The election of centre right parties in Europe could boost flagging and over-taxed economies in the region
Lothar Spaeth may soon become the most important man in Europe. Edmund Stoiber, who's trying to unseat German Chancellor Gerhard Schroeder, has gone on record to say he would appoint Spaeth as Economy and Labour Minister, charged with reviving Europe's biggest but most damaged economy.
Spaeth looks like a smart choice. A politician turned businessman, he steered Jenoptik AG through privatisation and made it one of the few successful international businesses to emerge from the old East Germany.
The appointment may prove just right for a country with mass unemployment and sluggish growth. Germans do not like living in a basket-case economy, and will punish the man who put them there.
With Stoiber, a Christian Democrat, ten points ahead in the latest polls, it looks almost impossible that Schroeder, a Social Democrat, can remain in power after September's election. If Spaeth does take power, he should find himself in good company. Europe is filling up with pro-business, free market politicians.
In the space of a few months, the political landscape of Europe has changed dramatically. The centre-left politicians who ruled in almost all of Europe's capitals are one by one being removed from power. The right is resurgent everywhere.
That may have far-reaching consequences for the euro, and for the European economy. Europe's centre-right parties are winning elections on tax-cutting agendas. That has set them on a collision course with the euro-zone's stability pact, which put tight limits on budget deficits. Like all right-wing politicians, they will promise to cut both spending and taxes, but will find that taxes are easier to bring down than spending.
The right has swept across Europe from south to north. Spain's Jose Maria Aznar took power in 1996, and in the years since then has liberalised Spain's economy. The result? Spain has one of the highest growth rates in the European Union (though Aznar faces a general strike for a plan to end the benefits of workers who won't take a job). Aznar is cutting the top tax rate down to 46% and promised to bring it down to 40%.
In Portugal, the right-of-centre Social Democrats rode a tax-cutting platform to victory over the Socialists in March. In Italy, Silvio Berlusconi's promises to cut taxes helped make him Prime Minister last year. He has already staged a bruising confrontation with the unions, and promised to cut taxes as a share of Italian GDP from the current 43%.
In France, centre-right President Jacques Chirac was overwhelmingly re-elected against the far-right candidate Jean-Marie le Pen. It remains to be seen if the right can capture control of the National Assembly in next month's election, but the omens must be good. If it does, France will have its most pro-business government for years.
France's new Prime Minister, Jean-Pierre Raffarin, has already appointed Francis Mer as finance minister. Mer was running Arcelor SA, the world's biggest steel company, and has pledged himself to supporting Chirac's planned tax cuts.
By autumn, both the French and the German finance ministers may well have been plucked straight from the corporate sector.
By the end of this year, the UK will likely be the only big European country governed from the left. Promises of tax cutting thrown around like confetti during election campaigns may prove harder to keep once those new governments are established in power. All the members of the euro have to keep their budget deficits within three percent of GDP. That will be hard to achieve.
In France, Chirac recently abandoned a promise to balance the nation's budget by 2004. The new Portuguese government has already had to scale back tax-cutting plans after being censured by the European Union. Expect more conflicts between new right of centre governments and the European Union and the European Central Bank.
The way for Europe's new governments to get out of this jam is to revive old-school Reaganomics. They will have to argue that cutting taxes will revive the economy, push down unemployment, and so solve the deficits.
There are some signs that it works. In Spain, which started this process, tax revenue is rising. The government managed to balance the budget for this year, mainly because falling unemployment led to big increases in the tax yield. But, Reaganomics in Europe is likely to have much the same results as in the US.
The American economy started a two-decade long party, but the deficits did not come down for another decade, and only then after an assault on spending. The same may well be true in the new tax-cutting Europe. The economy will boom, unemployment will start to come down, but the deficits might well be big. Yet if the recipe revives the euro-zone economy, as it revived the American economy two decades ago, most voters will probably conclude they have made the right choice.
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