Dr Alfred Gusenbauer, Leader of the Social Democratic Party of Austria

I think there is a lot of empirical evidence that the European model was more successful than the American one. The paradox is that America's economic policies in he 90's adopted the European tradition, while the Europeans gave up their traditions by the requirements of the Maastricht treaty and the interest rate policy of the German Bundesbank. So a lot of wisdom in the high growth rates of the United States of America throughout the 90s is that they performed an economic policy that is rather close to the European economic policy throughout the period of prosperity. At the beginning of the 90s the United States lowered the interest rate to the lowest level ever in the post-war period. In addition, fiscal policy supported growth policies in the United States and they even accepted a rather high budget deficit at the beginning of the 90s. Between 1992 and 1995 they lowered the budget deficit from 5.9% to 3.6%, but not through budgetary restraints but simply by waiting until the economic cycle was able to pick up.

The United States, therefore, adopted a rather anti-cyclical monetary and fiscal policy in the beginning of the 90s. Taxation policies supported the poorer parts of the population by increasing what we call negative taxation. They increased the top tax rates up from 31% up to 42%. The US interest rate in the 90s remained below the growth rate of the United States economy. The continuing high growth rates led to a continuing melioration of state finances. At the end of the 90s an economy that started with a budget deficit of 5.9% ended up with a budgetary surplus without engaging in consolidation packages as we are doing right now all over Europe. And this package of measures is rather similar to what has been economic common sense in the 60s and in 70s of Europe.

On the contrary, European economies engaged themselves throughout the 90s in lowering the budget deficit. They had a singular view to the deficit and to a certain extent, a singular view to the inflation rate; they never considered the consequences for growth, the consequences for employment and the consequences for distribution. The result is that by the end of the 1990s there were countries that had difficulties in consolidating their budgets. Growth rate were lower than in the United States of America and despite the fact that we were able to reduce unemployment in Europe over the past two and a half years, the unemployment rate on average still is higher than in the US. So it is a certain paradox that the United States for the first time in a decade (and in the post war period) was able to reach a higher economic growth rate through adopting what European economic policy had been for many decades.

The 90s were the first decade in the post-war period when the average European growth rate was lower than the American one. And I think one of the main reasons for that lies in the background of the neo-liberal paradigm in Europe after the fall of the Berlin Wall, which is mainly crafted according to EU regulations and is also the leading spirit of the Maastricht treaty. Of course there are differences between now and the past in Europe because traditional national economic policies do not have the same tools available as before. Monetary policy is done by the European Central Bank. National deficit spending will not lead to the same increase in demand on the national level than before. Because we are now living in open economies in Europe, there are different conditions. Therefore, one of the most important debates is how one could re-establish what has been the European model on the national level on the real European level. There are some steps that have been taken. However, it is not the continuation of the European model in the European way. We have a European Central Bank, but the mandate of the European Central Bank is a much narrower one than the mandate of the Federal Reserve Bank. Even Mr. Greenspan has to go in front of Congress and talk about not only the development of the inflation rate but more broadly on employment growth etc.

In Europe the mandate of the European Central Bank is much more limited. Second, an institutional problem in that context is that there is no political vis-à-vis for the European Central Bank. In the United States you have the US Treasury and Congress. But who is the economic vis-à-vis of the European Central Bank in Europe? It is a set of governments with a very, very difficult process of co-ordination, but there is no such thing as an economic government as proposed years ago by Jacques Delors. Therefore, there is no clear political counterpart that is able also to cooperate with the European Central Bank on a proper level. In addition, there is still no harmonisation of taxation of capital in Europe.

With the result of Nice I do not have the impression that we are going into the direction of harmonisation of social and ecological standards; quite the contrary: the results of Nice tell a completely different story. My conviction is that if the model that has been successful in Europe on a national basis--if such a model should be sustained--it only can be sustained on the European level. But then the predominant trend of European development has to be changed. I think that the European welfare state can only be maintained on a European level and that requires changes in policies and institutions and in decision-making, which did not happen at the Nice summit last weekend.

When going into social policies there is the general saying that societies that offer less protection and concentrate more on empowerment are more successful. I doubt it. If you have a comparison concerning the increase of labour productivity between, for instance, more protected societies like Austria or Sweden or other European states, and compare it with the United States, labour productivity still increased much faster in those protected societies than in the United States. I want to question the main stream of "evidence" that less protection leads to a more efficient economy and to a better society. There is counter empirical evidence that at least questions this assertion.

There are additional problems for the European social model, which was very much based on the co-operation between trade unions, governments and enterprises. Firstly, we are in a situation where trade unions are losing importance. They are not only losing importance because of their own fault, which might be there too, but because of the new third sector of the economy. Traditional industries and public services are two sectors decreasing, for the moment, the number of jobs; in these industries the unions have a stronghold. In the enormously booming third sector there is a rather low percentage of organisation. Without powerful partners in the dialogue to shape economic and social policies it is rather difficult to get to the same results. Therefore, trade unions nowadays are much weaker than they were before.

The second element is that, on the European level, you do not have the same mechanisms of policy co-ordination and co-operation between the different partners as we had before on the national level. So this poses a second problem when dealing with the establishment of a European social model on the European level.

The third element might be one of the problems of European societies (and also of Austrian society): the welfare state is a question of the distribution of income in a society. There are, of course, democratic limits to the amount created that can be redistributed. These limits are always tested in elections. It is rather difficult to go beyond an overall tax rate of 50% in Europe. There are some countries which have a higher tax rate but most are under 50%. So it's a question of distribution and on which fields of public goods you are concentrating. Giving the general trend in our society, we are facing a particular problem: we will have more and more elderly people in our societies who, as a strong part of the electorate, will vote for those who will dedicate a certain degree of redistributed social budgets to pension schemes. But we all know that pensions are not the future investments of society so what we are facing right now will be a competition to which public goods will redistribute social income. Will it go more to education or more to pensions? Will it go to health care or will it go to infrastructure? So there are different competing public goods where there are different interests within a society. One of the most ardent issues of our times is how we can rebalance these different interests in different public goods in order to get a more future-oriented sustainable and dynamic development.

I have nothing against empowerment and I think this is extremely important. But I see it from another point of view. If we are really entering the knowledge-based society and if throughout the work cycle people have to five or six or seven times renew their qualification. then society must provide tools and measures that offer the possibility for empowerment so people will be able to stay in the labour market.

There is no alternative to empowerment of people, but I would not see empowerment in contradiction to protection. There was a very interesting book by my friend Prof. Marris from London who wrote "How to Save the Underclass." I think there are two fundamental insights. First, if one is trying to limit the welfare state just to the poor this will be the end of the welfare state because the welfare state would lose democratic legitimacy. Secondly, if you have a development in a society where you really are confronted with an underclass, which means a part in the society which is not allowed the options of upward mobility, then the existence of such an underclass is the best guarantee for the political majority to be the political right. Those people will be concerned that those who are part of the underclass will develop a behaviour of political abstination. Being part of the underclass often means not going to elections, not going to vote. A tremendous part of the social reality will be excluded from the democratic process. And if the democratic process is only concentrated on the remaining two/third or 60% or 50% of society it will be very difficult to reach a political consensus. A policy that tries to include all parts of society is essential, as we tried to do through policies of the welfare state. Therefore, to conclude: I think the European Model has proven to be more successful and the main challenge in front of us is to re-establish what has been successful on the national basis at the European level.

I'll be now very polemic. If I have the choice to use the Swiss rail system or the British rail system, I'll chose the Swiss one.

I remember the British rail system in 1975, when I was on my first Inter-rail trip-one of the best rail systems we had in Europe. There was a tremendous deterioration of the British rail system in the past 25 year, although not only due to privatisation, that is true. They have a debate now on how to get it back under public control because the privatised rail system in the UK did not work. I know in Germany nowadays the debate is going in a completely different direction. There should be a certain privatisation of the rail system, but the way to go about it in Germany will be a different one than the way they did it in the UK.

Just on the basis of delivered results I prefer the Swiss state system to the UK privatised rail system. Second thing is if one is trying to motivate people to take their own responsibility. That's a proper attitude; I have only one question: why is the unemployment rate always reduced tremendously when we have proper growth? So it's not just in my understanding of the individual problems of people who are not prepared to do different things. It's also a question of economic development; the reduction of the unemployment rate in past years was a result of the rising economy and not the result of deregulation. Maybe I see it too much from the Austrian perspectives, but we have one of the most flexible labour markets. With 3.3 million people employed in Austria, 700,000 are going through unemployment at least once in the year. That doesn't mean they are forced to become unemployed because there is also a change of jobs. It is extremely flexible. Of course there has to be individual responsibility, but I think the debate nowadays is already a different one. Nowadays people do not think they are overprotected and we need a deregulation. The question by the people nowadays in times of deregulation and globalisation is what type of solidarity or protection society is offering for me because I'm left on my own in most instances. And therefore, the debate nowadays is a little bit different than it was some years ago. But I agree that there are still obstacles to individual activity and they have a lot to do with bureaucracy. They have a lot to do, especially in Austria, with the decentralised bureaucracy. We have the best type of bureaucracy; we have a central bureaucracy and a decentralised bureaucracy and in a lot of instances, they are doing the same things, which leads to a multiplication of obstacles for different economic activities.

If there is a European integration and there is some decision making on the European level, I think one of the main debates we must engage in is if, in such a development, our bureaucracy and administration has to be on the same level, i.e. on the national and federal level in a situation where at least 75% of legislative competence has gone to the European level. There is a lot of reform to be done. But let me just make one point: there is no politics without interests. And there is good reason why reform there is lacking behind. There have been a lot of economic and social reforms in the private sector, but in the public sector it is lacking behind because there is the political interest of political parties who want to maintain power at the level where they are. Of course public sector workers are the best organised in the country; they are very able to defend their interests. It is not a coincidence that deregulation took place in the sectors where organised labour was the weakest. It did not happen to the extent where it was quite strong. This would support your argument that trade unions should become weaker. I do not know if this is really offering a way out. If one is aiming at flexible regulation…in Austria we have a lot of collective bargaining that reaches an agreement on the federal level with flexibility options on the level of the enterprise; such type of agreements only can be reached by strong trade unions. This is why the metal workers trade unions, who are among the strongest, have the most advanced system of flexibility on the enterprise level, while in other sectors where you do not have strong trade unions, the flexibility on the enterprise level is much lower. There are strong trade unions which negotiate collective bargaining and offer options of flexibility on the enterprise level. I think this model worked quite well. One does not necessarily have to destroy the trade unions in order to get.

Concerning the taxation issue in Europe, I'm not in favour of a general income tax, but I think it would be very useful if we have harmonised capital taxes in Europe. Because even from a German point of view I think you should not be very happy about the different taxation of capital income in Luxembourg and in Austria. It leads to a sort of competition that gives a lot of advantages to Guernsey and some other type of tax heavens, which is not very useful to European integration. If one has a single currency and an entire set of competition rules, at least this element has to be harmonised.

Concerning ecological standards, I'm in favour of minimal standards and I talk in favour of that especially from an Austrian point of view. I'm not happy that the European Union did not implement majority voting in the ecological field. With enlargement-that I am very much in favour-all new member states, including those who have not agreed up to now, already can block any environmental progress. Austria and Germany, both on the border to new member states, will be the ones that are mostly harmed by this situation. In the ecological field you need some minimum standards; otherwise, it becomes a major element of competition too.

Last point concerning the future of Europe: I am not interested in the size of apples. The thing is, where it is necessary, we do not have a European policy and where it is not necessary, for instance concerning the apples, there is a European policy. And the question is: why is it like that? And it's very easy. If you have a huge bureaucracy like the Commission and decision making is taken away from the Commission and given more and more to the Council, the Commission naturally searches for niches of influence, which they are exploiting in very, very bureaucratic way.

The European Commission nowadays is not playing the role it should play concerning European integration, but rather they are very much concentrating on 12,000 pages characterising the proper size of tractor seats. And this is 30 years old because the first subject of common European policy was agriculture. This is why they are very precise in all issues concerning agriculture. Regulations are very strict. A reasonable attitude was the proposal of Joschka Fischer: an intergovernmental conference or European convention that tries to redefine what European competence should be and what national competence should be. What we have right now is the result of a historical development, but we must ask this question if the result that has been presented up to now is unable to meet the challenges of our time. I am not convinced that it has, unfortunately.