This week’s Acton Commentary from Research Director Samuel Gregg.

+++++++++

Europe: The Unjust Continent

By Samuel Gregg

In recent months, the European social model has been under the spotlight following Greece’s economic meltdown and the fumbling efforts of European politicians to prop up other tottering European economies. To an unprecedented extent, the post-war European model’s sustainability is being questioned. Even the New York Times has conceded something is fundamentally wrong with the model they and the American Left have been urging upon America for decades.

Western Europe’s postwar economies were shaped by an apparent concern for the economically marginalized and the desire to realize more just societies. This inspired the extensive government economic intervention, high-tax rates and generous welfare states now characterizing most contemporary European economies. After 1945, Communists and Christian Democrats alike rallied around these policies. For Marxists, it was a step toward realizing their dream. For non-Marxists, it was a way of preventing outright collectivization.

Even today, words like “solidarity” and “social justice” permeate European discussion to an extent unimaginable in the rest of the world. If you want proof, just switch on a French television or open a German newspaper. The same media regularly contrast Europe’s concern for justice with America’s economic culture. America, many Europeans will tell you, embodies terrible economic injustices in the form of “immense” wealth-disparities, “grossly inadequate” healthcare, and “savage” competition.

But while such mythologies dominate European discourse, it’s also true that Western Europe’s economic culture is characterized by a deeply unjust fracture. Modern Europe is a continent increasingly divided between what Alberto Alesina and Francesco Giavazzi called in The Future of Europe (2006) “insiders” and “outsiders”.

The “insiders” are establishment politicians of left and right, trade unions, public sector workers, politically-connected businesses, pensioners, and those (such as farmers) receiving subsidies. The “outsiders” include, among others, entrepreneurs, immigrants, and the young. Naturally the insiders do everything they can to maintain their position and marginalize outsiders’ opportunities for advancement.

So how do Europe’s insiders maintain the status quo?

First, one needs to understand that Western European governments are largely managed by a political class that transcends ideological divisions. In France, for example, the main parties of right and left are dominated by people who went to the grandes écoles­ – elite educational institutions that are very difficult to enter but whose graduates supply most of France’s business leaders, politicians, and civil servants. It’s not untypical for a grande école product to work for a politically-connected corporation, switch to the civil service, return to the private sector, before eventually becoming a member of parliament.

France is an extreme case, but this situation manifests itself throughout Western Europe. Not surprisingly, this group – whatever their political differences – generally agree that they should be in charge. Indeed, Europe’s political class is exceptionally good at self-perpetuation. It’s common, for example, for politicians’ children to follow the same road to power. Take Greece’s current socialist prime minister, George Papandreou. His father and grandfather were also Greek prime ministers. In America, not even the Bushes have emulated this dynastic feat. Incidentally, Papandreou’s predecessor as Prime Minister, the conservative Konstantinos Karamanlis, had an uncle who was prime minister of Greece 4 times and president twice.

Second, there is the phenomenon of what the Nobel Prize economist George Stigler identified in 1971 as “regulatory capture.” As Alesina and Giavazzi demonstrate, European regulators invariably identify themselves with those they are supposed to regulate – sometimes in return for jobs in a post-regulator life – and work hard to limit competition from new businesses or entrepreneurs.

This is a manifestation of a third disorder: European insiders’ willingness to use state power to keep European outsiders marginalized. European unions, for example, could care less about the unemployed and immigrants. Instead they press governments to make it very hard for companies to fire anyone, especially union members. Employers are consequently reluctant to hire. Many young Europeans and recent immigrants are thus condemned to cobbling together part-time employment contracts with no benefits.

But perhaps the biggest problem is one of attitude . It is not as if European outsiders are, for instance, clamoring for labor market liberalization. When Paris’s streets were hit by student riots in 2005, the protests were against relatively minor efforts to unblock France’s highly inflexible labor market. Likewise, Spain’s 20 percent unemployment rate has not been greeted with widespread demands for labor market reform. Instead the cry is for the same permanent job security (irrespective of performance) enjoyed by the impossible-to-fire crowd.

Central-East Europe is different. After all, they endured forty years of dominance by the ultimate ‘insiders”: i.e., members of the ruling communist parties. Unfortunately, as the Economist recently observed , there is evidence of a West European-like insider-outsider dynamic asserting itself throughout the region

Of course every society has its elites. The real question is whether a society embodies the possibility of social mobility through hard work and accessibility to economic opportunity.

This is what makes modern Europe’s endless justice rhetoric so distasteful. All the tedious solidarity-talk and social justice-speak essentially masks a social stratification based on the highly-unjust foundation of proximity to government power – a situation which further incentivizes everyone to join the daily jostle to obtain state-mandated privileges.

It’s difficult to imagine a more damning moral indictment of Europe’s discredited economic culture.

  • Roger McKinney

    Very interesting perspective on Europe! Thanks!

    The European system reminds me of ancient China. The path to success went through the state exams. If you could pass the exam and get into the civil service, then you were on the pass to wealth and respect. Of course, you got your wealth by stealing from the masses outside the civil service, but that was expected. The Ottoman Empire was like that, too.

    After a brief fling with a modern economy, as defined by Douglass North and the New Institutional School of economics, it appears that Europeans are reverting to the tradtional, closed society in which a small group of elites gets to plunder the wealth of the masses in exchange for loyalty to the ruler.

    Until recently, the hallmark of a poor, backward country was the ratio of people working for the state vs those in the private sector. The higher the ratio, the poorer the country. Now the US and Europe have adopted the third world, poor country model. Salaries for government workers in the US is considerably higher than for the private sector, and state workers have better benefits and much shorter working hours. I am encouraging my children to get a government job if at all posssible and forget about working in the private sector.

  • Andrés Holgado

    Dear Dr. Gregg:

    A friend has sent me your essay “Europe: the Unjust Continent” and I have a few remarks that I would like to share with him and yourself. I am a Sociologist working as industrial Consultant all over Europe and America, which gives me some sight over the points you mark in your cited work.

    The first consideration about the efforts from european politicians to save Greece and others from financial mess, does not mention the fact that this mess has been originated in the States (that does not looks precisely as the “just America” that could be opposed to the “unjust” european model) not to mention the Sovereign Funds (not all are sovereing debt, though) that are actively looking to improve their interest rates from the relatively cheaper rates used for public debt, with the helping hand of “independent” rating agencies that have no problem at all to classify as “junk bonds” the debt issued by a legal government that besides has the guarantee of ECB authorities. An agency that has such kind of evaluation models deserves, at least, some deeper examination. It is, then, an imported problem, in a certain manner, this financial crisis that evolved in an economic recession in Europe and, of course, the States. China, Brasil, even Canada are having, as you know much better performances, but this should be a different discussion if we should talk about “unjust societies” ….

    Your second argument goes about marxists and christian democrats alike creating the welfare societies. The process went much more complex: Keynes is hardly one of the kind you mention above, and the rising and fall of totalitarian models in Europe by the thirties as a response to “collectivism” is another fact to mention. The conventional wisdom about American society as seen from Europe, that you appoint later, is no more than prejudices that goes, anyway, about the States and not about Canada, in example. It is just people who talks more than read or travel. Very common, then, and very unimportant.

    Insiders and outsiders are there, indeed. There means, as I see it, everywhere. The outsider character of inmigrants in North America today seems clear. Entrepreneurs are outsiders by definition (if not, they will not be) and youth likes to be outsiders also. That does not mean that “politicians, trade union (officials), public sector workers and politically connected business” will not be unjustly privileged groups in Europe. But not only in Europe.

    Pensioners, farmers and unemployed (receiving subsides) are a class apart that deserves other treatment.

    Your talk about France´s grandes ecoles (ENArcs they used to call them) makes apparent that there are 60 million people in France that went through that system. No, sir. France is an egalitarian society (the first, maybe) since 1789. That, the national history evolutions, makes much of the differences that you can find in Europe. The “dinastyc” elements that you mention on Greece (as in other countries happen) has much to see with aristocratic tendences that comes from… maybe Greece. In every country there are a knowledge and power transmission lines system (usually called Universities, but not only) to maintain or renovate “elites”, as Pareto taught us.

    Last but not least (and believe me that I am sharing some of your thoughts) the Spanish situation definition, with a 20% unemployment rate, as an state of “permanent job security” and “impossible-to-fire-crowd” looks like a joke: Could you imagine which should be the unemployment rate with easier firing? Think twice, please. I know a little bit of Spain and can hardly recognice it in your words.

    “Of course every society has its elites”: That is your brilliant conclusion. Para este viaje no hacían falta tantas alforjas, we use to say in Spanish, in a phrase that is difficult for me to translate. We could keep on talking now about “new elites” and how welfare society creates people that tend to be conservative (elite) after being entrepreneur (or even, revolutionary people, as some politicians or “sindicalist”) or lots of other interesting questions. But shooting only on Europe is too easy and besides Europe is too big and diverse to be treated as only one reality.

    Thanks for your inspiring article and receive, please, my best regards.

    Andrés Holgado Maestre
    Sociologist, Mérida, Spain.

  • http://www.acton.org John Couretas

    Mr. Holgado:

    You make the astonishing claim that “this mess has been originated in the States (that does not looks precisely as the “just America” that could be opposed to the “unjust” european model)… ”

    I’m appending an article from the Greek daily Kathimerini in which another view is expressed. I’ve highlighted the passages that seem to contradict your assertion that the United States is behind the Greek “mess.” I would like to hear your reaction to this article.

    Eurocrats and chameleons

    By Stavros Lygeros

    Greece may be operating under the watchful eye of outsiders but some ministers are going to extremes. They behave like petty middle managers toward the International Monetary Fund officials and Eurocrats whom Deputy Prime Minister Theodoros Pangalos has derided.

    This behavior should come as no surprise to the deputy prime minister as he is familiar with the chameleon-like nature of the system.

    Politicians who once fostered kleptocracy, entangled interests, waste, parasitism and impunity have suddenly become the defenders and flag-bearers of the joint IMF-EU deal. New conditions call for new duties, as the Communists used to say. The most brazen of those who are responsible for Greece’s decline shamelessly wag their fingers at society. Not that the public is innocent – but a fish begins to smell from the head. For decades, a system of trade-offs worked between the political system and society. Traditional clientelism morphed into a guilty mutual tolerance that has corroded values and stalled development in Greece.

    The political system paid for society’s tolerance of its incompetence by tolerating corrupt public functionaries, avoidance of social responsibility, tax evasion and populist illegality in various forms.

    Of course, there are some members of the public who did not take part in the trade-off, a few of them on principle but most because they were not in any position to do so. However, those who did participate in some way do not bear the same responsibility as those who held the reins of power. While it is wrong to exonerate every citizen, it is an even greater mistake to lay blame on the general population.

    In the final analysis, now that the time has come to pay the price, middle and lower income earners will pay dearly for their participation in the feast.

    The qualitative difference is that the big players who pocketed the lion’s share have access to some alternatives; the small ones do not. Cursing after the event not only does not help but also impedes a necessary rethink.

    History shows that whenever the middle classes ape the caricatured ways of the rich they see on television, they pay a heavy price.

  • Andrés Holgado

    Dear, Mr. Couretas:
    I did not make the assertion that United States was behind the Greek mess. This is not the point. I said that the United States (obviously not as a whole, but certain US companies and people: more precisely, if you need it, Lehman or Maddoff, just to mention…) was the origin of the financial mess that was forcing the european politicians to try to save “Greece and others…”.
    The question about Greece “dinasty” has surprised me also when I realized that there were “Karamnlis and Papadopoulos” in Greek politics since I can recall (and I am 59 years old) but I am no expert on Greece and, hence, Greece was not the core of my previous arguments.
    I agree the most with the overall content of your remarks but it still keeps open my question: How anybody can say that Greek bonds, with the written support of ECB besides, can have a “junk bond” qualification? This fact, for me, shows the lack of integrity of any company able to affirm such a nonsense.
    I would appreciate your comments on the other maybe not so astonishing questions that I brought.
    Best regards.

  • http://www.acton.org John Couretas

    Mr Holgado: You said, “this mess has been originated in the States (that does not looks precisely as the “just America” that could be opposed to the “unjust” european model) … ” So I took you at your word. Apologies if I mischaracterized what you were trying to say but “originated” seems clear.

    Why are Greek bonds relegated to junk status? Because no one has any assurance that the “books aren’t being cooked” again, as we say here in the U.S.

    This is from the New York Times in January:

    The country cheated its way into the euro in 2001 by fiddling its statistics, and failed to curb its budget shortfall in the boom years. It will have the highest debt level as a proportion of economic output in the euro zone this year. Years of concealment led to the admission last October by the newly elected Socialist government that the 2009 deficit would be a stunning 12.7 percent of gross domestic product, more than twice the level forecast by its conservative predecessor.

    “Because of the history, there is not much sympathy out there for Greece,” said a European Commission official involved in the drive to enforce fiscal discipline. “There is a very strong determination to apply the rules.”

    What has changed this year? Apparently, nothing. Today’s Kathimerini:

    The Greek paradox

    By Tasoula Karaiskaki

    A couple of days ago, it was Transparency International, a month ago it was Public Administration General Inspector Leandros Rakintzis, and three months ago it was the American Brookings Institution that pointed out the same Greek paradox: Four separate state agencies consistently report on the stunning breadth of corruption in Greece, yet not much is being done to combat it.

    Corruption costs the Greek state some 20 billion euros a year – or the first installment of the bailout money from the European Commission and the International Monetary Fund. Every hospital in the country spends hundreds of millions of euros annually on sanitation, supplies etc, without being closely monitored. Even though the government just finished settling their debts (6.2 billion euros), the sector has already accrued another 1.2 billion euros in the usual manner.

    Committees, researchers, contractors, suppliers, organizations, nonprofit groups, civil servant rackets and numerous officers under oath of office continue to suck the state coffers dry. Two months ago, 70 Finance Ministry employees who declared incomes of up to 50,000 euros were found to possess real estate assets of up to 3 million euros each. What is stopping the government from purging the public sector of corruption? A simple feasibility study of every service would reveal both its needs and whether or not funds are being mismanaged. In every state entity, people know who is pocketing money but their lips are sealed. “Today it’s that guy and tomorrow it might be me,” the thinking goes. Had they been in the private sector, they would have been fired long ago.

    What stops the government from going through the records of every employee responsible for assigning contracts, distributing funds or issuing licenses, and finding and punishing the wrongdoers? The EU gives Greece money to fight corruption – the Interior Ministry received 500 million euros in 2007 for this purpose. It is embarrassing that so many crooks are being shielded by political parties in the safe haven of the public sector and labor groups.

    At a time when the authorities are struggling to find the funds to repay the social security funds’ debts of 5 billion euros and when the 2011 budget is all about boosting revenue through new taxes, the government continues to allow precious money to leak out.

    Date : 30/7/10

  • Andrés Holgado

    Dear Mr. Couretas:
    Sorry if my not so good English and “false friends” it provokes, made my arguments maybe confuses.
    Back to Greece, it is impressive how badly people in the Government there behaves; It looks worse than Italy, right?
    Then, how come than the EU simply do not expulse so tricky people from their ranks? How do you explain that? It seems that this should be a cheaper solution…
    By the way, Spain, Italy and every other “poor” countries in Europe should be expelled also from the Euro Paradise. May the real problem be the arrogancy of creating a currency, the Euro, perceived by many as an attack to the US$?
    How come be the same currency used in Greece (or even Slovenia…) and Germany?
    How come the US$ be used Iowa and NY?
    Mr. Couretas, there are many questions in the original Mr. Gregg´s article and in my first “contribution” that we are missing now, focusing in Greece. That maybe confirm my thesis: Europe is too big and diverse to be analized so fast.
    Thanks and best regards, from a tiny part of Spain.

  • http://www.acton.org John Couretas

    Best wishes to you, Mr. Holgado.