The Third Way will drive Europe into a slump

The so-called American economic revival has simply created low- paid, low-skill, casual jobs

TONY BLAIR'S intervention at his meeting with other left-wing European heads of government was clear and firm. Europe can adapt to the future only if it mimics the United States' more open and dynamic economy.

This will not have come as a surprise to comrades Jospin and Schroder, who have become used to the Prime Minister's lectures about the need for a Third Way for Europe. The British Government remains convinced that the reason Europe's unemployment rate is so unacceptably high is because of the dead hands of regulation, high taxes, redistribution and excessive public spending.

If only Europe would slim down its welfare state to British levels and cut corporation tax to something closer to America's, Europe too could experience a long economic boom with tens of millions of new jobs created. Of course, we should also have to accept laxer standards of environmental protection and food hygiene and put up with larger doses of hormones and genetically modified crops, but this would merely bring Europe into line with the existing demands of the American-dominated World Trade Organisation.

When we look at the American economy, there is no denying that it is experiencing its longest post-war boom and the lowest levels of unemployment in a generation. The question we have to ask, however, is whether this is because of or in spite of America's low-tax, low-regulation economy. Equally, we need to look beyond bland generalities before we simply echo the Thatcherite refrain about the causes of Europe's high level of unemployment.

It is all too easy to paint a nightmarish vision of the downside of the American dream, with nearly a third of the population having no guaranteed access to health care, and levels of homelessness, drug addiction and violence that dwarf anything we see even in the most deprived pockets of Europe.

Much of the so-called American economic revival has simply seen the creation of low-wage, low-skill and casual employment replacing the high-wage, high-skill manufacturing jobs that have been wiped out as large American corporations relocate their production to Mexico and other low-wage areas.

Of course, it is not surprising that America has had a sustained period of growth, given that virtually the whole of the rest of the global economy is subordinated to serve US needs. In recent years this American boom has been continued by a vastly overvalued stock market boom that everybody accepts poses catastrophic risks to the global economy when it comes to an end.

If the world is lucky, Alan Greenspan's Federal Reserve Bank and Bill Clinton will be able to manage a soft landing for America's stocks and shares that will snuff out the economic boom that has so mesmerised Tony Blair and Gordon Brown. If the worst happens and America's stock market spirals out of control, then this will be the final straw that tips the world economy into a re-run of the Thirties. Just why Europe should wish to replicate America's weaknesses is something that will fully require Tony Blair's persuasive skills to explain.

The so-called sickly European economy represents almost a mirror image of the American dream/ nightmare. Unlike America, Europe sustains a huge balance of trade surplus and, with the exception of the vastly overvalued British stock market, the rest of Europe's stock markets are not big enough or overheated enough to drag down the real productive strength of the European economy. Europe therefore does not need to be propped up with inflows of funds from Japan or from anywhere else, and as a result is better insulated from global turmoil than is the US.

In contrast to America's low-skill jobs boom, Europe has fought to try to preserve high-skill, hi-tech employment and, to sustain this, continues to have a level of investment 25 per cent higher than that of the US. Equally, Europe has avoided the worst excesses of human downsizing and environmental despoliation that have become a defining characteristic of corporate America. The grosser inequalities of wealth that disfigure Britain and America have been avoided, with Europe's top executives earning substantially less than their Anglo-American counterparts.

So, given this record, why are we constantly told that Europe must develop along American lines? There is no doubt that the crisis of high unemployment is Europe's Achilles' heel, but the shocking reason behind Europe's high unemployment is that it was a deliberately self-inflicted policy decision undertaken in order to prepare for the introduction of the euro. The problem has its historical roots in the collapse of the Weimar Republic and the rise of Nazism in Germany. This led succeeding generations of German politicians to fear a return of the great inflation that they believe opened the way for Hitler's rise to power. The response of Germany's post-war chancellors has been to stamp on the very first signs of inflation.

Normally these tight money policies would have undermined Germany's post- war boom, had it not been for the fact that Germany massively undervalued the mark, thus guaranteeing that its exports would be cheap enough to undercut its British and American rivals throughout the global markets.

As Germany prepared for the introduction of the euro, the undervaluation of the mark was conveniently forgotten in place of the mantra that Germany's success was due to tight money and a firm grip on inflation. These policies were then imposed on the rest of Europe in the run-up to the introduction of the euro. The result was obvious. European currencies became overvalued, exports were squeezed and unemployment soared. Two years ago, Germany led the rest of Europe in a quiet devaluation of their currencies against the pound and the dollar, thus preparing for a boom to coincide with the introduction of the euro.

Sadly, Europe's policy-makers had not foreseen the downswing in the global economy that began in Asia and has now snuffed out Europe's embryonic recovery at just the moment that the independent central bank has come into power. Unless the European Central Bank now dramatically cuts interest rates, Europe faces more unemployment.

It is these massive underlying economic forces that have to be understood if Europe is to tackle the problem of unemployment. Superficial comparisons between Europe and America will lead us into depression, not into a Third Way.