By Steven Pearlstein
Wednesday, May 6, 2009
You can easily imagine the popular story line that plays out daily in the politics of much of Western Europe. It's the one about bankers and money managers in New York and London who got rich by playing fast and loose with other people's money, under the eyes of regulators so blinded by their faith in markets that they couldn't spot a con game going on right under their noses.
And what makes it all the more galling to Western Europeans is how easily this plague of greed and deregulation so easily crossed the Atlantic, sending their own economies into a recession that is expected to be deeper and longer than it will be where it all began.
Sitting in his office last week, José Sócrates, the prime minister of Portugal, joked as he recalled the day last September when he first learned about "this thing they call a subprime loan." As head of this country's nominally socialist party, Sócrates spent the previous four years reducing the size of Portugal's government, taming its runaway budget deficit, challenging labor unions and deregulating its markets. And what is his reward? An economic crisis that has once again put the country in a fiscal bind and boosted the polling numbers of Portugal's Communist Party.
There are similar tales to be told across the continent. In France, top executives have been taken hostage by workers demanding that layoff notices be rescinded. In Sweden and Switzerland, companies have revoked pay packages for top executives in response to public outcry. And just last week, the European Union unveiled new regulations that have the hedge funds howling. Everywhere, there are calls for higher taxes on the rich, with the British government proposing to raise the top marginal rate to 50 percent from 40 percent.
"In terms of further market liberalization, I would say the window of opportunity is now closed," Christine Lagarde, France's reform-minded finance minister, told reporters recently in Washington.
Given the circumstances -- unemployment as high as 17 percent in Spain, exports off 20 percent in Germany, house prices off 40 percent in Ireland -- none of this is surprising. But the real story in Europe may be how firmly market liberalization seems to have taken hold. Not only have there been few, if any, calls for re-nationalizations, but some countries are still moving toward privatization and deregulation. Instances of protectionism are outweighed by the examples of cross-border mergers and acquisitions that have been accepted as a matter of course -- Fiat's designs on GM's Opel, based in Germany, is the latest. And in the face of international calls for additional fiscal stimulus, both governments and voters have been reluctant to borrow and spend their way out of this recession.
Here in Portugal, for example, huge teacher demonstrations recently shut down the capital but failed to derail Sócrates's plan to require annual evaluations of instructors in a public school system that has some of the highest costs, and lowest test results, in Europe.
And Americans would do well to consider Portugal's plan to put its Social Security on a more sustainable footing by linking the retirement age to life expectancy while still giving people the choice to retire at 65 with slightly lower benefits.
Perhaps the best example of Portugal's market-based approach to its economic problems is its big push toward renewable energy.
To harness the wind, Economy Minister Manuel Pinho set out to move the country beyond small, subsidized wind farms to create an industry big enough to achieve economies of scale, invest seriously in research and development, and attract billions of dollars in capital. The incentive came in the form of huge long-term transmission contracts that assured investors that there would be a market for the power at a guaranteed price, determined in an open and competitive auction. The hitch was that winners were required to manufacture a certain percentage of the windmills and the turbines in Portugal. A number of big European companies have now set up shop here.
Pinho took a similar approach to hydroelectric power, putting up for competitive bid long-term licenses to build and operate a dozen new or expanded dams. Bidders can also extend the life of the licenses if they agree to enter long-term contracts to buy nighttime power from the country's wind producers and use it to pump water from reservoirs below the dams back up to the reservoirs above. Energy gets stored during those hours when demand is low and used the next day when demand is at its peak.
What's noteworthy is that all this was done without a government subsidy and without favoring the country's former electric monopoly, EDP, in which the government continues to hold a minority stake. Indeed, EDP has been buying or building renewable-energy assets across Europe, in Brazil and in the United States. The spinoff of its renewable-energy division was the biggest IPO in Europe last year and is now the world's fourth-largest renewable-energy producer.
Back in the days of Bill Clinton and Tony Blair, there was a lot of loose talk about a "third way" that would combine the best features of Anglo-American capitalism with the social and economic safety net prevalent in Europe. If Portugal is any indication, Europe has been moving in fits and starts toward market capitalism ever since. Now that Barack Obama has become the most popular politician in Europe and his administration back home is intent on increasing the profile of a more-competent government in the workings of the American economy, a convergence seems possible once again.
Steven Pearlstein can be reached at email@example.com.