What the Dutch elections mean for euro area economic policies?

By: Wolfgang Munchau

Europe’s voters remain in a rebellious mood. A year ago, the Dutch rejected the European constitution in a referendum. Last week, they punished the centrist political establishment by strengthening the anti-globalisation Socialists and the anti-immigration Party for Freedom. Jan Peter Balkenende, the Christian Democrat Dutch prime minister, will probably succeed in cobbling together a coalition, albeit without a common agenda.

What has gone wrong in Dutch politics? There are many specific issues, such as immigration or European Union enlargement that have played a role in turning the Dutch anti-everything in recent years. The overarching explanation is that the Dutch, like other Europeans, are insecure about their future and are suffering from reform-fatigue. Mr Balkenende’s centre-right coalition was among the most energetic reformers in Europe, pushing through unpopular welfare reforms. The opposition parties gained votes in part because they promised to reverse the process.

The problems experienced by Mr Balkenende are part of a wider European trend. Continental European centre-right parties have been in political decline ever since they embraced reform. Angela Merkel, now chancellor of Germany’s grand coalition, last year campaigned for a radical reform programme and achieved one of the worst election results in her party’s history. The CDU state premier of North-Rhine Westphalia recently shocked his party by denouncing the welfare reforms as excessive and unfair. He has now positioned himself to the left of the Social Democrats and unleashed a big confrontation inside the coalition.

In Austria, too, the Christian Democrats are in trouble. Wolfgang Schüssel, the outgoing chancellor, was rejected by the voters despite a spectacular economic record. His Social Democrat opponents won the elections because they addressed some deep-seated insecurities in the electorate. Continental Europe is in the grip of an anti-reform mood, passing from one country to another. This mood translates into lower voting shares for the reformist parties of the centre-right.

France may be next. Earlier this year, Dominique de Villepin, prime minister, had to withdraw an ill-conceived programme to liberalise the labour market for young employees. Not too long ago, Nicolas Sarkozy, president of the centre-right UMP and his party’s nominee for next year’s presidential election, promised to make economic reform the centrepiece of his campaign strategy. But with the emergence of the populist Ségolène Royal as the Socialists’ presidential candidate, Mr Sarkozy has notably toned down his reform rhetoric. I suspect he would lose against Ms Royal if he went into this campaign with a libertarian shopping list of economic reforms.

So is Jean-Claude Juncker, prime minister of Luxembourg, right when he famously said: “We all know what needs to be done, but we do not know how to be re-elected after we have done it”? The answer is yes and no. He is right in the sense that politicians have no clue how to get re-elected. But he is wrong in stating that they know what they are doing.

The familiar explanation of ungrateful voters is not correct. The Dutch and Austrian voters are perfectly rational. If you are a low or semi-skilled employee, the probability that welfare reforms make you worse off in the short term exceeds the probability that they make you better off in the long term. I have yet to meet a continental European politician capable of providing voters with a comprehensive and transparent vision of economic prosperity and security in the 21st century. Perhaps Ms Royal’s astonishing early successes have been due to her ability to project politics down to the level of the individual.

If the problems are bad on a national level, they are just as bad in Europe. The European Commission unwisely made economic reform the top priority of its current five-year term. It is now stuck with the Lisbon Agenda, a reform programme intended to raise Europe’s competitiveness.

What the EU needs instead is higher productivity growth and higher employment. The way to achieve this, as Xavier Debrun and Jean Pisani-Ferry from Bruegel, the Brussels-based think-tank, argued in an excellent recent paper, is to turn the disparate (or rather desperate) national and European reform agendas into a common logical whole, setting out clear priorities, goals and instruments in a coherent reform strategy.*

Since most of the countries with difficulties also happen to be in the eurozone, it is a legitimate question to ask whether these reforms should be co-ordinated and properly sequenced.

The rebellion among European electorates will not stop unless and until European governments can persuade their insecure electorates that they have a clear and workable strategy for their countries’ economic prosperity. I also fear that the attempt to resuscitate the European constitution in whatever form, necessary though this is, may fall victim to this process. We must get the basic economic strategy right first.

 

*Economic Reforms in the Euro Area: Is there a Common Agenda? November 2006, www.bruegel.org

©The Financial Times Limited 2006

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