Diego Zuluaga

Diego Zuluaga is International Research Fellow at the Institute of Economic Affairs.

The latest episode in the Greek debt drama, which ended with the Greek government’s agreement to undertake much-needed reforms in labour market regulation, tax and pensions in exchange for a third, €86 billion bailout from Eurozone creditors, has convinced many that Germany will do whatever it takes to shape the single currency area in its own image. Before we know it, these pundits argue, we will all become penny-pinching, productivity-obsessed Fritzes with no time for leisure and no compassion from our fellow Europeans. Auf Wiedersehen, ‘social Europe’ and welfare state!

Only one man stands in the way of this Teutonic nightmare. Faced with the prospect of continued austerity from Berlin, François Hollande, the socialist President of France, has stepped forward to call for a different Eurozone, one based on greater fiscal and social union. What this would mean in practice is, among other things, a harmonised minimum wage and equalised corporate tax rates. And given that Monsieur Hollande has refrained from reforming either during his three years in office, one would assume that he wants them harmonised to French levels.

This would be no small feat: at €1,457.52 per month, the French national minimum salary is among the highest in Europe. Its corporate income tax rate of 33.3 per cent also tops the charts – and that excludes a temporary 10.7 per cent surcharge levied on companies with a turnover greater than €250 million. (French managers should be reminded of Milton Friedman’s quip that “there is nothing more permanent than a temporary government programme.”)

It doesn’t take a macroeconomic visionary to predict that such policies would be catastrophic for the Eurozone. Indeed, it’s pretty clear that they have been a disaster for France. Its overall unemployment rate has been stuck at 8 to 10 per cent since the mid-1980s, suggesting very high structural joblessness due to high minimum wages and burdensome labour market regulations that protect some employees while leaving the rest out to dry. Youth employment looks even bleaker, with around a quarter of young French unable to enter the job ladder because their productivity doesn’t justify the wages mandated by the government.

Meanwhile, French entrepreneurs have been flocking to London to avoid the weight of the French state, taking advantage of the ease of setting up a business in the UK, as well as the corporate tax rate of 20 per cent, which is now to be lowered to 18 per cent.

All the evidence shows that the French model isn’t working in France. Just imagine what would happen if you took French employment and tax policy and transplanted it to Greece, Italy or Spain, where average worker productivity ranges from 50 to 80 per cent of French levels and business activity is only now beginning to recover. Young Greeks and Spaniards could say au revoir to the prospect of gainful employment – that is, the half of them who are now able to find work.

So, what makes Hollande think that it would work for the rest of the Eurozone? If it was bloated governments, reckless spending and heavy regulation that caused, magnified and dragged out the crisis, is more of the same going to entrench the recovery?

Hardly. Indeed, there are broadly three categories of Eurozone countries according to how they entered and went through the crisis. There are those such as Germany which reformed spending and welfare policy before 2007 and survived the downturn relatively unscathed. Then there are those which had severe and structural deficiencies as crisis struck, and have since implemented significant reforms to make their economies more competitive, notably Ireland, Portugal and Spain. Finally, there are those such as France and Greece which remain unreformed eight years after the downturn started.

If we then look at each country’s relative macroeconomic performance, a neat correlation becomes clear. Reformed economies have left the worst of the crisis behind them and are growing at increasing rates, with unemployment falling apace. Unreformed ones continue to struggle, with GDP growth hovering around zero per cent and joblessness refusing to buck. This isn’t just a correlation but a causal link: structural reforms of the liberalising variety lower employment and business costs, which makes the private sector more competitive and boosts exports and domestic demand, leading to higher job and growth figures. Indeed, the evolution of unit labour costs across the Eurozone has mirrored the improvement in countries’ economic prospects. Reforms matter.

So, a French Eurozone is clearly not the way forward if growth and widespread prosperity is what we’re aiming for. What, then, is the model to follow? A few can be offered. The two I’m most fond of, because they’re in Europe and can easily be emulated, are Switzerland and Sweden. Switzerland is a highly decentralised confederation, where each individual canton sets its own corporation tax rate and where citizens recently rejected proposals for a minimum wage, identifying this misguided price floor for what it is – a crude intervention which shuts the low-skilled out of productive employment. With an open economy and liberalised markets, Switzerland has thrived as the countries around it have floundered.

Sweden also has much to boast about. Its economy is one of the freest in the world, following major reforms in the 1990s to tackle debt travails of its own. It is now easier to hire and fire in Sweden than almost anywhere else in Europe, red tape on business is comparably minimal, and the private sector has been involved in public education, welfare and social services. Crucially, Sweden remains a highly redistributionist state, but intervention takes place without disrupting market outcomes. This means that, rather than setting a minimum wage, the Swedish government acknowledges economic reality – letting businesses pay workers according to their productivity and supplementing their income through direct transfers where needed. When compared to other European welfare states, its results are remarkable.

As the Eurozone crisis comes to an end, the greatest danger facing the single currency area is that policy-makers will draw the wrong conclusions, seeking to implement Europe-wide what has clearly not worked at a national level. The sad truth is that France, with its dirigiste traditions and inflexible regulations, is a role model in virtually no area of economic policy. But examples of successful reform are readily available, and France and the rest of the Eurozone would be well-advised to face the facts, and change economic policy accordingly.

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