The New Europeans

Can an election change France?

Wall Street Journal
Saturday, May 5, 2007 12:01 a.m.

The changing of the guard in Europe's biggest countries is a chance for the Continent to renew itself. That's the good news. Here's the other kind: This fresh crop of leaders doesn't look well-placed to pull it off.

New political management will be in place by summer. Whomever the French elect tomorrow, the next President is going to be a younger face. Tony Blair plans to set a date next week to give the keys to 10 Downing Street to Chancellor Gordon Brown. Germany and Italy chose new leaders in the past 18 months. All are different, and Britain is the one economic standout, but this foursome sets the pace in Europe.


France is a good test case. Its socioeconomic troubles are nothing unusual for Old Europe--from stagnant growth to a debt-ridden welfare state to restive, underemployed young Muslims. But the political barriers to tackling these problems are highest in France. The presidential election, pitting center-right Nicolas Sarkozy against Socialist Ségolène Royal, might provide a mandate for change. According to an Ipsos survey on the day of the first round of voting April 22, the three main issues were unemployment, purchasing power and economic insecurity.

In the runoff, Ségo and Sarko have proposed very different solutions. Ms. Royal would bump up the minimum wage, already the highest in the OECD, by 20% and spend lavishly on social programs. She wants to make life easier for business, but the bulk of her program is old school Socialism. If Ms. Royal is the vision of a reassuring but untenable past, Mr. Sarkozy promises an uncertain, tumultuous, possibly brighter future. He mixes free markets and protectionism, yet emphasizes "action" and "rupture." The man wants to shake France out of its doldrums, the woman to softly nudge.

Even France may be ready at last to abandon statist orthodoxy. Mr. Sarkozy got 31% in the first round, the highest score for a right-wing candidate since 1974, and heads into the runoff with a nine-point lead in the polls. French voters are saying something must truly change. But will it?

Germany gives a half-reassuring answer. The "sick man of Europe" a few years back, a nickname today applied to France, the world's third-largest economy notched a recent high of 2.7% growth in 2006 and saw joblessness last month fall to its lowest level in five years. The previous government's limited welfare reforms helped, but the real credit goes to Germany's private sector.

Global competition, free capital flows and the single European currency have forced Deutschland AG to go around the politicians and get its act together. German companies restructured, outsourced aggressively and won wage concessions from unions. Now the world's biggest exporter can take better advantage of globalization. Last year, exports grew 13% and investment 8%, driving the revival, since consumption was up only 0.9%. Likewise in Italy, the private sector bypassed a shambolic state to pull the country out of recession; look at the turnaround at Fiat.

Europe's last watershed election was Margaret Thatcher's in 1979. Thanks to her and the Reagan Revolution, as well as globalization, politicians today matter less. In spite of Mr. Brown's penchant for stealth taxes and regulations, New Labour's commitment to leave Thatcherite reforms in place means that investors have little to fear from the change of leadership in an economically vibrant Britain. The Nordics, Ireland and Spain are all doing well after opening up their economies in recent years.


Alas, in the "Big Three" the pols have a central role to play--mainly to undo the policy mistakes of the past. Whether for lack of conviction or political will, they're falling short. Content with high approval ratings, Chancellor Angela Merkel has shelved her promises of flat taxes, the easing of firing restrictions and an overhaul of the health system. Her one big move was a three-point increase in the VAT this year, showing that Continental politicians can still do plenty of damage. Retail sales are down 9% in the first quarter. Italy's Prime Minister Romano Prodi pushed through some deregulation but also a big tax increase.

France's next President inherits an arguably tougher situation. Exports and market share abroad are falling and the French outsource less than Germans or Italians. France lags Germany on labor and welfare liberalization, which along with regulation and high taxes stifles innovation and economic growth. Capital and skilled workers are moving out of France.

The campaign may have culminated in a clear left-right split, but with little room for free-market ideas. In a telling moment in Wednesday night's presidential debate, Mr. Sarkozy declared in his concluding statement that his priority was "to protect France from delocalisation," or outsourcing. He didn't provide details along the lines of Ms. Royal's tax on companies that move operations overseas. In France, both left and right have pushed statism as well as market reforms when convenient, but neither has yet embraced anything even resembling a Thatcherite agenda.

Until a political consensus emerges in the Big Three that competition is the surest route to job creation, lower prices and higher wages, don't hold your breath for a genuine European economic renaissance.