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December WSJ.com 5, 2001 International Commentary Some Things Just Aren't Osama's Fault By FREDERICK KEMPE LUDWIGSHAFEN, Germany -- The chief executive of the world's largest chemical company, BASF, watched sadly from this industrial city as the economic assumptions upon which he based this year's business plans evaporated. First, the Japanese economy defied predictions of a comeback, frowns BASF boss Juergen Strube. Second, all hope for an American rebound this year exploded on Sept. 11. Yet for all the significance of those two disappointments, Mr. Strube and other European executives have a third problem: Europe's inability to create its own economic dynamism and "delink" itself from the American downturn. With the euro nearly three years old -- and with the introduction of notes and coins less than a month away -- the European miracle remains a pipe dream. "We expected Europe to be much more resilient" this year, sighs Mr. Strube. European executives are still convinced the single currency will create the larger, seamless market, bring efficiency gains and breed a competitive transparency among European countries that will bring more growth. But when? "Europe is becoming Europe," says Mr. Strube. "It just takes more time." With the Mideast in flames, with the Taliban still in the crosshairs, and with recession officially declared in America, it's easy to overlook Europe's continuing economic problems as a minor annoyance. Yet consider Europe as an opportunity missed at a critical moment. During the Asian financial crisis in 1997, it was the American consumer and his connected economy that helped save the world from a far worse fate. This time, Euroland has failed to play a similar role. Some executives say the problem is that the European Central Bank reduced interest rates too slowly this year, and that might be true. Others note correctly that national regulations and differences still make the European single market far from perfect. European economies of scale as still far off. But the far greater blame rests with governments that haven't moved against the structural rigidities that still dissuade investment and entrepreneurship. "Waiting for European structural changes is like watching grass grow," says Thomas Mayer, chief economist at Goldman Sachs in Frankfurt. Here, Germany is the chief offender, both because it has the Continent's most burdensome labor regulations and its slowest (and biggest) economy. Chancellor Gerhard Schroeder deserves high praise for a foreign policy that has made Germany more of a European leader during the current war on terror, but he's an economic also-ran. This despite the fact that the chancellor has done more than his conservative predecessors to lift corporate tax burdens and reform outmoded pension schemes. "He's like the model pupil who is really trying to make the grade," says Mr. Mayer. "How do you tell the poor guy that it's simply not enough?" Germany, the economy that should be the European engine, has instead turned out to be its caboose. Mr. Schroeder continues to blame his country's poor performance primarily on its greater dependence on the U.S. economy and the continued burden of integrating eastern Germany. Both have played a role. Yet a far greater problem is that Mr. Schroeder inherited the Continent's most inflexible labor market and then made it worse. He's made it harder for small firms to lay off unneeded labor. He's presided over new social-security costs low-wage on jobs. And he's helped extend a national system of worker co-determination -- under which union representatives share corporate board responsibilities -- to smaller companies, increasing their costs and restricting their room for maneuver in this down economy. Mr. Strube likens the struggle to that of Gulliver: Even if he manages to unravel all the binds, he's going to lose a lot of energy while doing so. The fact that German unemployment continues to grow shows that the labor market is more flexible than it might at first appear. Any company can cut if it is willing to pay the price. Labor-market rigidity does more to hamper new job creation than stop layoffs. Mr. Schroeder is hence left with unemployment heading over three million instead of down to the level of 2.5 million that he promised voters in 1998 when he was elected. The chancellor is gambling that when voters go to the polls next September they'll put more of the blame at the door of bin Laden, the U.S. economy and the eastern Germans than on his own labor policy. He's also gambling that the Social Democratic rank and file are less likely to rebel at higher unemployment than at the sort of reduced social protection that could increase the incentive to work. The way things work now, says Mr. Mayer, an economist who loses his job at a German bank would receive two-thirds of his salary for three years. If he takes a job as a taxi driver in the meantime and then loses that job, he would receive just two-thirds of a much lower base. The economist is wise to remain unemployed. For a start, Gerhard Schroeder should dismantle wage-bargaining agreements that impose a "one size fits all" salary range throughout industries where the respective companies may have vastly different resources. These agreements pose a double problem. By capping the salaries of high-end earners, they encourage the best people to leave the country. By keeping the entry floor high, they price jobs out of the market. It's popular to blame the European Union for all sorts of ills, but the EU has probably done more to advance, rather than halt, the freeing up of German markets. Because of pressure from Brussels, Germany is undoing subsidies for regional state banks. The EU has driven what telecom, utility and transport liberalization has occurred. And it isn't the EU's fault that Germany is one of the slowest in implementing its directives or that it was Germans this year who blocked an important initiative that would have knocked down obstacles to cross-border mergers and acquisitions. The European Competitiveness Report last month was a wake-up call, showing that the gap in growth and living standards between Europe and the United States is growing. Commissioner Erkki Liikanen blamed lower employment levels for much of the problem. And Germany was much of the cause for that. When the euro was introduced, some feared smaller European economies wouldn't be able to keep up with the Germans. Now, however, it might be time for the little guys to lecture Germany on its responsibilities as the Euroland leader. -- From The Wall Street Journal Europe URL for this Article: http://interactive.wsj.com/archive/retrieve.cgi?id=SB1007506029164380560.djm Copyright 2001 Dow Jones & Company, Inc. All Rights Reserved. Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws. For information about subscribing, go to http://wsj.com

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