Bold reforms can’t wait if Europe is to stay competitive

If Prime Minister Silvio Berlusconi of Italy can direct his finance minister to present a budget with a deficit equal to 0.5 percent of the country’s gross domestic product (GDP) in order to fulfill his pre-election pledge of tax cuts, why shouldn’t Costas Simitis be able to do something similar? Economy and Finance Minister Nikos Christodoulakis may have been detained in Athens by the «urgent» need to persuade the striking seamen to resume work (without getting the raise in pensions promised by other ministers) so that vacationers would not miss their Pentecost holiday. But the officials representing him at the European Union’s Council of Finance Ministers (Ecofin) were under strict orders: Greece will honor its commitments to the Stability and Growth Pact and stick by its proposals to present increasing budget surpluses. However, Greece does not differ from Italy on the need to cut back on public spending and lower the public debt, though, if anything, Italy’s debt situation is somewhat worse. Almost all European governments plan to lower their top income tax rates. It is a promise made by right-wing governments, which have been regaining power at a rapid pace. Social democratic parties still clinging to power hope that they will escape the electorate’s wrath by easing their tax burden. There is also a more fundamental reason for the tax reform: It is the fast and populist way toward reducing total labor costs; certainly far preferable to reducing other components such as salaries and employer contributions to social security. Pension contributions, especially, present a thorny problem for would-be reformers, best left untouched. Easy or not, this choice is a manifestation of the necessary restructuring European economies must undertake in order to achieve self-sustaining economic growth and improve the continent’s competitiveness vis-a-vis the United States. The latitude granted to France, with its unilateral declaration that it will aim for a balanced budget only when growth reaches 3 percent of GDP, as well as Germany’s declaration that it will once again aim for a fiscal balance, since its economy will grow 2.5 percent this year, are signs of a new European flexibility. In France’s case, the declaration will allow the new center-right government to fulfill President Jacques Chirac’s pledge to cut taxes. However, it is far from certain that these policies will be sufficient for Europe to return to a growth rate of higher than 3 percent during the course of next year. The continued rise in the price of the euro, which has gone from 88 US cents to over 98 in the past two months, is a double-edged sword. On the one hand, it has helped lower inflation within the eurozone to 2 percent last month. On the other, it may hurt European exports, to the USA’s benefit. In order for the European Union to take full advantage of the euro’s strength, it must hasten the reforms it has put off for too long for reasons of political faint-heartedness. Improving global competitiveness is a must. Simply maintaining internal demand is not enough to maintain a robust economy. Other shareholders of Alprom, whose chief raw materials supplier is aluminum smelter Alro, are US metals trading house Marco and its Romanian arm Conef, which jointly own 17.19 percent. The rest belongs to firms and individuals.