The Economic Irrelevance Of Europe's Politics
To this economist's eye, Europe's political left and right are indistinguishable.
Like their football (soccer) star Kylian Mbappé, French voters faked right and went left. They might have ended up scoring an economic own-goal, but to be fair, their menu choice was limited.
The French result came shortly after the European Parliament elections seemed to mark a decisive shift to the right, including in France. This unleashed the predictable frenzy of alarm — for the media, the “right” no longer exists, there are only the left and the “extreme right” or “hard right,’ so unless the left wins, democracy is in danger. Which does raise the question of what democracy means if its survival requires that only one political side can stay in power… but I digress.
You all look the same to me
What I have always found striking is that on economic policy there is virtually no difference between the political right and left in most continental European countries. Both sides support big government, a generous welfare state, high taxes and pervasive regulation. Because that’s what voters want. Most EU countries have never had a political force that can be compared to the Thatcher Tories in the U.K. or the Reagan Republicans in the U.S.. Not even to Blair’s Labour or the Clinton Democrats.
This is especially true for the parties that have gained substantial popular support in recent years, like Le Pen’s National Rally in France and Meloni’s Brothers of Italy. These are the descendants of the old fascist parties, and as you might remember, in fascist regimes the state used to control pretty much everything. The main difference between left and right is on social issues — which these days boils down mostly to immigration. So the choice is essentially between pro-immigration socialists and anti-immigration socialists.
The problem is that the kind of economic policies favored by both left and right are unlikely to deliver satisfactory results with or without immigration. Take a look at the next chart: it plots youth unemployment rates (people age 15-24) for Germany, France, Spain and Italy.
Source: OECD
Germany is the happy outlier, with a youth unemployment rate of 6%. In France, it’s close to 18%; in Italy, over 20%; and in Spain, 26%. In other words, in Spain one young person out of every four is unemployed; in Italy and France one out of five. And as you can see from the chart, this is not just a recent aberration.
When 20-25% of your youth is unemployed, your main problem is not lack of workers, it’s a completely messed up labor market. Oppose immigration, and you are left with an aging population and a shrinking labor force that makes your welfare system unsustainable. Encourage immigration, and you are still left with an aging population and a shrinking labor force that makes your welfare system unsustainable—plus an even bigger unemployment problem. Seen from this perspective, the choice between left and right is hardly a choice at all.
When 20-25% of your youth is unemployed, your main problem is not lack of workers, it’s a completely messed up labor market.
(Some of you might protest that there are differences in the economic views of the European left and right. My response is that if you zoom in enough, the differences can appear significant; but if you zoom out to the scale relevant for economic outcomes, they are not. )
Land of paradox
In an interesting recent post,
plots a labor scarcity index that caught my eye because it started rising just as the EU immigration crisis exploded around 2015-2016. Since then, labor scarcity has only gotten worse—with the pandemic lockdowns exacerbating the situation.So in a region where 6% unemployment counts as a record low (see chart below), labor scarcity remains a major headache, and immigration paradoxically manages to make it even worse. But of course no government — on the left or the right — is even considering reforms that might boost labor supply. As a typical example, the left won the French elections promising to lower the retirement age back to 60. Which in a country with an unsustainable pension system and a labor shortage must sound like the obvious solution, right…?
Who’s going to pay for it?
To get a sense of just how unsustainable European welfare systems are, take a look at the next chart:
Pension entitlements amount to a staggering 500% of GDP in Spain, about 450% of GDP in Italy, and 400% of GDP in France. As you can see from the chart’s legend, these liabilities are almost totally unfunded — there isn’t a pot of government savings set aside to paid these pensions, they will have to be funded by new taxes, or by cutting other public expenditures. But by all means, let’s lower pensionable ages and make the problem even worse.
The only hope is that the harsh reality of economic constraints can occasionally enforce a measure of pragmatism. Meloni’s government has reformed Italy’s ‘citizenship income’ (a pseudo-Universal Basic Income) and ended the ‘110%’ construction bonus, two economic monstrosities that even previous PM Draghi, a highly qualified economist and former ECB head, had inexplicably and shamefully kept running.
The big risk is that without major pro-market economic reforms, immigration will eventually push Europe into a true social crisis. In my view, based on personal observations on both sides of the Atlantic, Europeans are much more xenophobic and racist than Americans. A growing immigrant population which can’t be integrated into the labor market is a disaster waiting to happen — all the more so given cultural and religious differences. As I pointed in an earlier blog,
This is where European countries have run into deep trouble. None has a set of values you can sign up to and that will make you feel like you are truly an Italian, a German or a French.
The big risk is that without major pro-market economic reforms, immigration will eventually push Europe into a true social crisis.
Gradually, then suddenly
Things, therefore, could get ugly. There are unsavory elements in the European right—sympathizers of the old fascist ideologies, particularly pernicious as immigration and integration become ever more contentious. Then again, the European left includes sympathizers of the old communist ideology that throughout history has been an unmitigated economic disaster and a bigger mass-killer than even organized religion and fascism. Once again, not a great choice.
Maybe I’m just a simple-minded economist, but to me the only plausible solution starts with recognizing the need for economic reforms. Europe desperately needs a more dynamic economy to generate faster increases in living standards and offer better opportunities to natives and immigrants alike. A more rapidly expanding pie would make everything easier—whereas a stagnant economy creates a zero-sum game mentality and exacerbates divisions and animosity. Where opportunities are open and competition thrives, immigration can be an asset—France’s Mbappé is the progeny of immigrants, and most national soccer teams in the Euro 2024 competition are visibly diverse.
Will one of Europe’s political wings ever be willing to make the obvious case for a more dynamic economy? If neither side does, one day historians will probably say, “How did Europe’s politics get disastrously upended? Gradually, and then suddenly.”
What about…?
I know what you’re thinking. Go ahead, say it. “With the farcical run-up to the U.S. Presidential elections, you criticize European politics?” Fair enough. And it’s true that on economic policy, the difference between left and right has narrowed also in the U.K. and the U.S.. In the U.K., Brexit has proven so disruptive that the Tories ran a left-wing economic policy before being wiped out in the latest elections. In the U.S., Republicans and Democrats alike favor high public spending and trade tariffs (let’s blame Trump, shall we?), but the Republicans still prefer lower taxes and less regulation, so there is still an important difference. Of course, since public debt cannot rise indefinitely, at some point the Republicans will have to choose whether they’d prefer lower spending or higher taxes. We’ll see. Moreover, the U.S. still has a much more dynamic economy and much greater capacity to absorb and integrate immigration. Europe has neither.
On point as usual Marco! My fear is that the bump or traffic light usually gets put only after an accident happen and not before. Europe might end up in an economic reckoning, at best if not social as well, before change happens. - hope you are keeping well, I look back with nostalgia sometimes my GE days, where I didn’t need to sign to a newsletter to great intel from people like you ;-)
This article was very interesting and presented a well balanced opinion. It would be great if you could also share your thoughts on how Europe can make its economy more dynamic.