Real reason Europe isn't working

THOSE who hope the appointment of Peter Mandelson as Britain’s EU Commissioner will turn the tide of voter euro-scepticism in Britain should buy the most comfortable bed they can find and prepare for a long sleep.

It is not just that there is a bristling public suspicion of Mr Mandelson and a difficulty in taking anything that he says on trust. The bigger problem is that the EU has to present an economic performance that voters in Britain would wish to emulate rather than, as now, a deep stagnation they want at all costs to avoid.

As matters stand, the average rate of economic growth across the 12 Euro-zone economies this year is estimated by UBS at just 1.9%. For comparison, the UK economy is heading for growth this year of 3.25%, the US economy is reckoned to grow at 4.4%, and the world economy overall at 4.5%. Nor can these be said to be rogue or unrepresentative figures. Average GDP growth in both the EU 15 and Euro-zone have underperformed the US in eight of the past nine years. Meanwhile, unemployment across the EU averages 8.1% on the OECD standardised measure.

In this context it is the appointment of Jose Manuel Barroso as the next President of the European Commission that is of greater significance. It is under Mr Barroso’s leadership that the Commission will determine EU policy for the next five years. The magnitude of the task facing him was set out last week by Andre Sapir, who co-authored a report for the outgoing EU president Romano Prodi last year titled Agenda for a Growing Europe.

The literature on the EU’s economic failure is now fairly vast. But as a starting point it would be worth an hour of Mr Mandelson’s time to sit down in a quiet room with this report. He says the priority for the EU must be to achieve a higher sustainable rate of growth.

But the prognosis of Sapir, an economics professor at the Free University of Brussels, is not good. It was summarised in a guest article last week in the Financial Times (surely in a fit of absent-mindedness). He wrote that the very foundation of the EU - the much-vaunted single market - isn’t working. Since the mid 1970s, he pointed out, average growth in the EU has been declining decade after decade. During this period, Europe’s potential growth has fallen by one full percentage point and is reckoned on independent calculations to be running at just 2% a year against almost 3.5% in the US.

This he ascribed to two trends: declining productivity growth and the inefficient use of labour. As for the failure of the single market programme to generate the higher growth everyone expected, there were three causes, including a failure to liberalise labour markets. "Without such reform and greater labour mobility within and across countries," he wrote, "the liberalisation of product markets is unlikely to trigger the reallocation of resources necessary to produce higher growth."

However, the problems of the EU economic model go far deeper than the failure of the single market. They can be seen in the evident inability of the EU economics to lift growth much above the current tepid level without risking higher inflation. In recent weeks a number of economists have trimmed their forecasts for the maximum sustainable or non-inflationary rate of growth for the Euro-zone. Although the European Central Bank believes the trend potential growth rate lies between 2% and 2.5%, economists at JP Morgan reckon the sustainable growth rate to be just 1.5-2%. Credit Suisse First Boston puts it even lower, at 1.4%. If such estimates are even proximately accurate then the current low rate of growth by global standards is likely to be as good as it gets and indeed the Euro-zone may be close to over heating, requiring interest rate rises in due course by the ECB.

The EU’s problems are partly rooted in demographics - a low birth rate and a relatively small working-age population: only 63% of the working age population is employed. High levels of public spending to GDP also work as a brake on growth. There is also evidence of a reluctance to embrace new technology, evident in a recent critical report from the ECB.

The most widespread concern remains the failure to enact structural reforms. But this mantra has been chanted for more than a decade. Where embarked upon it has been half-hearted - unlike the opposition to it, which has been very full. According to the annual report from the Center for European Policy Studies, "Structural reforms have not really advanced over the years."

Now there are signs that the penny is starting to drop. Siemens has persuaded workers to adopt a 40-hour week instead of the customary 35. Last week DaimlerChrysler’s management announced it wanted reforms in working practices to win vital cost savings. In France, workers at German car parts manufacturer Robert Bosch voted to work 36 hours to save jobs, thus posing a threat to France’s 35-hour working week. But many more such actions will be needed to make any impact on Europe’s trailing productivity.

To this, the EU Commission in Brussels tends to side with the resistance. It is highly defensive of the EU-wide labour and regulatory regime. And it tends not to see high levels of public spending to GDP as a brake on growth. On the contrary, it believes the cure lies in more, not less, state spending. To every new symptom of slow growth and falling productivity, the received wisdom is that it is low cost production in the new accession countries that is the problem, not the high costs in the ‘old’ EU 15. Now comes the pressure for more integration. The advances of previous decades are not working because there is not enough of it. Thus the screw tightens for those who dare hesitate to embrace this circular truth.

As for the costs of Brussels that so inflame UK voters, these, too, are not the problem; rather, the EU budget needs to grow, and wealthier countries such as Britain should contribute more in the name of EU solidarity.

On Friday Downing Street asserted that news of Mr Mandelson’s appointment had been well received. Britain’s corps of political correspondents struggled to believe this. But it is the reaction in Brussels to which No 10 was almost certainly referring. For here Britain’s new commissioner is perceived as being "pro EU". He does not have the baggage of previous UK representatives. He has no agenda to circumscribe or reform the EU, nor indeed any evident zeal to change what he does not perceive as being all that flawed.

Indeed, Mr Mandelson sees his role quite differently. It is, first, to reassure the Commission that Britain is on board for the European project; and second to advance the cause of further EU integration among British voters, and to disarm their scepticism towards the EU constitution and the euro.

It is this insouciance of Britain’s new commissioner that offends so many. It is contemptuously dismissive of the idea that there is a problem and of the concern that Britain may stand to lose more than gain by greater integration. Neither he, nor his Prime Minister seem to grasp what the problem is. And that is the most worrying feature of all.