Re-Examining Those Assumptions

April 1 1994 by JP Donlon


Big themes go hand in hand with big-time gatherings of big shots. The recent annual meeting of the World Economic Fonim, where about 1,200 top executives and political figures gather each winter in Davos, Switzerland, was organized around such a theme: “redefining basic assumptions of the world economy.” The trouble is, are people whose careers are tethered to old, familiar assumptions of a mind to do much re-examining, let alone any redefining?

Hans Tietmeyer, president of the Deutche Bundesbank, and Larry Summers, undersecretary of the U.S. Treasury for international affairs-who opened the annual meeting attended mostly by European and North American leaders-defined the macro challenges: Restore growth in the industrialized world, maintain monetary stability in the transition economies of Eastern Europe/Russia and Latin America, and ensure stable finance for the world’s emerging markets. Once uncorked, however, Summers poured the old wine of Keynesian demand stimuli. If such measures didn’t work for Jimmy Carter in the 1970s, one wonders why this would succeed today, when demand forces are internationally, not domestically, driven.

Interestingly, one of the major challenges facing business leaders in Europe was neither redefined nor reexamined, yet it was much discussed in corridors and hotel halls: If the European single market exists, why doesn’t it work? Last year was supposed to be the payoff of freeing the movement of goods, capital, services, and people among the 12 EC countries (extended to the four EFTA countries, Austria, Finland, Norway, and Sweden this year). According to a Financial Times poll, 77 percent of European countries say they have registered no benefits from the single market.

Recession is only partly to blame. European CEOs privately complain that the high cost and low flexibility of labor markets have seriously impaired competitiveness. German chief executives particularly see the productivity trade-off when they compare output at home with that of their operations in Eastern Europe. (GE, for example, recently consolidated its lighting production for all of Europe in its Tungsram facility in Hungary.)

The issue is not high wages per se, but lack of flexibility, limitations on working time, rigid work rules-in short all the attributes of the nanny state that EC president Jacques Delors had codified in the Social Charter. Does anyone remember that it was over this element of EC union that Margaret Thatcher tussled with Delors and continental leaders? At the time, she was criticized both at home and throughout the EC for being “anti-Europe” and “out of touch.” (It is not widely reported, but the commission has quietly stopped implementing remaining elements of the Social Charter. British chief executives now are said to rib their continental counterparts by asking, “Why haven’t you completed the charter?” As in, “Go ahead, make our day, make yourselves less competitive.”)

But technocrats, whether in Washington or Brussels, love to meddle. The zeal with which the Clintonites intend to restructure the health-care and insurance industries is no less earnest than Europeans who practiced the “national champion” strategy years ago. The bill has come due in the form of higher structural unemployment and state subsidies that refuse to die despite the best efforts of European Competition Minister Karel Van Miert and his two predecessors, Sir Leon Brittan and Peter Sutherland. The single market, elegant in conception, is yet captive to an earlier set of unexamined assumptions.