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Europe between dirigism and liberalism

Europe between dirigism and liberalism

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Published by Antonio Santangelo
ISPI analisys about European Union
ISPI analisys about European Union

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Published by: Antonio Santangelo on Mar 04, 2010
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The world is in the midst of asevere economic crisis whoseeffects are still not totallyclear. Its social and politicalimpact (i.e. changes in labourmarkets, ruling classes, etc.)is beginning to be felt, thusreflecting the lag that usuallyexists between changes inoutput and changes in employ-ment (and political pre-ferences).Despite this lag, a largedebate on the possiblewinning economic model inEurope after the crisis hasbeen already prompted.To put it simply, two modelshave been confronting eachother in Europe so far: theliberal Anglo-Saxon model andthe social market economy ofcontinental Europe. One couldargue that this draws an over-simplified picture out of whicha much more complex situationexists. Indeed, significantdifferences can be detectedinside these two alternativemodels and each encompasses – at least partially – manypeculiar features of the other.For instance in continentalEurope, the State-centredFrench economic model (theso-called
) cannot befully matched with theGerman corporatist systemand includes many elementsof the typical Anglo-Saxonmodel (if anything for theFrench participation in theEuropean Single Market). Inaddition, the relatively smallNorth European countrieshave tried to follow analternative path which putstogether a large welfare stateand free-market reforms.Notwithstanding these differ-rences, the identification of twocompeting models (Anglo-Saxon and continental) can beread as a good approximation ofthe reality, especially for thebiggest European economies.This simplification can beextremely useful not only toevaluate the best economicmodel to cope with the currenteconomic crisis but also tocheck its ability to be thepreferred option for Europeancountries (and the EuropeanUnion as a whole) in the post-crisis era.
?No, thanks
Despite the positive heritageof Thatcherism in GreatBritain in the last decades,continental Europe has optedfor a social market economybased on a “big-size” State.On the one hand, this implieshigher taxes, heavy regulationof product and labour marketsbut, on the other, also agenerous social safety-net.This continental approach hasalways been criticised by“orthodox” liberals who havewarned that a minor emphasison free-market will lead – sooner or later – to less
N. 138 - MAY 2009 
Carlo Secchi and Antonio Villafranca 
Europe after the Crisis:
vs LiberalismAbstract
The socio-economic model of continental Europe seems to win over the Anglo-Saxon one during the current crisis (at least according to the British «The Economist»).But one should also wonder if and to what extent figures show that this would-be victory is really taking place. Is this a completely unexpected result? Is it in line with economic literature or a new discovery in economics? The Policy Brief analyses the functioning of these two competing models during the crisis and highlights their advantages and shortcomings to cope with the post- crisis era. A mid-way solution between them would represent a successful response but only if it could be included in the framework of the European Union. The EU seems the ideal and inevitable place to find a compromise but the sensitiveness of the future competences and powers to be handed over to the EU and the growing differences in the political space of the enlarged Europe are challenging this view.Is it possible to find a “second best” solution not necessarily including the entire EU but – at least in the short-medium run – a part of it? 
Carlo Secchi is Vice President of ISPI and Professor of European Economic Policy at Bocconi University, Milan.Antonio Villafranca is Senior Research Fellow of ISPI.
ISPI - Policy Brief 
productivity of the economicsystem, less competitivenessin international markets and,ultimately, less economic growthand employment. Besides, theexpensive welfare state maygive rise to a debt-fuelledeconomy hampering the futuredevelopment of a country andposing problems of inter-generational equity. In fewwords, the sclerotic continentaleconomy appeared to beoverregulated and too depen-dent on State interventions.This was the prevalentopinion on the continentalmodel until a US-generatedfinancial crisis turned itselfinto a full-blown global crisiswhich hit Europe last yearwith severe economic andsocial consequences un-evenly spread across itscountries.The unparalleled intensityreached by the crisis ischallenging this view andputting into question thesuccess of models ofeconomic development wehave been experiencing sofar.In an increasingly uncertaincontext verging on real panic,some people have also raiseddoubts about liberalism itselfand its future sustainability(for instance in environmentalterms). As a result, the crisisrisks to engulf not only theinternational economy butalso the liberal approachitself, which is showingunexpected drawbacks in atruly globalised economy. Butthis criticism seems to be tooextreme. Rather, the crisis isbringing back to the surfacerecurring, if not old, questionson the liberal economicsystem: the presence of theState in the economy; marketfailures; proactive use of fiscalpolicies; participation in inter-national economic governance;the environmental sustainabilityof capitalism, etc
.These questions are notparticularly original as theyhave been characterizing thecapitalist system since itsorigins, but the depth and sizeof the current crisis areplacing new emphasis on thebest model – in the frameworkof a liberal approach – aEuropean State should optfor. In particular, the unevensocial impact of the crisis inEurope is stressing the limitsand drawbacks of the Anglo-Saxon model while sheddinglight on the benefits of thecontinental one.The British «The Economist»fuelled the debate on the bestEuropean economic modelwith an unexpected – andpartial – 
mea culpa 
whichtouched upon the very coreprinciples of the newspapersince its foundation in 1843:
capitalism anddecreasing role of the State inthe economy. In particular, thenewspaper stressed the factthat a «new Europeanpecking order has emerged,with statist France on top,corporatist Germany in themiddle and poor old liberalBritain floored»
These issues are extensivelyanalysed in the volume
Liberalism in Crisis? The European Economic Governance in the Age of Turbulence 
, in C. SECCHI - A.VILLAFRANCA (eds.), to bepublished by Edward Elgar in July2009.
Europe’s new pecking order 
,in «The Economist», May 9-15,
Indeed, data show that all thebig European countries (withslight differences) have ex-perienced a severe economicdownturn in the last quarter of2008 leading to a modest0.9% of GDP growth for theEU as a whole on annualbasis. Things will be evenworse for the EU’s GDP (-4.0%)next year. Clearly, no goodnews can be predicted for thethree biggest Europeaneconomies in 2009: -3.0% ofGDP in France, -5.4% inGermany, -3.8% in the UK. Inaddition, the severe economicdownturn will be inevitablymirrored by a dramatic rise in job losses. The averageunemployment rate for thethree countries is expected toincrease by 8.8% in 2009 and10.2% in 2010, with minordifferences among them.Nonetheless, the social impactof this downturn in 2009 (near-stagnation being the bestforecast for 2010) and thereasons behind it areconsiderably different in thethree countries just becauseof the adopted economicmodel.In the UK, GDP reduction willbe determined – to largeextent – by a significant fall indomestic demand (-3.6%).Therefore, the limits of a smallsafety-net leading to a sharpdecrease of private consump-tions in times of crisis (-3.4%in 2009 and -1.5% in 2010)are crystal clear. In thiscontext, it comes as nosurprise that public con-sumptions will sharply rise inthe next two years (3.6% and2.9%, respectively, in 2009and 2010) as part of the hugefiscal stimulus measuresannounced by the UKgovernment. These measures
ISPI - Policy Brief 
are estimated to account for aquarter of the forecastincrease in public deficit ratio(from 7.2% in 2009 to theimpressive 13% in 2010).Obviously, this needs to beread as the attempt of theBritish government tocounterbalance its modestwelfare state (and the ensuingincome squeeze for itscitizens during the crisis) withnew measures of publicspending. This will also leadto an unprecedented increasein the UK debt ratio from 66%in 2008 to about 79% by2010.The situation is rather differentin continental Europe. In thiscase, a strong welfare statealready exists and automaticstabilisers – including unemploy-ment benefits (such asredundancy funds, mobilityallowances, solidarity contracts,etc.) – are working at fullspeed, even if mechanisms,amounts and timing differ foreach country. As a result, thetrend of private consumptionsis not expected to be negativein France (+0.2% in 2009 and+0.3% in 2010), while amodest reduction is foreseenin Germany (-0.5% in 2009and -0.7% in 2010). Thisimplies a minor need forincreased public consumptionand fiscal stimulus (ifcompared with the UK) withlower pressures on publicaccounts. The French budgetdeficit is projected to rise to6.5% in 2009 and to 7% in2010, while Germany willreach 4% and 6%,respectively, in the next twoyears. These figures aredefinitely above the limits ofthe Stability and Growth Pact(SGP) but they look low ifcompared with the skyrocketedBritish data.The differences betweenGermany and France stemfrom the main source of theGDP fall: foreign balance(60%) for the export-orientedGermany and stockbuilding(40%) for France (the foreignbalance contributing for 33%)in 2009
.Therefore, the continentalmodel seems to prevail in thewake of a crisis as it can relyon existing safety-nets thatmake the burden less painfulfor citizens.On the political side, onecould easily predict thatpeople will clearly perceivethe potential superiority (andadvantages) of this model andtend to favour and vote forparties supporting it. As aresult, the policy recom-mendation for the UK wouldnot be simply to increase thesize of the State by spendingmore but to improve thequality of the State interventionby spending better throughconstant and efficientinvestments (as the Frenchhealth system demonstrates).But in doing so, we are notcertainly making a newdiscovery in economics. It hasalways been clear that theAnglo-Saxon model wins intimes of growth but it makesthe social impact of the crisisharder. Conversely, thecontinental model hampersgrowth potentials but makesthe crisis less painful and itsexit smoother.One should also note that thesystemic nature of the current
Calculations by the authors ondata provided by the
Economic forecasts - Spring 2009 
, EuropeanCommission, Directorate-Generalfor Economic and Financial Affairs,March 2009.
crisis is contributing to em-phasize the positive aspects ofthe continental model. Not-withstanding the unevensocial impact, the presence ofa symmetric external shock(as the crisis is hitting all theEuropean countries) allowedthe Council to ease theMaastricht criteria with norelevant complaint by memberStates. But in case of anasymmetric shock (hitting aState or group of States)governments would berequired to get a specialexemption from the EU (alsounder the revised SGP) toovershoot the 3% deficitcriterion (and, in any case,respecting precise and narrowlimits)
. This would inevitablyreduce the available optionsof a single government and,ultimately, limit the benefits ofthe continental model sinceautomatic stabilisers wouldnot be allowed to work fullyand no transfer fromEuropean funds could beforeseen.In sum, the debate over thebest model of economicdevelopment is anything butnew. Also today’s crisis isstressing benefits and
In 2005 the Council has redefinedthe exception foreseen in TEC, art.104, par. 2a: any (temporary)excess over the reference valuewhich results from a period ofnegative growth rate (thus nolonger a recession of at least 2 percent, or 0.75 per cent), or evenfrom the accumulated loss ofoutput during a protracted period ofvery low growth relative to potentialgrowth, should be considered asexceptional, and therefore notsanctioned. See C. ALTOMONTE
et al 
EU Fiscal Policy in the Age of Turbulence: will the Lisbon Strategy Survive It? 
, in C. SECCHI- A. VILLAFRANCA (eds.), cit., p.134.

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