Reflections from Europe | MARCH 7, 2005
A War of White Hats and Black Hats: A War of Attrition between Economic Reality and Political Dreams
In Russia, after his re-election President Putin announced a sensible economic programme, encouraging hopes that after two failed attempts in 1861 and 1905, that potentially rich country might be third time lucky and finally extricate itself from the wet, cold mud in which it seemed to be forever mired—thanks mostly to the caprice and perversity of its own governments.
Now, however, a stalemate in the war of attrition seems to exist where neither side is really winning and the black hats give as good as they get. President Putin, despite protestations to the contrary, has abandoned his avowed policy of establishing secure tenure for property with freedom and light taxation for enterprise, both indigenous and foreign. The Yukos affair bore spectacular witness to this U-turn. The company, the country's biggest privately owned hydrocarbon producer was hit by a series of claims for taxes in past years that could not even pretend to be founded on the tax code; for 2001 and 2002, the back tax claimed exceeded the company's total sales. To satisfy unpaid tax demands of $21 billion, the government put up Yukos's largest productive asset at public auction and sold it to the sole bidder, a letterbox company, for $9 billion; the letterbox company then sold it on to state-owned Rosneft for the same amount. The sinister aspect of this comedy is that the Russian government asserts with a straight face that Yukos was not nationalised, let alone confiscated; the transaction was a perfectly normal case of recovering a debt owing to the state. There is much apprehension in Russia that other, albeit less spectacular, cases will follow.
The running is made by a squad of grey eminences around the president, many his former colleagues in the KGB, some holding high rank in its successor, the FSB. They are nationalist and not corrupt by Russian standards, but not literate in economics. Government ministers are mainly grey bureaucrats with the possible exception of finance minister Kudrin. The intellectual cream is represented by two liberal (in American English, "classical" liberal) economists, German Gref the economy minister and Andrei Ilianorov, Putin's personal economic adviser. Ilianorov openly called the Yukos affair "a swindle" and was reduced a notch in rank but kept his place. Gref declared that the government will not meet the president's 7 per cent p.a. ten-year growth target "by banging the table". He warned that the scarcest factor of production in Russia is an honestly functioning court system, without which the country, intoxicated for the time being by the high oil price, will sink back into the perennial mud.
A delegation of Western economists was received by Mr. Putin, and castigated him for not pressing on with his original economic reform programme. He told them with a rare sign of real humour: "Everybody wants to go to heaven, but nobody wants to die". Political expediency and short-termist compromise must prevail over the virtue of doing the right thing.
The Bolkestein Directive is not the title of the latest thriller you find in the airport kiosk. It is the last major administrative act of the outgoing EU commissioner for the internal market. It is designed to make the market for services within the EU as free as the market for goods. Its particular sting is a country-of-origin clause which permits a Polish, Baltic or Hungarian person, say an architect or a market research agent, to sell a service in Germany or France while only paying the (low) social insurance premiums and taxes due in his home country. This is taken in Western Europe as a quite flagrant licence to practice "social dumping", the undercutting of decades of socialist achievements, and is political dynamite. President Chirac of France has promptly "vetoed" the directive and was joined, though in less peremptory style, by German Chancellor Schroeder. Brussels says the directive has been issued under existing powers, cannot be "vetoed" and will stand. The French government of course will do as it pleases. It will not be the first time that it refuses to apply a directive or honour a treaty; its contempt for the deficit limit it signed up to in the Maastricht stability pact is eloquent proof that the EU cannot force a major member country to do what it really hates doing.
The Bolkestein directive, like the Yukos affair, is symbolic of wider conflicts. In 2000, the EU countries solemnly adopted the Lisbon programme of economic reforms that were to make Europe "the world's most competitive, knowledge-based economy": education was to be reformed, regulation simplified, and above all labour laws were to be eased to enable labour markets in the most sclerotic of eurozone countries, Germany and France, to start functioning.
In the universities, regulatory agencies and the unions, the black hats were, and still are, sitting in heavily fortified positions. For nearly five years now, they did not permit the Lisbon programme to move forward. After he took office last November, and after he survived attacks by the left-leaning European Parliament and other socialist bodies, Mr. Barroso proposed to revive the Lisbon programme and tried to rally member countries to it. He was told in barely veiled terms by some major eurozone governments that that they were more concerned with safeguarding the "European Model" than with initiatives that would make waves.
Germany, independently of the Lisbon programme, did carry out one immensely important reform of unemployment benefits that will almost certainly produce a speeding up of economic growth later this year, though things will first have to get worse before they will get better. France relaxed the ceiling of permitted overtime under the infamous 35-hour week laws from 130 to 220 hours a year. The new upper limit would permit a "legal" work week of 39 hours, though they would be quite expensive overtime hours. However, true to form, the government made this extension of authorised overtime subject to the agreement, not of the workforce at a plant or office, but of the union supposed to represent them. This was yet another step in the government's continuing effort to build up the unions and give them an importance by means of legislation that their sparse membership (only 8 per cent of the labour force, and that almost entirely in the public sector with negligible membership in private industry) would not justify. However, according to the European Model the unions must be important and if they are not, the government will give a helping hand to make them so.