Bookshelf: Europe needs action

This diagnosis of Europe's failure to exploit its advantages sends the message that reform is long overdue.

by David Smith, economics editor of the Sunday Times, UK
Last Updated: 23 Jul 2013

Timing is everything, in economics as in so many other things. Europe as an Economic Powerhouse starts with Victor Hugo's rousing 1849 vision of a Europe no longer at war but battling on trade. He then fast forwards to the late 1980s and early 1990s, when the 1992 vision of a European single market was greeted with widespread optimism.

The US was weary, Europe apparently dynamic, refreshed with the new blood of EU latecomers such as Spain and Portugal and the prospect of a fully functioning internal market. Both Hugo's mid-19th century optimism and the Euro-enthusiasm of the late 1980s suffered from a poor sense of timing. In Hugo's case, it took a few minor wars and two major ones to get to something like European unity. More recently, single market optimism has turned to ashes in more than a decade of inferior economic performance.

So has Fassbender got the timing right this time? He is director emeritus at McKinsey and brings a consultant's eye to pinpointing the 'client's' problems. His diagnosis of Europe's failings over the past 'lost decade', which takes up the early chapters of the book, is hard to fault.

The single market is encumbered by closet protectionism and red tape; there is no single European capital market; the euro's introduction has resulted in economic divergence among its members rather than the hoped-for convergence. In some cases, that divergence has been exacerbated by the fiscal straitjacket imposed by monetary union's budgetary rules.

Most of all, EU countries have failed to follow through on the bold declarations made at Lisbon in March 2000, when the aim was to create "the world's most dynamic and competitive knowledge-based society" by 2010. The Lisbon agenda has been scaled back to the point of invisibility, largely because of a reluctance to embrace structural reforms.

Europe's potential advantages over the US, Fassbender suggests, include "a more inclusive social model, a more equal distribution of income and a more generous welfare state". But the vision of the 1990s came to nothing, perhaps because nobody had the imagination or political force to leverage these advantages.

So what should Europe do? Fassbender's programme for action begins with completing the unfinished business of the single market, enabling new commercial champions to emerge as they exploit economies of scale. It should also include an integrated capital market and free movement of workers. He also advocates replacing red tape with 'smart regulation', rather than simply deregulation. Smart regulation would be run from Brussels, introduced on strict cost-benefit tests and work on the basis of broad principles rather than rigid rules. Sunset clauses would be the norm for most regulations, to guard against regulatory creep.

Europe, too, has to build on its brand strengths, through what he describes as 'category definers' - firms that stand for excellence in their sector. From Stihl in chainsaws, through Mercedes in cars, Swarovski and Gucci in luxury goods, Zara in retailing and Dyson in vacuum cleaners, Europe has its share of category definers. But it needs a lot more and it is up to business to "seize the opportunity and anticipate future industry evolutions in order to be among the definers of new categories".

Finally, Europe needs to 'reinvent' the state. That will mean privatisation, lower welfare spending (but higher pensions) and a government sector more geared to providing an environment that encourages economic success, rather than picking up the bills for economic failure. "European welfare states will become more socially just and cheaper to run," he writes. "A leaner government, staffed with better people, will get regulations right and help private enterprise, in part by curtailing its own size."

Is it achievable? Could his recommendations, which I have only touched on, create the kind of transformation Europe needs? The recipe is certainly enticing, but there is little evidence that European politicians are ready to grasp the reform nettle seriously or, perhaps more importantly, that they could get it past their voters. Fassbender's book is clear, concise and mercifully low on jargon. The message is that it is time to be more optimistic about Europe again, if only because the alternative - a tired continent dragged down by unfavourable demographics - is so unpalatable. Europe needs action.

Europe as an Economic Powerhouse: how the old continent is gaining new strength, by Heino Fassbender, Kogan Page, £25, ISBN: 0-74944-556-4.

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