentives that are placed on people, the difference between what you get if you work and what you get if you don't work, then that potentially may get worse. So there's going to be quite a struggle in Europe just to make sure things don't get worse, because facing this demographic crush, the problems of supporting the health care and pensions of the increasing number of elderly are going to put even more burden on taxes and the work incentives of the younger generation.

That's a problem we also face in the U.S. going forward. We have, I think, less of a pension problem, but probably more of a health care problem than Europe does.

Now let me elaborate a little bit, give the examples of some of the ways in which, if Europe gets the incentives right, it is able to achieve much better performance. And I already mentioned mobile telephony. Electric power is another example. Not all the European economies I think have got that right. Germany hasn't gone far enough but still has a ways to go. The U.K. has a lot of struggles around its deregulation. We know that there are pitfalls in deregulating electric power, as California can attest. But if you do successfully deregulate—and that may mean competition and privatization; it may also mean where you have a monopoly part of the industry, as you do in electricity distribution, for example, by putting the right kind of price caps and encouraging—really putting pressure, incentive pressure on companies to improve, you can get a lot of productivity growth.

In the U.K., for example, a lot of the productivity improvement has actually occurred in the distribution system, driven not so much by a multiplicity of companies but by downward price pressure imposed by regulators. So it's really getting the regulatory incentives right. Generally that means trying to increase competitive intensity, but in some cases, it may just mean putting downward cost pressure, making sure companies have incentive to improve their productivity.

We did see in France, when France was exposed—this is one of the benefits that Europe is reaping from the single market. As the French auto industry really became fully exposed not only to the German industry but to the emerging Japanese industry which was entering with transplants into the European market, you started to see substantial restructuring in the French automobile industry.

Now, that's a good-news story in that it shows you that if you sort of take away gradually the privatization, if you allow the restructuring to take place, you see tremendous productivity growth. France had one of the highest rates of productivity growth anywhere in its automobile industry and actually by our measures overtook Germany in terms of output per hour.

The bad news around that story is that a lot of the workers that were released by the auto industry were put into early retirement. So they really only got half of it right. They got it right that they had to improve their auto industry, make it more productive, more competitive. They didn't get it fully right because they didn't take those workers and have them restructured and moved into other jobs.

One of the plants that was closed was actually in Belgium, and I think a very large number of those workers were put on early retirement. Some of them were only 48 at the time that they were put on early retirement. So that's an awfully long time that taxpayers are going to have to support the workers.

So you have to get both parts of it right. You not only have to facilitate the restructuring of companies and improve their productivity, but you also have to have the labor market incentives right as well.

This comes out of some of the work that's being done by the European Commission and by the OECD, pointing for the needs to implement some of the directives. There are things, by the way, that the European Commission and the EU is doing that will sort of improve competitive intensity, improve labor market flexibility. There are some things that I think are less positive, beginning to actually impose some greater regulations on some countries that are less regulated. So I think there's a great need to make sure that the institutions of the European Union are moving Europe in the direction of greater flexibility and incentives in its labor market, greater competition and deregulation in its product market, and the chart here mentions a couple of those cases.

I'll now go to where I was already jumping. I think the examples from the Netherlands, Sweden, and Denmark demonstrate that if you actually institute labor market reforms, you do change behavior.

Now, we don't give any of these three countries A-plus grades for their labor market reforms that they instituted. There are some remaining substantial concerns in the labor market institutions in all three of them. I think that we see now the Netherlands beginning to have more problems, and that sort of illustrates that fact as Sweden continues to have some problems, put a lot of people on sickness benefits and so on rather than necessarily putting them into employment.

But even with those caveats, the real positive lesson is that if you undertake systematic labor market reform, you can raise employment levels, you can lower unemployment levels within a European context. And all three of those countries made those labor market reforms while preserving a good bit of social protection. So in this sense, I don't think Europe has to embrace what Europe sees as cowboy capitalism, whether you associate—where you say, well, the U.S. is being misrepresented or not. Let's leave that aside. To the extent that Europe thinks, oh, we can't take away all our social protections, I think our answer to that is you don't have to take away all the social protections, as long as you create incentives within your social system to get to work.

Denmark, for example, does it in a way that says yes, we will provide you with training, we will provide you with income support, but you better go get a job, and we're going to point you to a job, and if you don't take that job, we're going to take those benefits away. So it's a fairly directive system. It's not just a system that says we'll just keep paying.

In principle, Germany has some of those same rules, too. If people aren't willing to take jobs, then they get cut off from benefits. But if you go talk to the people in Germany who administer the system and you say, well, how many people have you actually cut off, they will say nobody. Okay? So they're not making those rules effective.

So to repeat myself, there are positive lessons that you can learn within Europe that can be applied within the European context, and there are things that the Netherlands, Sweden, and Denmark can do to take their reforms to the next level and things that the rest of Europe can learn from what those countries did.

This is a rather text-heavy chart. You've got it in front of you. I won't try to read it. I'm going to mention two of these. The one is land use reform because it often does not get mentioned as a barrier to economic growth. Land use restrictions affect productivity and also employment because if you're going to have employment growth through new businesses, through the creation of new service jobs, you have to have reasonable access to land. That's one of the most striking results that I think has come out from those McKinsey studies. And it applies not only to the European countries; it also applies to countries like India and Latin American countries where it's often very difficult to get clear title to land.

It also applies, by the way, to the U.K. The notion that the U.K. is more like the U.S. than the U.S. itself is deceptive. Actually, on this we disagree with the OECD's ranking of product market regulations. The U.K. is very good at not having a lot of restrictions on starting new businesses, so that's a good thing. Many of the measures that the OECD looks at, the U.K. does very well in terms of not looking very regulated. But in its control of land and the so-called historical preservation rules, it's absolutely rigid. You can't move. You can't build anything. You can't—if you buy something like a hotel or an office building that is—if it's not brand new, if it's a historical building at all, broadly defined, you can't move a doorknob, you can't do anything, and that severely limits the ability to convert existing buildings or to change existing land use. Britain is very restrictive on the opening up of land. It's not that it doesn't do it at all. It just means that the price of land is very high and the restrictions on land use are very great. There are a number of other ways in which Britain is quite restrictive on the product market side.

This is one that I find you bang your head against the wall. If you talk about land use reform, easing up zoning laws in Europe, politicians just sort of say, no, we're not going to go there, the green lobby is so big. I think that's a serious choice that Europe has to make. If it's really unwilling to open up its land use restrictions and make it easier perhaps to recycle old land into new uses, it's going to hold back its economic growth and development.

The other one that I'll mention here is allowing a wider wage distribution. Now, you know, one of the things people point to to compare the U.S. and Europe is that the distribution of incomes and of wages is much greater—the inequality is much greater in the U.S. And that's true. I think in many ways it's a problem for the U.S. that we have such a wide distribution of income. But it's also the case that I think the attempts to preserve wage equality in Europe are inhibiting employment growth. And what we suggest is that you should allow the distribution of wages that employers pay to widen. So you can't expect employers to pay a higher wage than a worker can generate in terms of output or marginal product, because if you do that worker is not going to get a job. So by forcing excessive equality on what employers pay, you limit the number of jobs you have. You have minimum wage rates that are too high in some countries or contract wages that create too much equality.

You can preserve greater equality through redistributive taxation. There is, of course, an incentive penalty associated with that, but you don't have to make the after-tax distribution of income as wide as the before-tax distribution of income. So I think there's a lot that can and should be done there to help create employment growth.

I don't have enough time and this is probably not the context to talk about the macro side. The only thing that I'll mention is that you have to sort of get the macro policy right. If you're in a cyclical downturn, then it's very hard, even if you have structural reforms, to create employment, that a cyclical downturn kind of trumps some structural reforms. So one of the things we need to do is to make sure that monetary and fiscal policy—and that's hard in the case of fiscal policy because there are already big deficits. So there's not much room for stimulative fiscal policy. I think you need to avoid contractionary fiscal policy while at the same time improving the Stability and Growth Pact, which maybe has collapsed at this point, improving that in the long run, to improve fiscal consolidation in the long run with avoiding fiscal contraction in the short run.

I think the European central bank can afford to be a little bit easier in its aggregate demand. I think it could be a bit more stimulative, particularly in the way of fostering a climate of economic reform.

Our view is—and I think we share this with Olaf—that although there has been some progress on economic reform made, it's not nearly enough. Some of the things that have been done to reduce pensions so that they're not such a burden, to reduce the length of time that people give unemployment insurance, some of those things are going through, and those are moves in the right direction. There still has not been nearly enough done to create a flexible labor market so people move from job to job. I think there has still not nearly enough been done, and a lot of what needs to be done needs to be done at the national government level. These are things that are policies of national governments, both on the social policies and in terms of the regulatory policies, not having restrictions on—you know, you can't—even though in principle there's a single market, a lot of times a German company cannot compete in the U.K. or in Italy because of very specific, you know, rules about how you stand on a ladder, how you tow a trailer behind something. And those things all sound small and petty, but they repeat it over and over again in industry by industry and limit the competitive intensity in Europe. And a lot of that stuff has to be done on the national level and not enough has been done.

Thank you.

[Applause.]

MR. BAILY: Jacob maybe wanted to make a couple of quick points. Do you want to do that now?

MR. KREMERS: Yes, if you like, go ahead.

 

Jacob Kirkegaard, Martin Baily

MR. KIRKEGAARD: Thank you. I just want to make one point to one thing that Olaf said and maybe pre-empt some of the questions. It's this notion that Olaf mentioned that Europe has chosen not to work, and I think, you know, the idea that there should be some kind of cultural explanation for why Europeans choose to work less than Americans. I think everybody has heard the stereotype that, Americans live to work while Europeans work to live. And I just think that that's a very dangerous status quo-inducing misconception, because, in fact, if you look at the average working week, hours worked per week of full-time self-employed people in the U.S. and in Europe, they're, in fact, very close to each other. So, you know, for people that actually have the biggest degree of influence of how much they choose to work, it actually turns out that there is, in fact, no difference whatsoever.

And I think if you look at the difference in terms of labor force participation between the U.S. and Europe, it comes very much among older workers, which highlights the point that it's not really a cultural choice whether you participate—whether you choose to work or not. It's really a matter of incentives. And the fact that you in Europe have got free health care provided for you, or paid for by the government predominantly, whereas you in the U.S., in fact, Medicaid only kicks in at the age of 65, and very frequently you will need to remain in employment to have access to health care is a very significant incentive that is very different between Europe and the U.S. and absolutely, in my opinion, has a much bigger impact than any so-called cultural differences.

And one other thing: I think Olaf's book is really great in terms of exposing some of the misconceptions in Europe about what really goes on in the U.S. But to generate and sustain reform in Europe, I think there are other stereotypes that really need to be broken down as well, and the most dangerous one—or the one that really needs to be broken down, in my opinion—is that the European model is, in fact, social. There's nothing social about a model that continuously has double-digit unemployment rates and, you know, in the case of several European countries has got female labor force participation below 50 percent, et cetera. And certainly there's nothing social about a model that gives the current generation the opportunity to retire at the expense of everybody else at the age of 55 but, in fact, thereby will condemn future generations to work until God knows when if you want to maintain the same standard of living.

So, I think that that really in terms of framing this discussion and avoiding the fact that you run into a U.S. cowboy capitalist versus a social model, I mean, it really is important that you break down this idea that the European one is social.

MR. KREMERS: Thank you very much. You touch actually on the question of how you measure economic success, and I think that brings to mind a recent book by Richard Layard entitled "Happiness." I don't know whether you've already seen it. What he does, coming from a labor economics background, is also try to look a little bit deeper than only income per capita at whether countries are successful, and I think that's a good exercise. I like that book, and not in the least because it turns out that the Netherlands is the happiest country in the world.

But having said that—maybe that's something for the new book forum—let's turn to some questions from the audience. Mr. Loungani?

Questioner: Thank you, Mr. Kremers. I had a question for Olaf. I was wondering why after living six years in this country you're choosing to go back to Europe if it's such a horrible place.

[Laughter.]

MR. GERSEMANN: Well, many personal reasons. Being a reporter, it would be cul de sac to stay here unless I switch from paper to paper. I mean, I do love it here, but not least because I pay American taxes while I have six weeks of vacation. So I live in the best of the two worlds.

MR. KREMERS: Mr. Wijnholds had a question.

QUESTIONER: Thank you. I am very interested in this subject, being a European and having lived in Washington for a long time over a period of more than 30 years in various periods. I must say that I am closer to Mr. Baily than to Mr. Gersemann, certainly, and Europe needs structural reform, there's no doubt about it. And I think Mr. Gersemann focused very much on the situation in Germany which is really the worst performer, unfortunately, in Europe at the moment.

But let me be a little provocative because I think what might have been nice in this discussion if we also had somebody like Jeremy Rifkin here, who tells the Americans that the European system is superior. I don't believe that. But let me just give you a few stylized facts about how a European could see America and what are some of the side effects of cowboy capitalism. And let's contrast that with, let's call it, compassionate capitalism, because certainly we need capitalism in Europe.

But, of course, the U.S. has great flexibility in its economy, and that's its strong point. The U.S. safety net, however, is very limited, and poverty rates are relatively high in such a rich country. There are a lot of financial scandals—Enron, WorldCom, Wall Street. It's good that there's an Eliot Spitzer, of course, in this country. I think it's one of their strengths. There are two million people in jail in this country, and they're not included in unemployment statistics. There is no health insurance for 40 million people. Fifty percent of Americans say they are not happy in their work, and this I quote from a recent column in the Financial Times, where I understand Mr. Gersemann you are going to work.

Again, of course, Americans are not the happiest people in the world, according to surveys, and here I also quote Richard Layard's book, who indeed says that the countries that come out highest, according to these surveys, which you might challenge, are the Netherlands, Scandinavian countries, and Ireland.

So I do think that you might have, Mr. Gersemann, also looked at, if not some of the better performers in Europe in a contrast, also to a country like Canada, for instance.

MR. KREMERS: The question was to Mr. Gersemann.

MR. GERSEMANN: First of all, Canada is actually in many ways the best-performing G-7 country. That's very true.

I certainly ignored in my book countries in Europe like the Netherlands, like Finland, Denmark, et cetera, which really outperformed those three other European countries over the last, at least, ten years.

However, when you look at the statistics, there is—leave Canada aside for a moment—no European country which has such a high productivity growth and such high employment growth than the United States. Not in that combination. There are some who made employment gains, there are some who made productivity gains, but not in the combination of both high productivity growth and high employment growth. The U.S. really stands out, and that's why I think it's justified to compare the U.S. to Germany and France and not Sweden to Germany and France, or the Netherlands.

Also, I do not really know what's so compassionate about shutting out millions of people from the labor market. You do that in America as well, and also there's no equal access to education. But those European countries are actually performing worse. So, I mean, yeah, it's very compassionate that my father can retire at the age of 60 and play tennis for the next 30 years, as he does. But is it compassionate for the people who have to pay for that? I have my doubts. So the definition of being compassionate, it's easier to say than really to fill with content.

Also, with regard to happiness, it's certainly true that there's more to life than GDP. I totally agree with that. However, I mean, there are surveys out though I'm not familiar with this particular study by Layard. However, when you look at how optimistic people are, how many people say they're doing better than they have been five years ago, or are doing worse, also here the U.S. is doing better.

MR. KREMERS: Better than who?

MR. GERSEMANN: Better than at least those three European countries. Also, while it is true that GDP per capita is not everything, just think about it this way. When you double your income tomorrow, would this make you a happier person? Maybe. Maybe not. But if your income is cut by 50 percent tomorrow, I think the likelihood that you're going to be happier is very slim. So I think GDP per capita is an important number. And if the per capita income is 40 percent higher in the U.S. than in Germany or France, this is an important number.

MR. KREMERS: I think in part this brings us beyond your book because your book doesn't look at the Netherlands and Finland, et cetera. But my view is that GDP per capita as a measure of economic success is particularly relevant when you compare countries that are really in a different stage of development. But I think when you start comparing developed countries, I think one has to look a bit broader, and that brings us into all sorts of difficult but also interesting issues. And I think to shake Europe or European countries up, it's good to look at GDP per capita. But if you want to, I think, deepen the discussion and make it more interesting, I think it is good to look broader.

MR. KIRKEGAARD: I just had one comment, which was the notion that the U.S. has more financial scandals than Europe does. We haven't talked a lot about the financial sector, but, I mean, I think it's certainly an area where Europe has got a lot of work to do. Itt's true about WorldCom, Enron, et cetera, but, I mean, what about Parmalat, et cetera. You know, it points both ways. And if you were to look at the size of the markets and the number of companies being regulated by U.S. regulators, I think they're doing a pretty good job. And, in fact, if you were to take it even further, I mean, you could say the biggest accounting scandal in Europe is not corporate scandal. It's weak government statistics. It's how they manage to sneak into the euro zone based on fraudulent accounting. I mean, that's the biggest scandal in terms of accounting.

MR. KREMERS: Mr. Baily and then Mr. Gersemann.

MR. BAILY: One of the reasons we try to avoid in our book sort of necessarily getting into a horse race, there are obviously more things to happiness than GDP per capita. There are more things to even economic success than GDP per capita.

I think two comments about that, one that we already made, which is that the world is changing, and Europe cannot just say, okay, I'm happy to settle at, you know, a lower level of GDP per capita. The technology is changing. I think the rest of the world is changing. Europe really needs a more flexible, dynamic economy simply to preserve its living standards and to preserve the level of happiness that it has.

The second point is that a lot of the trade-offs that get made—and this is true of the U.S. too—are not very efficient trade-offs. In other words, there's a lot of 100-euro notes being left on the sidewalk because there are a lot of policies which don't really provide security, which don't really preserve jobs, but that's the claim that that's what they're doing. And so you're sacrificing GDP per capita, but you're not really guaranteeing people employment.

One of the people who's pushing the Lisbon agenda is a group in Brussels called the Lisbon Council, and one of the points they make is that what Europe needs to do is to try to provide better guarantees of employment as opposed to better guarantees of jobs, because the guarantee of holding a particular job doesn't work. Okay? People aren't keeping those jobs. What you want to try to guarantee is that there's an opportunity for employment for those that want that employment. And I don't have any real worries that that's a bad thing to do, I think, to improve the efficiency of those trade-offs.

And then on the issue of happiness, a lot of that has got to do with choices that individuals make rather than necessarily policy choices.

MR. KREMERS: A quick comment from Mr. Gersemann. Then we'll go to the question here.

MR. GERSEMANN: This is something I forgot to respond to Mr. Wijnholds: the people behind bars in America. This is certainly one of the many stereotypes, like we had a German Economic Minister some years ago claiming, okay, if we would put as many people behind bars as the Americans do, our unemployment rate would be much lower. It's probably the craziest stereotype about America.

First of all, I mean, I would totally agree, that two million people are too many, and there's something going wrong there. But with regard to the labor market implications, first of all, empirically it's done by Alan Krueger and Larry Katz, two of the best American labor market economists in this country, and certainly no cowboy capitalists. And they came up with a number that increasing the prison population in the '80s and '90s contributed about 0.1 to 0.2 percentage points to the decline in the unemployment rate. So we are talking about 0.1, 0.2 percent in the medium-term.

The other thing is most of the people, even in the U.S., get out of prison at some point, and then they look for a job again. And I think it's pretty sure that their chances, their opportunities to find a decent job, regardless of good or bad they were before they went to prison, certainly are worse. So my claim is that the long-term effect of putting people behind bars on a massive scale is going to increase employment problems and not solve them.

MR. KREMERS: Let me make one comment. We have discussed now or touched upon elements of analysis, and I think maybe it would also be interesting if one or two questions would be asked about the political economy of how to stimulate reform, how to get to reform. So maybe if you would keep that in mind, then I'll first go to the gentleman here who had already indicated earlier that he had a question. Go ahead.

QUESTIONER: It's interesting you made this point because that's precisely where I intended my questions to go. The first is it seems as wonderful as the economic ideas were, they seemed divorced from political context, specifically what is called American exceptionalism, the absence of a strong labor or socialist party in the United States. And given that historical reality, it's not surprising that we've gotten the economic divergences that we have.

And my second point is, even if one wholeheartedly believes in your solution, it seems politically infeasible. To make an analogy with an American football game, the average American election is contested between the midfield and the other team's goal line; whereas, the average European election is between one team's 40-yard line and the other team's 40-yard line. So for an American to run on Jeremy Rifkin's program as a European Social Democrat would be a ticket to the political wilderness. And any European saying that America is the economic ideal would equally end up in oblivion. So my question is: how we get there, that is, politically accomplish valuable economic changes.

MR. KREMERS: Thank you very much. I can tell you one thing, and that is that no European will understand American football. At least I don't understand it at all. But I thought also the gentleman here in front had a question, so go ahead. And maybe if you could just state your name and affiliation.

QUESTIONER: Thank you. My name is Fritz van Beke. I'm another expatriate Dutchman, and out of my experience with the two continents, I would like to make a few observations.

The first one is I have lived in this country more than 45 years. I would say that six years is not nearly long enough to understand this country, period. And so one gets into this thing about, you know, myths and whatnot. Yeah, you can pick up numbers here and there, everywhere, show whatever you want to show, you know. That's very easy. And if you take a slightly different period, you show something else. No problem. But I would question a couple of things. One is on this GDP per capita question. There are other measures. There's the human development index, and certainly Europe—generally, many European countries rank higher than the United States on that, without any doubt. I don't have the numbers here.

Secondly, on the labor market flexibility and unemployment, what the U.S. has done is it has a lot of flexibility in the labor market, at the lower end especially, by allowing illegal immigration into the country. It has basically sacrificed the employment—it has basically sacrificed the black population, the black urban population in the inner cities, you see, and it's left immigrants come in to fill all the low-wage jobs. So you should also look at the unemployment rates for blacks and so on if you're going to make these comparisons. And I don't like to make these comparisons because I don't think it gets you anywhere.

The point is—a number of people have said it, and it's very hard to disagree with it—that obviously there is room for structural reform in Europe. And that's all and let's stick to that.

Just one more comment that I wanted to make, and maybe the German gentleman has a reaction to that. I was in Holland in February, and I read an interview in one of the leading Dutch papers with the outgoing chairman of Siemens, and he made the point that basically Anglo-Saxon economists, financial types and everybody, just simply don't understand what is going on in Germany. And he said there's a lot more change below the surface going on than is being recognized and given credit for. He said there's a lot of work being done with labor unions and all kinds of fronts, and there's much more flexibility already there and still in the making than, you know, what the Anglo-Saxon observers generally give them credit for.

MR. KREMERS: Thank you very much.

Well, Mr. Gersemann, you were invited to say something nice about Germany.

[Laughter.]

MR. GERSEMANN: First of all, you might be right, I'm not in the position to say anything about the U.S. after having lived here for only six years. However, we do have a public discussion about America in my country, so other people do talk about America, even people who have never been here. So, I mean, the discussion must start somewhere. I agree totally—as a non-American, I don't really understand why the African Americans are lagging behind so much. And that really is not a question I would like to go into.

Also, what I looked into, my book is the last 25 years. I'm not looking at what happened since like '96 or '97. I'm looking at what has been happening since at least the late '70s. And, furthermore, on the human development index, there are six countries in the world who are ahead of the U.S. I don't have it off the top of my head. All of the G-7 countries, including France, Germany, and Italy, are behind. They're like 17th, 18th, 21st. They're behind America, not ahead of America.

The last point about change in Germany. It is true, there is a lot happening below the surface, and that is, the system is eroding from below. So it's not reformed by politicians, by the government in a planned way but, rather, it's eroding. So, for instance, collective bargaining: officially it's still there in eastern Germany, unofficially not. So we adopted the Italian way of solving people by regulating things a lot and then trying to circumvent it. Maybe it's the only way, but I really doubt if this will be the road to success.

MR. BAILY: Can I comment on that? I agree with many of the comments that have been made. The implication was that politically it's going to be very difficult to have change in Europe. Yes, I think it is going to be very difficult.

If it's correct, as we indicate, that the current system is not sustainable, then that will have the effect of really forcing change. I don't think that Schroeder was a natural reformer out of ideological conviction. I think he enacted reforms because he felt he had to because of the budget pressures and various other things. So I think there are some very strong economic pressures that are pushing towards reform. Whether the political process will get Europe to the right place, the place that Europe wants to be, not that I or Americans want it to be but where it wants to be, remains to be seen. But I think those pressures are very strong.

Let me make a comment. Olaf has come in for a bit of criticism here. Let me point out that when I went and Jacob and I went to Germany, to Europe, to talk about some of this stuff, I was stunned by how gloomy a lot of the sentiment was in Germany, not only by political figures, by union figures, by business people, by some of my McKinsey colleagues that work with a lot of companies throughout Europe. Yes, I think there is some change going on, and I hope you're right that the flexibility is sort of bubbling up from the bottom. But at the same time, I think there's a tremendous amount of concern. And Olaf's not the only German talking about how difficult the situation is in Germany. Hans-Werner Sinn is one of the most distinguished economists and one of the most influential economists in Germany. I went to a talk by him, and, boy, if you want to hear a gloomy story about Germany, you should go listen to Hans-Werner Sinn, because he's a lot more gloomy than I am.

MR. KREMERS: But he is not a cheerful man, I think.

[Laughter.]

MR. KREMERS: We have to discount that. But I have seen a very long arm there at the back already for some time. Could you state your name and to whom your question is addressed?

QUESTIONER: Sure. My name is [inaudible]. I'm working in the office of the Executive Director for Germany here in the Fund, and I was about to rush to Germany's defense, so to speak, in that capacity before Mr. Baily made some more upbeat remarks on Germany. So I can cut this a little bit short.

I still want to say that one thing, that I would also point to the fact that over the past five years Germany has seen a huge effort in terms of wage moderation, and this has brought down unit labor costs tremendously, as it was shown in one of the recent articles in The Economist, for example, and this is certainly something which is very favorable for Germany also as an exporting nation.

I wanted not to dwell much more on Germany but to touch a little bit on the reform process in Europe, in the European Union as a whole, and why there is so little consensus, at least among ordinary people I would say, for economic reform,. This can right now can be seen very well, for example, with the services directive.

I think what politicians and also us as economists have to keep in mind is that many people—and this is certainly true for Germany—at this stage feel overburdened by reforms. For ordinary Germans, five years ago the deutschmark just went away, and then this adds, in particular in East Germany, to all the challenges that have been created by the reunification of the country. So the lesson from that is that obviously strong political leadership is needed to convince people of the benefits of Europe and of the benefits of structural reforms. But this will take time. It will need a lot of patience and a lot of explaining on the part of us, the economists, where these benefits could lie for ordinary people. And I would recommend that everybody working for the European Commission, the Director General for Competition should spend like four weeks in eastern Germany bordering Poland and to convince the construction workers there of the benefits of the service directive. That would be an improvement.

Thank you.

MR. KREMERS: Could I tie it in with an observation of my own? I thought one of the last slides of Mr. Baily's presentation was interesting where he showed us the top priorities for reform. And what struck me in that was that they were, I think virtually all of them, action points for national governments. And I think tying in with the question or the observation just made, a question to three panelists, where do you expect the best chances for reform, national European? Also, one slide of Mr. Baily—one or two even—suggested to me that maybe big business in Europe is one of the biggest obstacles to reform, the national champions. So where should we focus our political economy to come to reform?

MR. KIRKEGAARD: I can certainly comment on that. I think it also goes to the question from the gentleman in the middle row. I think it's dangerous to perceive that there is a left-right divide in Europe, whether or not you conduct structural reform or not. Yes, it's true that obviously Gerhard Schroeder is a Social Democrat, but Jacques Chirac is nominally, in fact, right wing. So is Silvio Berlusconi, and these are the two countries which are the perpetual laggards in terms of implementing the internal market and certainly meeting the Lisbon goals.

So it's not so much that there is a left-right divide in Europe as a divide between countries in which you reach a consensus about the need for reform and countries in which this is not the case.

And another thing is that it is wrong to perceive, in my opinion at least, unions, for instance, to be uniformly bad for structural reform. While it's true that the unions were the ones that organized the 35-hour week strikes in France, et cetera, in fact the reason that the unions in France and Italy are particularly obstructive in my opinion is because for historical reasons you have several competing unions on the left wing of a lot of European countries—you know, the Trotskyites, the socialists, the communists, et cetera. And the regulations give these unions, despite their low membership, national representation. They are the ones that have to sign up on these national bargains.

But to answer the question of whether you should create a consensus in individual countries for reform at the national level or the EU level: I think in terms of reforming social institutions, et cetera, doing that at a European level is extraordinarily dangerous because, I mean, all you have to do is look at the participation rates in the European elections. What was it the last time? Was it 40 percent on average? Whereas national elections in most countries are far higher.

So to reform institutions that basically will have a very direct impact on people's daily lives at a European level I think is a recipe for disaster. And not just in periods where you have referendas to pass. I mean, you know, I'm Danish so I've participated in a number of these referendas and can certainly attest to the fact that you're not voting on what's in the text. You're voting about perceptions about what goes on here. Just as the perception is that the service sector directive will inevitably lead to social dumping across Europe. The issue is that all workers that come in under this directive have to adhere to national minimum labor standards—minimum wages, et cetera. So the risk of social dumping in my opinion is quite limited. But obviously this discussion has already been framed. And, you know, the battle has, quote-unquote, already been lost.

MR. KREMERS: I have been instructed to wrap up at 2 o'clock, but I think I would like to give the floor to maybe Mr. Baily on this subject, and then the last word to Mr. Gersemann.

MR. BAILY: Well, I'll be very quick because I think I've probably said much of what I want to say. I think there is a danger in that the EC or the EU institutions become an obstacle to reform. So a lot of what has to be done has to at the national level. I think it would improve the chances for success if the EU institutions were firmly on the side of reform, and I think, you know, at least at the top, Barrosso has shown an enthusiasm for reform. He's gotten into a certain amount of trouble for that, but I think that's a courageous stand that he's taken, and I think he knew, coming from Portugal, the need for reform, and I think he's carried that with him as President of the EC.

To the extent that the EC can become something that encourages national governments to reform, I think it's positive. To the extent that it ends up on the other side actually forcing national governments to be more regulated and limiting the extent to which competition among countries within the EU encourages reform, I think it's going to go in the wrong direction. So I think the jury is still out on that.

MR. KREMERS: Thank you very much.

MR. GERSEMANN: I have my doubts whether reforms should be imposed upon people against their will because that's, I think, one of the problems we're having right now. People feel in Germany, for instance, that these cuts in unemployment benefits are imposed upon them without at the same time they are given more and more opportunities to find more jobs. I made this point earlier. So I think people really have to be convinced that reforms can work, are beneficial if done correctly, and it has to be done by leaders, I think, who somehow have the aura of optimism, like Reagan did 20 years ago in this country, his `it's a new morning' in America. I think we need something like that rather than a strong leader, because strong leadership in this sense is imposing something on people against their will. I think people really have to want it themselves; otherwise, it's not going to work.

Also, with regard to the European Commission, the European Commission is the McKinsey of Europe in a sense, because it's used by national governments to push through reforms. We in Germany would still have our rotary phones if it were not for the European Commission, Because the unions were so strong, the government couldn't do anything about it, so it outsourced the job to the European Commission: "please tell us to reform the telecommunications market". And in the same way as a company you bring in McKinsey, then McKinsey says, "okay, you have to do this or that", and then executives tell their employees, "yeah, we don't want to really do it ourselves, but McKinsey says it makes sense, and they are the smart guys."

So I don't know, I mean, it worked so far with telecommunications, for instance, or utilities. If this is the road to success, I really have my doubts because in the end, if you look at how many reforms are needed, the reform process needs the backing, strong backing by the population and a mandate, like the British gave a mandate to Maggie Thatcher 25 years ago.

MR. KREMERS: Your words about an optimistic leader I think are fitting concluding remarks, so let me thank the three speakers maybe with applause from the audience.

[Applause.]

MR. GERSEMANN: Thank you very much also to the Fund.




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