Wednesday, November 23, 2011

Reform, reform, reform!

The technocratic turn in the Euro crisis has brought us yet more talk of 'reform'. German central bankers grimly warn that there can be no quick fixes and that debtor countries must 'reform' in order to save the euro. But what do they mean by reform?

There is a deep irony in all of this. Germany spent close to two decades being lectured by the Anglo-Saxons about 'reform' - the German social market economy, based on social partnership, long-term investment, strong social protection and a heavily regulated service sector, were singled out by neoliberals as the reason for Germany's weak economic performance after reunification. And Germany did reform - the Hartz measures moved the German social model in a more liberal direction, permitting the creation of more low skilled and low paid jobs and reducing welfare entitlements, at least for some workers. And lo and behold, Germany quickly shed its reputation as the sick man of Europe and is once again calling the shots in Europe.

How much of this is down to 'reform', rather than Germany's rather conservative consumer culture, is a difficult question to answer. However, one simple point that can be made is that Germany is not the only country in Europe that has 'reformed'. Italy and Spain have both had waves of labour market reform and important institutional changes in financial markets. The obvious implication is that reform is not necessarily a solution to anything, and that we need to be a bit more specific about what reform means.

One good example of this is that the dominant orthodoxy of the last couple of decades has been the deregulated capital markets were good for both stability and growth. Ahem. Germany actually resisted reform in this area (the famous Mannesman takeover by Vodafone led to a more restrictive law), much to the disgust of Anglo-Saxon observers. Meanwhile Spain embraced contemporary financial practice much more enthusiastically, resulting in an unsustainable housing boom which has left the country deeply exposed in the current crisis.

The Euro crisis is bad for everyone, but the pain does not seem to correspond in any consistent way with the extent of reform in the various European countries. It is not easy to see how more of this ill-defined reform is going to solve the problem.