In Search of New Rules for the Old Continent
Ricardo G. Barcelona, S. Ramakrishna Velamuri

European political tradition appears to favor a consensus that often sidesteps the difficult choices, in particular those relating to market liberalization and competition. Such an approach to policy making (or policy tinkering) has had its day, claim Ricardo G. Barcelona of Royal Dutch Shell and Professor S. Ramakrishna Velamuri of IESE Business School in their paper "A European Dilemma: The Tough Choices to Greater Economic Freedom."

The present feeling of deep crisis affecting Europe's political leadership could spur action to make the tough choices for Europe. Working towards greater economic freedom requires deep transformation of Europe's often ossified institutions. Without a crisis, attempts at modernizing may suffer in the hands of a political leadership that is content with doing the minimum to satisfy narrow national interests.

Barcelona and Velamuri believe that economic freedom depends on people's resilience and ability to pursue their goals. The government's role is to create an environment that enhances people's chances of achieving their goals. They question whether the deep-rooted concept of the welfare state in Europe -where citizens look to the state to provide basic minimums, such as free healthcare, free education and job security- is consistent with a more and more economically integrated world. In other words, the issue is whether Europe's economic and social well-being is safer in the hands of interventionist governments, or with people who assume greater responsibility for their own welfare within a supportive political framework.

Seen from the perspective of economic freedom, Europe's dilemma appears to be a question of how far governments can put their trust in the markets and their citizens' and firms' ability to come up with creative responses to competitive pressures. In other words, Barcelona and Velamuri ask if European politicians can trust the markets and focus instead on their principal task of creating a more supportive institutional framework.

From the perspective of the most likely socio-economic paradigms of the next two decades (characterized by globally competitive economy, the diminishing influence of the state, and gaps between rich and poor curbed only by trade and immigration), Europe's ability to continue to prosper would increasingly depend on its ability to attract and retain talent. Such talent is likely to flourish in an environment where it is given institutional support to enhance its chances of success. In Barcelona and Velamuri's view, this is underpinned by greater economic freedom. What can erode it are governments that expropriate the fruits of labor and entrepreneurship through their power of taxation, regulation and market interventions.

In practical terms, in order for Europe to enhance its attractiveness as a destination for capital and labor, in order to secure its rightful place in the future, the authors propose three policy areas as the focus: proactive immigration policy, labor market flexibility, and lowering capital and entrepreneurial barriers.

The proactive immigration policy targets high human capital immigrants that bring with them a rich source of talent, expertise and a significant capacity to contribute to their new home countries. Such a globally mobile talent pool is likely to gravitate towards areas with a friendly environment that gives immigrants a chance to fully contribute to their adopted society. Immigration often eases skill shortages and helps to kick-start a phase of greater economic dynamism and renewal.

The second policy, labor market flexibility, is meant to correct the present European rigidity of labor legislation that causes the Old Continent to lag behind U.S. productivity by 20.7 percent, employment at a quarter of U.S. growth, and a significantly higher unemployment rate. Experience shows that as markets become more protective, governments succeed merely in bestowing their benefits on the shrinking pool of gainfully employed.

The third suggested solution, lowering capital and entrepreneurial barriers, refers to taxation and the bureaucracy relating to creditor protection, patents and funding of new ventures, which remain as areas for further rationalization.

Public-private initiatives take on a new meaning in the context of tackling the tough choices to greater economic freedom. Barcelona and Velamuri believe that enlightened government facilitates the creation of an institutional framework that enhances economic freedom. The private sector, for its part, pursues activities that are beneficial to all its stakeholders. In such a partnership, public-private initiatives may just prove to be the enduring glue that makes economic and social cohesion feasible - in Europe and globally.



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