Reforming Europe from Below

Look at European history for the past 25 years, and you see that from the late 1970's to the early 1990's the continent was plagued by macroeconomic instability, high unemployment, over-regulated markets--including, importantly, financial markets--unregulated monopolies, and inefficient state-run industries. Over the past decade Europe has made important progress in restoring macroeconomic stability, but it has been less successful in enacting the micro-level reforms that are necessary to deregulate markets and improve their efficiency. Why is this? Is there a lesson in this for the countries of Central and Eastern Europe as they prepare to join the EU?

High inflation and mounting public debt generated a feeling of ``crisis'' in the early 1990's in some EU countries: when one's house is on fire, the costs of doing nothing are too large to continue sitting back and doing nothing. It took the exchange rate crisis of 1992, for instance, to make Italy's leaders realize that something had to be done about the country's public finance mess. The fear of being left out of the euro did the rest, by creating a political consensus in favor of taking the right and necessary steps.

Today, Europe's economic house is no longer on fire. So it has become much harder to break the back of special interests in order to liberalize markets and improve economic efficiency. Just this past June, for example, France went through a 1968-style month of strikes and street protests only to implement minor pension reforms: the elimination of a few special privileges enjoyed by public sector employees.

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