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Explosive Europe- can it be defused?

Euro or no Euro, Europe is a powderkeg waiting to blow up. You cannot run a modern democratic economy on over 10% unemployment for long, especially when you have a thousand miles of open border to the impoverished East. Around Berlin, where I am now a visiting academic, graffiti and gangs of youths run unrestrained. This is a great and throbbing city but its mood is ugly; unemployment in East Germany is unofficially estimated at around 40%, and even officially it is 20%- Brandenburg, the state surrounding Berlin, is no different. Yet Berlin has the largest Turkish community outside Turkey; numberless Russians, Poles, Czechs and other foreigners come to it as moths to a flame. Because they are willing to work at lower wages than the locals, often illegally, they get the jobs that are going. The resentment among the indigenous people builds up naturally and ferociously, and exploded recently in Saxony-Anhalt, just south of Berlin, in the elections that gave 13% of the vote to a bunch of neo-Nazi ex-cons, the Deutsche Volksunion or DVU.

There is no Enoch Powell in Germany to articulate the worries of ordinary people and get the mainstream politicians to react constructively to their problems. Instead the latest loose talk has been of proscribing the DVU; in a democracy? Even Christian Democratic Union ministers tut-tutted at that, but are otherwise quite devoid of ideas. Their Chancellor Kohl is universally written off, and their party wishes it could have another candidate but of course it is too late. He has no ideas either, but stepped briefly and uselessly into the gutter to speak of `guests behaving themselves' in Germany- as if it is the guests that are at fault, instead of the economy that is failing to generate jobs.

The Social Democrat man, Gerhard Schröder, is no better. He vapourises about social justice and getting `all the social partners together' to plan a great jobs revolution but without any change in the current ways of doing (or rather regulating and so not doing) everything. Do these men never read any recent economic history? Never heard of US and UK wage and price controls? Never looked at the astonishing growth of jobs in the USA?

City investors do not care because German companies are doing well by increasing efficiency, closing German plants, locating in cheaper Eastern Europe or the UK, and refusing to listen to the absurd pleas from Herr Kohl to be `socially responsible'- Mr. Piëch in Wolfsburg gave their collective answer when he retired thousands of VW workers early in his campaign to revive the company. Those City investors might be right that the - indispensable- larger German firms can escape most of the wider social disarray; but the smaller ones, trapped in the home market, are in the firing line.

I suggested some weeks back that a possible route out of all this in the short run would be further massive devaluation. In the past two years the Bundesbank allowed 25% or so devaluation of the Dm without turning a hair. However the recent summit where the politicians made such a mockery of the central bank proprieties written into the Maastricht Treaty seem to have put the collective central bank community into a foul mood. The Bundesbank is threatening to raise interest rates (Herr Tietmeyer reportedly threatened at one point to resign over M. Chirac's antics) and the dour Mr. Duisenberg has been making it clear that he and his European Central Bank, ECB, colleagues will tolerate no risks to inflation- clearly including devaluation. We are already in the phase where the new central bank establishes its macho- and the politicians are in flight after cocking up the Euro's birth. Having invested so much in the Euro they are now anxious to make it look as good as possible; that means it has to look strong.

So that window of opportunity to bring down unemployment for a few years has slammed shut on them. What will they do now?

The French and Italians are reported to be planning a large Keynesian stimulus through public spending once the Euro is launched and the Maastricht criteria on public deficits forgotten. They are banking on the new Schröder government not objecting, as it too will lean towards reflation- all that the social partners will be able to agree on.

It will not work and it will of course threaten a nasty conflict with the ECB, which as fast as the governments spend more money will raise interest rates to counteract the resulting inflathonary pressure. Countries with loose fiscal policies and tight monetary policies produce rising real interest rates and high exchange rates- witness the UK in 1980 (and 1992) and America from 1979 to 1985.

These methods have all been tried before and failed. That knowledge is now a commonplace in the international policy community- notice has been taken in some smaller countries, such as Holland, Denmark and recently Spain. So why on earth do these politicians of the Big Three persist in their terrifying economic error? The reason must be that the tide of ideas has not yet turned in these countries; their elites are set in their dirigiste ways, much as ours were pre-Thatcher. Ours too would not consider any way other than incomes policy and reflation; not for them such vulgar remedies as freeing labour markets, competition, and deregulation- good heavens, who knows what people might get up to then? The Thatcher revolution forced them out, to our eternal gratitude, but their continental colleagues are still well in the saddle. Free market ideas are not even on the menu in the centre of Europe.

Apologists there praise the sense of community that continental regulation brings. Well, no longer; the rampaging youths and neo Nazis have seen to that- and the community is sympathetic to them. Something will have to give. The question is what and after how much misery and disorder? Will the 4-5 million unemployed in Germany turn on the unions? Will they make the black economy hum? Will they be permitted to become part-time and self-employed and so deregulate the labour market by the back door? Who knows? But one thing we do know: an unsustainable trend must stop, sometime.

Patrick Minford is professor of economics at Cardiff Business School and visiting professor at Liverpool University.
 
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