The Downside of Imperial Collapse
When Empires or Great Powers Fall, Chaos and War Rise
The past-including my past-is over. The prophet Isaiah wrote: "Forget the former things. Do not dwell on the past. See, I am doing a new thing. Now it springs up. Do you not perceive it?" At every moment of life, at every moment of activity, one should mostly envisage the future, and that is the reason for the title of these lectures.
In my comments on the world economic situation, I will cover three points. The first will be the conditions for a lasting economic recovery; the second, my view on the phased march toward a new Bretton Woods; and the third, a joint assessment of the structural aspects of the crisis.
The Williamsburg Summit provided an opportunity to mark the end of the world economic crisis we have lived through since 1973. Mutual undertakings should have carried a clear signal to all actors on the economic scene. The opportunity was not seized.
I do not want to minimize the results of the Williamsburg Summit. For instance, the joint statement on arms control and security, in the present context of relations between the Soviet Union and the West, was a significant collective step, with three major components:
-the confirmation by the three European countries concerned that they will proceed with the deployment of Euromissiles starting at the end of this year unless a now improbable agreement on current INF negotiations takes place before; the electoral results since then in the United Kingdom and Italy have given additional weight to this commitment;
-the explicit exclusion of the French and British nuclear forces from INF negotiations, which was necessary since some imprudent steps had led the Soviet Union to insist on their inclusion and cast some doubts on the attitude of Western countries; to be sure, the proposal by the U.S.S.R. after the Williamsburg Summit to impose a freeze on existing nuclear forces, including European ones, shows that this fundamental question, which is addressed in my third Lecture of this series, remains most unfortunately outstanding;
-the reference to the indivisibility of security, to be approached on a global basis, conveys to Japan and indirectly to the People's Republic of China, recently neglected by the United States and European countries, the most welcome indication that any agreement on a new equilibrium of forces in Europe will not be to the detriment of the much needed equilibrium of forces in Asia.
But, as far as the economic recovery is concerned, the Williamsburg communiqué, through its vague references to the commitment to reduce structural budget deficits and to "pursue appropriate monetary and budgetary policies that will be conducive to low inflation, reduced interest rates, higher investment, and greater employment opportunities," does not reflect any resolute collective leadership in the management of the world economy. And public opinion, whatever was the wording of the conclusion, intuitively but clearly perceived that there was neither a strong political will nor a personal commitment to enforce the resolutions.
In my judgment, the Williamsburg Summit should have led to three precise mutual undertakings: the United States and Canada committing themselves to action aiming at a decline in interest rates; Japan committing itself to an opening of its economy; and the European countries committing themselves to a greater convergence of their respective economic and financial policies. These undertakings, supplemented by a strong and binding commitment to fight protectionism and to open a dialogue on energy prices with oil-producing countries, would have sent clear signals. Since they did not occur, there is a need to have a fresh look at the world economic recovery, after the Williamsburg Summit and in light of its shortcomings.
Indeed, there are greater indications that a steady recovery is currently under way in the United States, confirming a judgment already made in April. Industrial production has grown since November 1982 by more than eight percentage points, recovering more than two-thirds of the losses registered from July 1981 to November 1982. The latest figures available on the rate of capacity utilization, on orders of durable goods, and more broadly on advanced indicators confirm this trend. After increases, in real terms, at annual rates of more than 2.5 and eight percent respectively in the first two quarters of 1983, the GNP (gross national product) will undoubtedly register additional substantial gains during the second half of the year, and might well, as projected by the Organization for Economic Cooperation and Development (OECD), grow at a yearly rate somewhere between five and six percent at the end of the year. But will this recovery be durable and sustained and sufficiently widespread to cope with the employment problems which are plaguing our societies?
As far as the components of demand in the United States are concerned, there are some positive elements, such as the relatively low level of inventories and household indebtedness and the positive evolution of real wages, but at the same time, the high level of real interest rates, which presently stand at five percent against a historical level of two percent, and the present dollar exchange rate act as deterrents to exports and to productive investments.
Factors other than real interest rates, such as consumer demand, fiscal incentives and profitability, are important determinants for business investment, but a significant decline in nominal interest rates is awaited by markets as a signal of a sustained recovery. This issue is linked to the question of the U.S. budget deficit in a manner clearly summarized by Martin Feldstein: "If the Government continues to borrow 5 or 6 percent of the gross national product to finance its budget deficits, the real interest rate must remain high in order to squeeze private borrowers down to the limited amount of funds that remain . . . . Real long-term interest rates must be reduced by convincing evidence that the budget deficit in future years will be declining rapidly."1 In the absence of any precise commitment by the United States in Williamsburg, I personally do not see how the present deadlock, under which the President wants a rapid increase of military expenditure, the Congress wants to protect social expenditure, and nobody wants seriously to increase taxes, could be overcome before the November 1984 election. It means that high real interest rates and a high real exchange value of the dollar, even if it is slightly reduced, might persist, thus hindering recovery forces presently at play.
But more fundamentally there is a risk that the international diffusion of the U.S. recovery will not take place according to usual patterns, which might in due course hurt the U.S. economy itself, even if it is less dependent than other industrialized countries on export developments. Traditionally a U.S. recovery has fueled exports of developing countries, increasing their orders of equipment goods from countries such as Japan, Germany and France, and the interdependence between European countries has led to a diffusion in Europe of these expansionary forces, thereby sustaining the world recovery.
This time, and due to the international debt crisis, developing countries will not be in a position to benefit fully from the U.S. recovery. They have undertaken major adjustment programs, which implies that their growth will most probably not exceed two percent in 1983 against an average growth of five to six percent in the past 15 years. Demand for equipment goods from oil-producing countries will fall substantially, as already indicated by Saudi Arabia, while real economic growth in East European countries, which averaged eight percent in the early 1970s and four percent from 1975 through 1980, should continue to be negative in 1983 after a contraction of two percent in 1981 and one percent in 1982. Therefore, the industrial countries have to count more on themselves than in the past to assure a lasting recovery. And the signs in industrial countries other than the United States are only moderately encouraging.
At present, the Japanese economy grows at a rate of about three percent, quite modest by its past standards, but the permanent competitiveness of its industry means that it would undoubtedly be in a position to be a full participant in a broad recovery of industrial countries. Thus the key issue is the problem of recovery in Western Europe-at a time when high real interest rates are hurting European countries, probably even more than the U.S. economy, since financial techniques developed in the U.S. markets to alleviate some of the effects of high interest rates (such as the widespread use of variable interest rates and of futures markets) have not yet materialized in the European financial markets.
To be sure, there are some positive signs in Germany and in the United Kingdom. But there is no example in the past of a sustained recovery in Europe without a mutually reinforcing expansion both in Germany and France, two major countries with intense mutual trade relations. Such a coordinated expansion is probably out of reach in present circumstances. After a most unfortunate countercyclical policy in 1981 and 1982, France is engaged in a much needed adjustment program, with an uncertain timetable and an unconvincing overall determination to implement it, in view of the political contradictions of its present government majority. It is unlikely that it will be able to play a positive role in contributing to the present phase of recovery.
After the missed opportunity of Williamsburg, there is therefore a need for a collective discipline to be agreed upon between European countries, a matter on which the meager results of the Stuttgart EEC Summit in June cast evident doubts. However, the campaign for the next European parliamentary election, to be held in June 1984, offers an opportunity to impose on governments this much-needed sense of action. I launched the elections to the European Assembly by direct ballot; in my judgment, even if other internal political consequences might have to be derived from their results in some individual countries, they should fundamentally be used to give popular support to undertakings and policies for Europe as a whole.
As far as the 1984 elections are concerned, the major issues are the unification of the fundamental economic sectors, the impulse to be given to common policies, and the joint problems of defense and political unity of the continent which I address in my second Lecture. At the same time, I would propose that a clear mandate for a coordinated strategy aiming at economic recovery be given to the European Council, which I launched at the same time as the direct elections to the European Assembly; in my view they were the two pillars of future progress toward European unity.
The components of this strategy will have to be assessed in due time in view of the most recent developments in individual economies, but the overall aim is already clear. Countries suffering major imbalances would have to cut further their public expenditures while giving the proper incentive to the productive sector. Countries having mastered their price and balance-of-payments developments would at the same time give some additional impulses to their ongoing recovery. The coordinated strategy launched in mid-1984 would aim at having, at the end of that year, when the U.S. recovery forces might begin to dissipate, an ongoing collective recovery in Europe sustaining a worldwide expansion. At the same time, at the next summit of the major industrialized countries, the European participating countries, as a complementary element to their own action, will have to convince their partners of the need to take mutual reinforcing actions along the lines aptly described by Anthony Solomon and George de Menil in their excellent report on economic summitry or by Helmut Schmidt's prescriptions, which I basically support.2
During the same time, progress should be made toward addressing international monetary problems, and notably debt problems, in order to broaden to the world economy as a whole the recovery in industrial countries.
The Williamsburg Summit ended with an ambiguous reference to an international monetary conference, stating in its final declaration: "We have invited Ministers of Finance, in consultation with the Managing Director of the IMF, to define the conditions for improving the international monetary system and to consider the part which might in due course be played in this process by a high level international monetary conference." As I see it, early strong movement toward a conference is not likely, especially in view of some of the comments publicly offered by U.S. authorities after the Williamsburg Summit. Since procedures should not come before substance, I had advocated, before the summit, a strategy of gradual steps-what I have called "a phased march" toward a new Bretton Woods. This gradual approach remains in my judgment appropriate, but special emphasis should be put in the coming months on initiatives to be taken at the European level as a contribution, or an alternative, to a wider international monetary agreement.
The first step would be to strengthen the role of the ECU (European currency unit) and the EMS (European monetary system), for three mutually reinforcing reasons. A strong European pillar is an indispensable component of any lasting international monetary system. It could provide for Europe an alternative if it appeared that no collective agreement could be reached at the world level. The promotion of the EMS is the best way for Europeans to induce the American authorities to assess better the international role of the dollar, as was demonstrated in 1978-79 when the launching of the EMS led the U.S. government to initiate a comprehensive program to bolster the value of its currency, at a time when relative positions were the reverse of the present ones.
The decisions to be taken to strengthen the EMS are well known: an extension to all European currencies, including the pound sterling; a consolidation and a broadening of existing credit facilities; more automatic intervention on exchange markets; and a wider utilization of the ECU which should become gradually a freely usable monetary instrument and an intervention currency. It implies, above all, a greater convergence in the economic policies of individual countries, since no system of stable exchange rates can function between countries with such differences in inflation rates and monetary aggregate developments. A collective discipline in Europe is at the same time a condition for a lasting economic recovery and for a viable international monetary system. The passage to the second phase of the EMS will therefore be a part of the coordinated economic strategy I will propose for the European elections in mid-1984.
The second step would then be to implement a "target zones" system between the ECU, the dollar and the yen. It would start with wider margins than in the EMS, but these margins would be reduced gradually. Since exchange rates are largely determined by domestic monetary developments, it would require mutually agreed monetary targets. Coordinated interventions by central banks would operate in support of this action.
It is self-evident that interventions cannot assure by themselves the stability of nominal exchange rates if they are not supported by effective economic policies, notably domestic monetary policies, aiming at a stability of real exchange rates. But interventions can avoid unjustified short-term deviations from basic trends and in addition can induce stabilizing forces on exchange markets. In the absence of interventions, speculative placements can shift from one currency to another on the basis of relative nominal interest rates, with a limited risk of seeing potential gains offset by an adverse move of exchange rates. The threat of intervention could induce more caution, through, for instance, a larger use of relative real interest rates or of covered interest rates, and therefore limit the impact of destabilizing capital movements.
After the effective functioning of this target zones system over two or three years-through what I have called a progressive "coagulation" of the system-the time would be ripe to address in a conference the question of the stabilization of monetary relations within a "World Monetary System" (WMS), which should place great weight on the need for stable, while adjustable, exchange rates.
In my judgment, these steps and the ultimate goal to return to a system of stable exchange rates should have been announced in Williamsburg. At a time when we see the end of the energy crisis, whose positive effects on prices and employment should mirror the negative effects of the two oil shocks of 1973-74 and 1979-80, a collective commitment to return to a stable international monetary system would have sent the clear signal that the world economic crisis was over, thus liberating economic initiatives to themselves contribute to the fulfillment of the prediction.
Since this has not proven possible and probably would not prove so before some years, let us take an approach based first on a joint European initiative, but without losing sight of what should be the ultimate goal.
The second major problem for which steps in the direction of a solution should gradually take place is the debt problem. In 1982, the fragility of the system, under which during the last 20 years international bank claims were increasing at an annual rate of 25 percent, was exposed by a series of major financial and political events: the debt crisis in Eastern Europe, in the wake of the Polish crisis; the debt crisis of Latin America, in the wake of the Falklands War; and bank failures in Europe and the United States contributing to the disruption of international financial markets.
These difficulties were related to a conjunction of events: a worldwide recession, a sharp fall in commodities prices, and high interest rates due to excessive reliance on monetary policies. But they also indicated more fundamental problems: a weakness in the structure of developing countries' debt with a pronounced trend toward shorter maturities, which implied great vulnerability to a shift in the attitude of commercial banks; an excessive reliance on the interbank market, highly sensitive to confidence factors; a problem of funding for nondollar-based banks, with the marked reduction in the OPEC surplus.
Under the far-sighted and decisive leadership of the Managing Director of the International Monetary Fund, it has been possible to overcome these crises in 1982 by an appropriate mix of adjustment policies, new financing by the Fund and the Bank for International Settlements, and additional commitments by commercial banks. Prompt action by all countries on the IMF quota increases is a vital element of this ongoing process, based on wider use of the Fund's resources. In addition, unexpected developments or difficulties in the implementation of adjustment programs (as exemplified by the Brazilian case) might well lead to renewed problems, and we should build upon the experience of 1982 to define a more systematic approach. Severe adjustment was obviously needed, but it cannot be a permanent solution for countries facing major development challenges.
The solutions are complex, since the indispensable confidence of lenders, most notably bankers, has to be maintained. This is why I do not believe in schemes based on massive refunding or on mandatory transfers of existing claims to a new international organization. Such a "political" approach ignores several basic factors, notably the very diverse situations of the borrowing countries, and the need to demonstrate their ability to restore in the future an adequate economic balance. One should think rather of mechanisms assuring a more rapid access to short-term liquidity provided by the BIS and the IMF, and of a market for bank claims with some participation by central banks, starting with the weakest element, which is the interbank market. In addition, a system of partial guarantees by multilateral institutions, acting in support of sound economic programs, might be contemplated.
There is a need to avoid past excesses in lending and at the same time to maintain an adequate flow of financing. Clearly, specific measures to proceed with the resumption of a reasonable growth of international credit cannot be determined only through the public representatives or through the private lenders, but require a joint approach and review. Hence my proposal to set up a small but representative international commission, including government officials and private lenders from different countries, and representatives from borrowing countries and multilateral institutions, to make concrete proposals on the handling of debt problems.
Developing countries are severely adjusting their economies, and their people need to know that their efforts will be fruitful. The annual meeting of the IMF and the World Bank should provide an opportunity to display a collective endeavor both to give adequate resources to multilateral institutions and to address more lastingly the problems of developing countries.
If it were possible to launch action in the direction of stability of exchange rates through a European initiative, and to give an adequate answer to the debt problem, major steps would have been taken in the direction of a new Bretton Woods conference which should be the end and the culmination of such a cooperative process.
While the conditions for a sustained economic recovery in the world and the possible steps in the direction of a new Bretton Woods conference are for obvious reasons the most widely discussed topics in international economic circles, they should not make us lose sight of the long-term and fundamental problems which are confronting us. Clearly their solution will emerge from the collective evolution of our diversified countries and not from official prescriptions. But there is a need to have a fresh look, in view of the most recent developments, at the key elements of long-term growth and prosperity in the world: population and employment; natural resources and energy; new technology and capital formation in the framework of expansion of international trade.
I intend to come back to the fundamental problem of employment, which has economic, social and cultural dimensions, when addressing the challenges facing our democracies. At this stage I will offer only some preliminary remarks on what could be the scope of a joint assessment of issues that the world is collectively facing: the structural aspects of the crisis.
Natural resources and energy. The availability of natural resources is a major component in long-term growth. It has been one of the merits of the Club of Rome, and the Meadows study, even if many of their fears were probably unfounded, that they introduced into the public debate and into public policies the associated questions of natural resources and of environmental values. It is an area where additional progress is needed to reconcile the desire of producing countries to get predictability and profitability for the prices of their products and the desire of importing countries to protect the role of market forces. Discussions are under way at the EEC level with the coming renewal of the Lomé Convention with associated countries, and discussions are still going on at the world level on the Common Fund, and I do not want at this stage to do more than to stress their importance.
The focus on energy issues is an example of the contribution of international cooperation through the summit process as has, again, been lucidly described in the Council on Foreign Relations report.
After the first oil shock, the United States maintained a perverse policy of control of domestic oil prices which implied a subsidy given by domestic producers to oil imports, a blended price for consumers lower than the world level and an associated overconsumption, and an absence of incentive for exploration and drilling. The undertaking by the U.S. President at the 1978 Bonn Summit to decontrol oil prices, an undertaking fulfilled by President Carter in 1979 under a timetable later accelerated by President Reagan, has made major contributions to a better world energy balance: a resumption of oil production and exploration in the United States; a decline by five percent in the energy/GNP ratio in the United States; a decline by one-third in U.S. oil imports. After the second oil shock the coordinated answer given by the 1979 Tokyo Summit, with undertakings on maximum oil imports, was also an important contribution; we have now a manageable world energy situation where demand is compatible for several years with the present level of OPEC productive capacity.
But the breathing space thus obtained should not be used for complacency. We have to build on a sound basis our long-term dialogue with oil-producing countries. But we have, as well, to maintain our efforts to reduce our dependence on oil imports, since the medium-term political vulnerability of the Middle East remains and there is still a long-term need to shift from an oil-dominated energy picture to a more diversified one. This means that consumers should not get wrong signals from market prices (which raises in some countries the question of additional taxation), that all producer prices and notably the price of natural gas in the United States should reflect world prices, that obstacles to the development of coal production and nuclear energy should be removed, and that adequate financial incentives should be given to long-term projects such as synthetic fuels and solar energy.
Innovation, capital formation and trade flows. The second fundamental element for which some joint approach is needed is the problem of innovation and capital formation in the framework of increasing trade and capital flows.
To be sure, high-technology industries will not directly solve our problem of employment. According to a Data Resources, Inc. study on the U.S. economy, high-technology industries will see their output more than doubled in the next 15 years (against an increase by about one-third for manufacturing), but in view of their small share and their rapid productivity growth, jobs in these industries will stand at only four million against more than 20 million in the rest of manufacturing and more than 50 million in trade and services.
But they will provide a large demand for highly qualified jobs, consistent with the projected educational level of our young people, contribute to a higher rate of productivity growth, which is the key to living standards, and leave room for a decline in traditional industries where jobs in industrial countries are displaced by the exports of newly industrialized countries.
On this, I must add, because I do not want to be misunderstood, that it is very important for our countries to keep a very broad base of industrial production. The idea of a general evolution toward services or high-technology activities, in isolation from other industries, would be a historical mistake. We need to keep on our soil, your soil, the soil of Western Europe, a large part of the industrial ability to produce general industrial goods. It is not by direct public support that we can solve this problem, but certainly the general environment, the tax policy, the credit policy must be adequate to this goal, which is to keep a diversified, living industrial sector.
Neither can an adequate promotion of high-technology industries depend on undue government interference. We all have in mind examples of state-owned industries where the unpredictability of future financial resources, the absence of adequate reaction to market signals, and the lack of incentives through competition have combined to hamper technological developments. Governments should confine themselves to maintaining an adequate economic environment based on competition, to granting adequate incentives to industry-based research, and to financing fundamental research and seeing to it that its results are readily available to private industry.
But nevertheless, in view of the magnitude of the challenge and the need for international cooperation, I see merits in the idea of some general discussion of major technological problems between summit countries, provided it does not pave the way for a bureaucratic approach to problems which belong to the industry itself. Clearly our market economies and our Western world still have the technological leadership and the aptitude to promote it.
The promotion of technology will imply additional financial requirements on top of those required by traditional manufacturing, housing, and infrastructure, and those required by a forceful energy program. Associated with this, there should therefore be an effort in each industrial country to promote saving, through price stability, an adequate tax structure, and competition between financial intermediaries, and to channel a large part of it toward risk capital and industry financing.
If we succeed in such an endeavor, we will be in a better position to address the difficult question of trade. It is self-evident that the international division of labor benefits all of us and that the key for the development of many developing countries is access to major markets for their products. At the same time, in a period of low growth and rising unemployment, governments in industrial countries are not able to master the everlasting demands for protectionist measures. We all know of examples in the United States, in Europe and in Japan of such moves which under different names, notably self-imposed restrictions, have the same adverse effects on trade, growth and future employment. And, most unfortunately, in spite of the Williamsburg pledge, recent actions such as the quotas imposed on European specialty steels by the U.S. government show that protectionist forces remain very much alive.
A sustained recovery is clearly the fundamental condition for a resumption of trade liberalization which has shown and will show how it can amplify growth and spread its benefits all over the world. If a broadly-based recovery is well under way in 1984, the time might be ripe to launch internationally an initiative on trade which will complement the initiative on technology. It is too early to define it more precisely, but it could include additional access to industrial markets for LDCs' goods, the abandonment of some projects in industries with long-term excess capacity such as the steel industry, and the refining and petrochemical industry, and the promotion of exports of capital goods through adequate financing schemes. If we have been able to resist protectionism during the crisis, it would be a major failure if we were not able to overcome it when the crisis is receding.
Let it be my hope that more convergence between European countries may lay the groundwork for new European initiatives to address jointly with other major countries these long-term issues on which our future depends.
CURRENT PROBLEMS IN INTERNATIONAL RELATIONS
My topic in this second Lecture will be international relations, mainly in the light of transatlantic relations between the United States and its Western European partners. Most of the economic questions I dealt with in my first Lecture play, of course, an important role in these relations. But they are only part of a global picture in which ideology, politics, strategy considerations, and reactions of public opinion are also of utmost importance. Therefore, transatlantic relations need to be considered in the broader context of the competition between two geopolitical systems, the Western liberal democracies and the Eastern entity led by the U.S.S.R., two systems which have entered a new period of tension, this time mainly concentrated on Europe.
There is a trend in the United States today toward focusing less exclusively on Europe and showing more interest or concern about other areas, such as Asia or Central America. This might be partly the result of the drift of your society in the direction of the West Coast and the South. But it occurs at a time when the Soviet Union concentrates its efforts on Western Europe. In Western Europe, there are new trends which might be dangerous for our common interests-the pacifist and neutralist movement in Germany (which Chancellor Kohl's victory should not obscure), in the Netherlands, in Scandinavia, and even in France, which has shown more response to pacifism recently than in earlier periods. Also, there is a different approach in analyzing the Soviet situation and the growth of a certain anti-American feeling. All these elements indicate that it is time to think about a common attitude toward East-West relations, about a shared responsibility in North-South relations, and about new initiatives for Western Europe in order to achieve a better balance in our Western world.
The process of détente, which started around 1970, has now been practically interrupted. It was based on a balance of forces and a certain understanding of common interests which have nowadays been reduced. Everybody has become conscious, or should have, of the Soviet military threat, which is now permanent and diversified. But we are also aware of the economic weakness of the Eastern countries and of the contempt of the leaders of the U.S.S.R. for human rights. At the time of Helsinki, now eight years ago, we could expect that our continent could obtain security, foster development and progress in standards of living by commercial and technological exchange, and achieve serious progress in human rights, freedom of information, and free movement of people. Some results were achieved in the following years. But at this point in time, this evolution has deviated from its course. Today, Western Europe's security is jeopardized, East-West trade is hampered, and the eastern part of our continent is a zone which some of its nationals want to leave, whereas our part of the world is a zone where foreign migrant workers long to stay. Obviously, the main objective of the U.S.S.R. is again Europe, after various Third World undertakings, with uncertain success.
What the Soviet Union would like to achieve is not a military invasion and occupation of Western Europe, but what is called, in an inappropriate term, and an inelegant term, "Finlandization" of Western Europe. It is inappropriate because the Finns resent it very strongly since they are trying to keep their own personality and independence. The word "Finlandization" is something which deeply hurts them, and which is certainly not the proper one to characterize the inability to resist any military, or even political, blackmail. But the desire of the Soviet Union to create such an inability, using various leverages such as inter-German relationships, is a reality.
It is strange that so many Europeans do not have a clear perception of this present menace and express more fear of the arms which will protect them tomorrow than of the arms that threaten them today. For some Europeans, the American military presence and strategic deterrence, which appeared yesterday as a safety to our security, are now labeled "risk." People want peace without effort, not understanding what is at stake. The fact that modern armament, mainly nuclear devices, has become an area reserved to specialists may have diluted the traditional link between the people and their defense or their army. European masses seem sometimes less concerned with their defense and to be putting emphasis on other values. Everyone knows the expression, "Besser Rot als Tot" ("Better Red than Dead"), which was used by some German youth and older people too. Our common preoccupation, therefore, has to be: should Europe be defended? Can it be defended? And does it want to be defended?
It is obvious that Europe has to be defended, and in the present situation, to reach the desirable high level of security, we cannot stop or lessen our efforts to achieve a modern and strong defense. This is a reason why we approve your efforts to work toward this vital objective, even if the cost is high. We do also have to stress our political will, to do what we can for the protection of our continent. And I would like the European countries to speak with one voice on this matter of the utmost importance. I was, for instance, very disappointed that the European countries were not able to answer the questions raised by President Reagan or by Vice President Bush, in February of this year, when they said that they were ready to study any proposal or suggestion concerning the deployment, made by the European countries themselves. I think it was a historical occasion that the European countries let slip away.
In this perspective, the progressive deployment of the Euromissiles is an undeniable element of our security and of a balanced situation in Europe. But let's not forget that the rationale of this armament effort is to realize a true balance of forces and not to stress the search for superiority. We should, therefore, maintain our concern for security and keep our armament effort on the borderline of negotiability with the other party. In the field of Euromissiles, it means that the confirmed will for their deployment, which has been adequately expressed in April by Mrs. Thatcher and Chancellor Helmut Kohl in London, should be combined with a phased program of implementation and an affirmation of the possibility for the U.S.S.R. to enter a negotiation at different steps.
This is a complicated technical problem, but I will insist on two points. First, negotiability, which is at the core of discussions about arms control. Clearly, we should not eliminate any option if this option is needed, solely because the Soviets declare it nonnegotiable. But, on the other hand, when a proposition is presented as being open to negotiation, a precise evaluation of the negotiability value is necessary. For instance, I personally think that the most recent proposal, to have another single level of deployment on both sides announced or chosen before the deployment, has a very weak value of negotiability.
It seems to me very important when you speak of negotiability to transfer the possibility of negotiation from what I will call the "ante-period" to the "post-period" of deployment. At the moment there is still the idea that there could be useful negotiations before the deployment. There is not a single chance to succeed there. In fact, insisting on this possibility reduces the credibility of the negotiations. So the move, the change, is to show that first there will be deployment, because now the conditions not to have it will certainly never be met, but after the start of deployment, then the will to negotiate will go on, taking into account the further phases of deployment.
My second point is the very important question of the treatment of independent European nuclear forces. In SALT I and SALT II, it was decided that the British and French strategic forces were not to be included in SALT discussions. In 1979 and 1980, when there was the discussion on the deployment of the Pershing II and cruise missiles, I refrained from taking a public stand because I thought it was impossible for us to take part in a decision which did not concern us because we are not among the deploying countries-and at the same time to affirm that our nuclear forces should be kept out of the negotiations. So my view was to support privately, with the American President, the British Prime Minister and the German Chancellor, the decision for deployment and to tell them we would take parallel steps, such as the development of a new French missile, the S3, which will parallel the deployment of the Pershing. Recently, this position has been changed, and there was an official French expression of support for the deployment. The response by the Soviet Union was predictable: the inclusion of the French and British strategic forces in the negotiation.
This is unacceptable to us for a simple reason. Our nuclear system is intended for two purposes: one, to be used with the allied system in case of a general confrontation, but the other purpose is to be able to match a direct threat by the Soviet Union to ourselves-blackmail, or pressure, or a threat-by the ability to inflict upon them a very damaging strike. So, we cannot enter into negotiations in which our nuclear system will be reduced just to match the intermediate missiles of the U.S.S.R. Because if there was a confrontation, or a threat by the Soviet Union, it would be a threat by all the strategic missiles of the U.S.S.R. They will not say: we will use only the SS-20. They will use all their systems to frighten us. So, we must have an evaluation of our strength which is not calculated only by the medium-range missiles, but by the whole strategic Soviet system. Thus, we have to stress that it is impossible for the French system to be included in the INF negotiations. For the immediate future, we should have to keep the level of our deterrence at at least the present level, and it is only in the case of a significant reduction in the global strategic level of the U.S.S.R. that we could enter into a negotiation. It is an area where developments in recent months have brought at the same time some plusses, with the Williamsburg Declaration recognizing the special character of independent nuclear forces, and some minuses, with the Soviet proposal to freeze such forces; it will remain a major concern for all those attached to a strong and independent Europe, within the Atlantic Alliance.
Whatever our common determination is, we certainly cannot give up hope of a better and more relaxed future for East-West relations in Europe. So the present necessities should not prevent us from expecting that détente might be revived one day, when necessary changes have occurred in the minds of the new Soviet leadership. But in the Western world, there remains an important divergence between those who favor economic and financial pressures in order to bring the communist system to its collapse, and those who think that this policy has proven an illusion in the past, that the Russian people will react to it by sticking closer to its leadership, whatever the hardship might be, and that a change in the regime, which is of course one of our objectives, can only be the result of a slow, long-term and complex evolution.
It is a fact that if we are at this time vulnerable in terms of security, Eastern Europe remains extremely vulnerable in terms of its economy and way of life. Western Europe is more than ever attractive for the various countries of the eastern part of our continent, both for the peoples who long for better living conditions and more freedom-and who have shown this dramatically, for instance, in Poland-and also for the governments which expect much from our technology and from our production to palliate the shortcomings of their centrally-planned economies. Our European agriculture produces enough to feed our own people, and in addition, much of the population of these countries where collectivism has proved unable to provide enough appropriate food. Therefore, I do not think that we should be shy in demonstrating our superiority in this domain, especially as the East European market might be an important element in the recovery of our own economies.
In the recent past, there has been excess in lending. There is now excess in the opposite direction. Of course, we must discuss a common approach to limit energy dependence and to control technological transfers more effectively, which are justified aims. We should also study a reasonable policy for granting new credits under proper terms to these countries, which already have heavy debt burdens and are in the process of severe adjustments, in several cases under IMF programs. We should, using our financial leverage, encourage the trends toward economic reforms, which should bring more decentralization, more openness, and more market forces into largely closed systems.
Our recognized goal-which might seem very illusory to some of you, but my experience with Poland and with Hungary has given me some demonstration of the contrary-should be to increase our economic attraction for Eastern Europe, to create an effect of economic Finlandization. Instead of being only afraid of the military and political pressure coming from the East, we should have a symmetrical pressure coming from the West through a rather sophisticated and complicated policy increasing our economic attraction and, perhaps, presence. Finally, we should also remain firm on human rights, while maintaining a balance between the necessarily discreet diplomatic handling of some individual cases and the need to stress the global problem by public criticism and political discussions.
In the mid-1970s, there was some hope of seeing the relations between the developing countries and the industrialized world start on a new base and of obtaining positive results in pursuing the North-South dialogue, which we started in Paris in 1975. Today we are, on the contrary, faced with a blocked situation. There is certainly a need to find a more pragmatic approach to a problem which remains one of the most dramatic of our time and where the capacity of the Western world to respond to the needs of the South and to contribute better to the realization of its potential is challenged. The communist system has already shown its inability to adapt its programs to the conditions which prevail in developing countries. Let our imagination, our will, and our much more flexible system demonstrate that the liberal world can cope with the problem in an efficient way.
The developing countries appear generally as a unity, even if the nonaligned movement cannot hide political differences and even conflicts among its members. It is not our purpose to challenge this apparent unity of the Third World, but let us make some distinctions for analytical reasons.
The first group is the group of oil-producing countries. They are facing a completely new situation, which will have, if it endures, long-lasting effects not only on the world energy market and on our economies, but also on their own development and on their participation in the various financial circuits. More than ever, the Middle East oil sources remain vulnerable, mainly because of political factors which could have a serious impact on our regular supply. The world economy has been and still is under the destabilizing effects of the erratic movement of oil prices, of the debt problems of some of the most important oil exporters, including those in Latin America, and of the drastic change in the reserve situation of some of the major countries. It seems to me that the time has come for a new dialogue with these countries. This feeling is shared by Helmut Schmidt, who declared recently that "when the heads of governments of the industrial world talk to each other at top level, they should envisage follow-up talks at top level with the major oil-producing countries, too."3 In Rome I had made some proposals toward achieving some kind of long-term assessment of oil prices, which could be in the common interest of all of us. Without prejudging the exact content of this dialogue with the oil producers, there is a need to open it without delay, to review the energy situation, oil prices and their economic consequences which should be a mutual concern.
I do believe in the superiority of dialogue over an attitude of open conflict. You remember that, in the winter of 1973-74, there was the beginning of a confrontation between the oil-producing countries and the consuming countries, with measures of retaliation and some threats against them. It was a possible way, but I did not believe in it because among the oil-producing countries you have many friends of the West. So to enter into a confrontation would have been very dangerous, because we could have destabilized one or two of our potential friends in the area.
For instance, it is fair to say that in the last years the Saudi leaders have had a moderating influence on the energy prices. They avoided an excess in prices and they avoided also the collapse of the market, so they had a responsible attitude. And I thought that jointly we could try to encourage some of the rational or pragmatic attitudes and discourage some of the excesses.
I am always trying to put myself in the place of others. For instance, when I thought of another head of state, I always tried to imagine where he lived and to understand his feelings, which is always very difficult. The developing countries are absolutely convinced that we do not care about their problems and that we are just showing polite interest to avoid aggressive attitudes on their behalf, but that we are not really interested in proposing or enforcing solutions. And indeed, we are giving a very clear demonstration of this: when the price of oil was moving up, all the Western leaders were saying that the price of oil was a question of mutual concern calling for consultation. But now when the price is moving down, we say that it is not a concern for anyone. We are waiting for the decrease in the price of oil, which is cutting incomes in oil-producing countries, stopping their investments, hampering some of their financial resources. So, if we want to convey a feeling of world responsibility, since we asked to discuss the consequences of the increase, we should propose discussing the consequences of the decrease. This does not mean that we should look for a joint unified price-the market forces will come into play-but we should review long-term prospects for alternative sources and try to envisage what the global energy picture could be in the future.
As far as the newly industrialized countries are concerned, most of them being located in Asia and Latin America, they will benefit the most from a world economic recovery, provided they find outlets for their production. The combined efforts made by industrialized countries in the field of new technologies and trade should find useful applications there. Some of these newly industrialized countries have to face a major debt problem, and we should now build upon the experience of 1982 to define a more systematic approach, such as the one I proposed in my first Lecture. It is certainly necessary to handle the debt problem in a coordinated way, both to give these countries some relief in the debt servicing and to maintain an adequate capital flow. The World Bank and the International Monetary Fund should be involved in this effort, while multilateral guarantees could be sought for private lending and direct investments; a specific effort should be made on energy projects.
For some low-income countries, there is a fundamental need to increase official development aid, which is the only regular reliable source of financing most of these countries can count on. In recent years, the world economic crisis has heavily affected these countries, the prices of their commodities, the cost of their energy supply, the volume of foreign aid and investment. Some of them are in a most dramatic situation, for instance in Africa, where climatic circumstances have added to their difficulties. I think that in the common effort to share in order to help these countries overcome this crisis, the United States should have a more positive attitude, in better accordance with your possibilities, with your tradition and with your philosophy. Low-income countries are forgotten in the world of today, since their economic importance is limited. But they will be the test of our ability to cope with situations which are not directly linked with our personal interests.
These new efforts in favor of the low-income countries should be coordinated, as we started to do when we created, at my suggestion, the Coordinated Action for Development in Africa (CADA). We need to address jointly some of the fundamental issues: basic needs, food and agriculture; population policy; stabilization of prices of commodities and compensation for shortfalls in export earnings; and diversification of the economic base. For instance, it is a historical mistake for the European countries and for the United States not to embark on a large program of development in Africa, which would not be very costly and which would probably change the balance for this continent for decades to come.
Let me now speak of a new start in the construction of Europe, as a balancing factor for the Western world.
European elections to be held in 1984 will be the next and best occasion for European leaders, parties and people to express themselves and to show their capacity to give Europe such a new start. It is true that the faith of the Fathers of Europe has vanished and that the European Community has evolved into a bureaucratic institution with too much bureaucracy and too little imagination. During the last five years of the 1970s there were a number of achievements and an effective impulse was given to the existence of a political Europe by the setting up of the periodic European Councils. But later, in 1979-80, we entered a pre-election period, and no significant progress has been made during the last three years.
So I agree with some statements and I share the disillusioned view of Europe's absence today. It is probably one of the periods in recent history in which European countries are most silent and give least impulse to new proposals or new achievements for the Western world. But I think the time will come for a new start, which would consist in seeking more unification of the fundamental economic sectors, giving impulse to existing common policies, and taking a new approach to the joint problems of defense and political unity of the continent.
I remind you of the statement which was made in 1972 by the Paris Conference of the European heads of state, which declared that 1980 would be the final year for the union of Europe. We are now in 1983 and are still without any significant move toward unification, as demonstrated by the limited results of the European Summit in Stuttgart, where Chancellor Kohl was unable to get adequate backing for his European initiative, modest as it was. In various fundamental economic sectors, like energy, transportation, communications and telecommunications, and financial services, I suggest that we should tend toward large unified European markets where private operators could compete freely. It would need serious measures of deregulation-the United States and the United Kingdom have been taking some in recent years.
In the field of energy, we could think, for instance, of a closer integration of electric grids, the establishment of gas and oil transportation networks considered in the perspective of the global market, the joint development of major projects, like exploitation of the North Sea gas reserves, and common objectives for energy imports.
To give a new impulse also to already existing common policies and define new ones, let us have a review of the Common Agricultural Policy, where real unification should be sought. My proposal would be that, in the future, the level of prices should be indifferent to exchange rates. We should accept that our national economy, when we devaluate, or when we reevaluate, supports the cost of the change. It is a technical point, but it is a fragmentation of the market if every time we change an exchange-rate parity in Europe we restore for agricultural products a tariff barrier, the so-called "monetary compensatory amounts." We should also give consideration to a policy for Mediterranean products, now that the Common Market has to envisage the membership of Spain and Portugal. And we should also better affirm the legitimacy of our policy with a clear and far-reaching debate and discussion with our American partners.
In the field of research and technology, we should consider funding projects and joint endeavors by and between industrial firms, especially in the domain of biotechnology, where Europe has the capacity to develop into a major partner for American and Japanese research and industry. We should also, which is more complicated, devote effort to establishing a coherent common social attitude with a view toward harmonizing labor legislation, and to addressing jointly the most difficult sectoral and regional employment problems.
Finally, the time has come for a new approach to our problems of defense and political unity, to which I would have devoted a large part of my time in the last two years if I had been reelected. I thought that it was too early before to do so for various reasons, but I thought that the time was ripe now to envisage the possibility, the risks, and the challenge of some initiative for European defense. In 1975, Germany and France decided to build a tank-a Franco-German tank-which would have been unique and built half and half by France and Germany, and I regret to have seen this project recently cancelled. Because a closer integration in the field of armaments could have probably led to joint projects and to more interchangeability of equipment.
Some European countries, France and Italy for the moment, are already cooperating in the emergency peacekeeping forces in Beirut. Why could we not think, for example, of setting up jointly with the other Europeans and, notably, the British, who have some parallel activities in Lebanon, a European rapid deployment force-the ERDF-with a permanent staff and coordinated logistics, which could be used for peacekeeping purposes and for emergencies without having to call for separate European countries to act. And of course we should have an altogether fresh look at nuclear strategies-and it is one of my regrets-I've mentioned this before-that the beginning of this year was not used to make a counterproposal, a suggestion, to the American Administration, concerning the way to deploy in Europe the new intermediate missiles.
In the parliamentary field, which will be more exposed during the next year because of the perspective of the 1984 elections to the European Parliament, why not establish a new mechanism for reaching better harmonization among European legislations? At the moment there is the question of the role and the responsibilities of this Parliament, and there is a conflict between the executive branch and the parliamentary branch over drawing the line, but why not set up a kind of legislative shuttle between the national parliaments and the European Parliament, to progressively create a harmonization and then some unification of the legislation in sensitive fields? Finally, we should also think about other measures which would strengthen the political powers of the Community-for instance, by progressively changing the rules which require unanimity for all important decisions; and by progressively giving room for normal votes by qualified or single majorities; and by having a new thought about the presidency of the Community, which is now a rotating responsibility with little impact on international life. There are ways which could be suggested to change the importance and the efficiency of this presidency.
I really believe we should give Europe a new start in order to react to three potential threats which have developed in recent months: West German neutralism-not the neutralism of all Germany, but forces of neutralism in Germany; the French tendency to protectionism; and British particularism. And if we could embark on a significant move it would be a major contribution to a better balance of power and to a closer understanding in transatlantic relations, which are really the pillars of world equilibrium.
RECENT TRENDS IN EUROPEAN DEMOCRACIES
This last Lecture refers to recent trends in European democracies. It will be, I suppose, a new and somewhat disturbing approach to the political problems for some of you, but I think that the way to envisage those problems is really fundamental for the future of politics.
All our democracies share common goals and common features, but at the same time each of them has its own particular characteristics. I will not, therefore, address the recent evolution of U.S. society, but focus on European democracies. To be sure, recent developments in Europe must appear to a U.S. observer as contradictory and puzzling. For instance, conflicting electoral results in recent months, with the victory of the left in Spain and Portugal and its defeat or retreat in Germany and Austria; contrasting economic policies between EEC countries leading to periodic gatherings of their finance ministers to adjust their exchange rates accordingly; contradictions among crosscurrents in the same country. The various temptations of neutralism, terrorism or anarchy are often present. But the overall commitment to a common European vision of modern democracy-a new "Weltanschauung"-finally prevails. It is this new vision of European democracy that I would like to discuss with you under three headings: the challenge of intense cultural and social change; a new dimension in political leadership; a new approach to long-term problems.
In recent years, a fragmentation of the traditional society has taken place in Europe. There is, at the same time, a quest for new individual liberties and for reference to the past, what you have called here the "Roots" phenomenon. The young are bringing into the public debate the new themes of environment, human rights, and truth and morality in public life. The citizen who traditionally had only two dimensions-his work and his multigeneration family-is more and more part of a diversified network of associations or groups through which he develops his aspirations for travel, culture and information. New structures have appeared with the rapid evolution of our educational systems and the emergence of new types of family relations. Women are playing an ever-growing role in the work force and in the political debate. An awareness of problems throughout the world and of international tensions is present in day-to-day decisions.
But, when one looks at the various tendencies present in different measure across the borders of Europe, four fundamental trends emerge. First, a move toward autonomy and informality. The quest for personal expression is now one of the most powerful currents, and the rejection of authority and social constraints is still a very important force that has emerged in the last decade. But what is curious to note is that in the last three or four years, one detects a more open attitude, rejecting the most radical stance and accepting some kind of modernized leadership.
A second feature is a move toward intuition and emotion, with the decline of rationalism or moralism, and more broadly of ideologies in general. To be more specific, a political campaign in Europe cannot be won now through rationalism or the quality of argument. It is through emotions, through a more intuitive approach, which was used, for instance, in the last French presidential campaign. At the same time, introspection, femininity, a sense of the potentialities of time act as substitutes for former rigid ideologies.
Third, there is a move toward a new modernity, which started with the rejection of a society dominated by consumption, or a society manipulated by the media and advertising, and which is evolving now in the direction of a new realism.
And the last feature, which is very curious-all this is based on long studies and not on my personal judgment-is a move toward complexity and uncertainty, which is the recognition of the integrated world to which all societies belong.
These fundamental movements have been supplemented by technological changes in the gathering and the transmission of information. The modern media (TV, cable TV, satellites, individual computers, video tapes) add to our societies the new dimensions of instant information, permanent dialogue and added selectivity in choices.
I would like to give you some figures showing how these new trends affect a country like France. Between, for instance, 1974 and 1981-my presidential term-the change in certain aspects of French society has been dramatic and not at all in the political field. For instance, in 1981, 17 percent of the persons interviewed, which corresponds overall to 8.5 million people, expressed the view that they were more sexually liberated now than seven years before. Another example, in the same period in which there was dissatisfaction with the crisis, ten percent of the population, that is, about five million people, expressed the view that they were more satisfied with their lives on the job than they were seven years ago.
So the reactions of the population are very different from what one expects. And also, this evolution is faster in the segment of the population in which one probably would suppose that the evolution would be slower. For instance, in this period, the fastest evolution was for the French people having only a primary education; for the industrial workers, for the retired people, for the men between 50 and 64 years, and for women. On the other hand, this evolution was slower for the students, the executive people, and the people less than 20 years old. For instance, the need for personal expression increased by ten percent in the working class and fifteen percent among farmers.
To understand these changes is to understand the very structure of the society. French society is a society in which the extremes are moving faster than the middle, and they are moving toward the middle-toward the behavior, the attitude, the cultural position of the middle. So we are not at all a radicalizing society; we are a society with a deep movement of convergence.
These new dimensions of the citizen (better informed, more educated, and with greater aspirations to the full recognition of his individual rights and individual expression) have to be taken into account by the political leadership in its three main functions, which are for me the three functions of modern statesmen: to listen, to decide and to communicate.
First, to listen. The very nature of democracy, and its unchallengeable superiority, is having the final decision in the hands of the citizen who, at election time, indicates if and when he feels that his message has been sufficiently listened to. To listen is not easy. The amount of information received by political leaders is increasingly vast and it is necessary to discriminate between that which carries fundamental messages and that which is transitory and contradictory-more noise than information. The intervention of the media and the wide use of polls allow citizens to participate in a kind of direct referendum-a kind of Swiss referendum-on every type of subject and without a proper institutional channel. Hence, the tendency toward excessive personalization of power, abrupt changes in policy formulation or implementation, and temptations to bypass the whole institutional system through demonstrations-for instance, the marches for peace-or even their perversion by direct action, like terrorism. Thus, the ability to listen to the ongoing change might well become the fundamental characteristic of political leadership in modern democracies.
The second function is to decide. Decision is the essence of political leadership and the major difference between political leaders and intellectual leaders, whom I highly respect and praise, and who analyze or judge. A leader is a mechanism built to decide, and all that he receives is at the end translated into a very simple act, which is to say "yes" or "no." We are watching what I would call "democracy in real time"-this is a use of the language of computers-under which now, through the media, the event, the reaction to the event, the decision-making process, the decisions, the reactions to the decisions of various groups, are simultaneously transmitted to the citizen and assessed by him. It might well be that our present democratic practices are not fully consistent with this evolution. At a time when society has to be conducted with flexibility, by a series of mutually reinforcing impulses given without delay, the discontinuities which are inherent in the election process might appear to the historians of the future as an anomaly. Hence the need, perceived in many European countries but without significant success up to now, to try to engage in a bipartisan dialogue where long-term issues are collectively assessed, while the final decisions clearly lie in the hands of the elected political leadership.
And the third function is to communicate. The political leader has finally to be able to communicate, which means to deliver his own message not only to a small group of other politicians or intermediaries or experts but now to each individual citizen at his home. This function is in itself complex, diversified, frustrating and evolutionary. It will dominate the procedures of selection of political leaders, who will become increasingly judged according to a dual standard, with different criteria: the ability to conduct the society through permanent changes and also the ability to communicate to the citizen the goals to be reached and the path to be followed to reach these goals. Communication for a political leader is not only a question of words to be transmitted but also of acts and decisions which are perceived as symbols of the direction in which our societies have to engage themselves.
It is, I think, a very important and historical change. Henry Kissinger said, or wrote, that the leaders of the world are less and less selected according to their ability to govern; they are selected by other criteria. And we must admit these two dimensions of the political leader. We must not fight against it-it is a fact-and in the past there were such situations. For instance, in the far away past, a leader usually was required to have two abilities: military ability and governmental ability-Caesar, Alexander, Napoleon. A modern leader must have two abilities: an ability to govern and an ability to communicate. And an ability to govern will not be recognized in modern times without the ability to communicate.
And if we accept this, then each one must prepare himself for it by an adequate training and preoccupation. The risk is that the second criterion will one day surpass the first one and that people will be mainly judged for their ability to communicate. This was expressed by some articles in the American press which I read recently. I don't think we will go to such extremes; these extremes existed always. It is a problem to fight against a demagogue, but our societies will probably respond to this by the multiplication of the communications networks and probably through a diversified structure of communications. It will be perhaps less easy to be judged on your ability to communicate just through one single medium, which is for the moment mainly, of course, image.
These new trends in European democracies-deep change in the society, deep need for communication-should lead to a new approach to the long-term problems that our societies are jointly facing.
1. The need to focus more on long-term issues. During the last ten years of what we called the "crisis"-which is a code name for a number of interrelated changes in technology, behavior, energy consumption and production patterns, international relations, and domestic and external monetary developments-profound changes have occurred in private enterprise management. I will just mention these because you know them, often more than I do: new types of decision-making based more on discussion and openness; an accent put on reducing vulnerability to random events, which implies ability to change a strategy rapidly; the dismissal of five-year planning, in view of growing uncertainties, and an accent put, on the one hand, on the short term (revolving plans for two or three years) plus, on the other, an in-depth consideration of a few salient long-term strategic issues over a ten- or twenty-year horizon. Through these changes the market economies and the private enterprises have continued to demonstrate their superiority over centrally-planned economies.
But, curiously, the same changes have not taken place in the conduct of economic affairs of governments, which rely basically on the same instruments, on the same methods, and on the same procedures as ten years ago. In my judgment, progress should be made in three directions:
-To achieve more stability and more predictability. For instance, the lags, the delay, in monetary and fiscal policies, have had countercyclical effects, which suggests that additional caution is necessary in using these instruments. We should rely more on medium-term monetary targets and on predictable fiscal policies, while strengthening, by deregulation, market forces, with their built-in stabilizing effects.
-To introduce into these policies a greater degree of adaptability. In fiscal policy there might be a case for giving the executive some added flexibility in adjusting tax rates to the current economic situation. In monetary matters, international cooperation on interest rates and exchange rate management-combined with some fixed references-would provide a more predictable framework while allowing at the same time rapid changes. And finally, as far as incomes are concerned, there might be lessons to be learned from the German experience with what they call "concerted action," which links the adjustment of wages to the global economic outlook.
-To develop a long-term strategy. There is a need for governments to focus more and more on long-term issues which have been neglected in all our countries, like, for instance, social security, employment trends, education, and research and technology. Of course, the absence-the total absence-of short-term rewards and the importance of short-term pressures explains everywhere the political indifference or desire not to be too directly involved in these difficult issues. Hence, a need to build a new type of dialogue, if possible bipartisan, with the direct involvement of the citizen himself. And I must say that in this field probably the United States is in advance vis-à-vis European countries. You had, for instance, the important discussion about retirement age, which is one of the major issues of our social equilibrium of the ten years to come, and you gave some indication of the consensus finally starting to emerge. But up to now in Europe we have not been able to reach such a consensus-or even to study deeply such an issue.
2. The problem of employment. To exemplify what I mean, I will deal with the most fundamental long-term issue, which is employment. Employment is still the major challenge of Western societies and will remain so.
More than 32 million people are presently out of work in Western industrial countries and even if OECD countries were to get back to a real growth rate of three percent, unemployment would not drop in the next few years. Clearly a sustained worldwide recovery is the key answer, but at the same time there should be a renewed effort to assess better the link between growth and employment. Since 1973 real GDP (Gross Domestic Product) in the United States and in the four major EEC countries (France, Germany, Italy and the United Kingdom) has grown at the same yearly rate of about 2.2 percent. But associated with this there was a yearly increase of employment of about two percent in the United States (which implies the creation of 18 million new jobs from 1973 to 1981, a result modestly impaired by a new reduction of one million in 1982) against a stagnant employment in the EEC (yearly increase of about 0.2 percent). Stagnant employment makes problems of unemployment still more acute since workers who have lost their jobs may stay unemployed for a long time and young people may never find jobs. Long-term unemployment (more than six months) is several times higher in Europe than in the United States, and the share of youth unemployment in total unemployment has risen steadily since 1973.
To a large extent, this contrasting situation reflects development in labor costs. From 1973 to 1980, output per worker in the United States rose one percent annually, and real compensation rose 1.8 percent annually, while in the EEC the corresponding figures were 2.7 percent and 4.1 percent. Faced with a rapid increase in labor costs, declining productivity growth and rising oil prices, European firms have seen their profitability squeezed. They have closed their marginal plants and invested in capital-intensive techniques contributing to employment stagnation.
There is no easy answer to this fundamental problem, since ultimately one cannot envisage sustained growth if the purchasing power of the employed population is not growing steadily. There is therefore a need to reduce the non-wage component of labor costs, which means probably a stabilization of social benefits associated with a broad reform of social security systems in Europe, with a view to reducing the share of contributions based on wages. There is, at the same time, a need to learn from America's success in developing part-time employment, which represents 15 percent of your working force against 8 percent in my country, France.
Finally, the associated long-term problems of employment and the viability of social security systems, and notably of retirement schemes, should be addressed adequately. There are lessons for Europe to draw from the Japanese experience with an ever-increasing level of education of the working force, which might well imply extending to 18 years the mandatory education period, and from the U.S. experience, which gives flexibility in the selection by individuals of their age of retirement.
Employment will be largely determined in the future by social and cultural attitudes toward part-time work, retirement and education and therefore should not be addressed only in economic terms but in the broader context of the overall evolution of our societies.
Demography is both fundamental and predictable, while employment is the yardstick against which our ability to run free societies will be measured in the years to come. But if the data and the stakes are well-known, the possible solutions remain largely unknown. They should reflect national priorities and traditions, but I think that a better exchange of experiences, and a bipartisan dialogue in each individual country, is clearly needed.
I have already mentioned other issues, such as natural resources, innovation and capital formation as examples of the long-term problems to which the leaders should address themselves. If they do, they will gain nothing in political terms, since probably the intellectual horizon of the people does not go beyond a few months. By evaluation, by research, it appears that for the average Frenchman, the intellectual horizon is probably three months. What will happen beyond three months is not a direct concern for him. And when one is a leader, one ignores the next three months-one is living in a perspective of between a year and a half and ten years. A year and a half because any decisions you take will not normally have a result before that, in the economic, monetary or fiscal field. And if you embark on a new, major development-nuclear energy, a new weapon, a new technology-you know that the result will only come in a period which could be estimated between five and ten years. So there is a built-in discrepancy of point of view between the leaders and the voters, and it is an inherent responsibility of the leaders to address themselves to these long-term issues.
The general conclusion of these three lectures is left open for you as listeners-and now as readers. But I will suggest this. There was, before the crisis, a gradual evolution in international relations: growing interdependence and complementarity between industrial countries, détente in East-West relations-with, however, weaknesses (indifference to the North-South dialogue) and drawbacks (the disruption of the Bretton Woods system). These developments have been interrupted, and we have instead a fragmentation of conflicting issues, policies and solutions.
Clearly, lasting changes are taking place in our societies: new social and cultural values, new aspirations, new concepts. But the present moment, 1983, offers new opportunities, and new challenges through the conjunction of three events:
-The waning of the energy crisis, which carries with it opportunities to ensure lasting economic recovery, develop a new dialogue with the oil-producing countries, and take measured steps to move the monetary system toward a clearly stated objective of a fixed structure.
-A change of leadership in the U.S.S.R. with its likely effects on the internal evolution of the East European countries and on East-West relations, probably the most important challenge.
-A new strategic balance as exemplified by the decision on the deployment of Euromissiles and recent military technological developments.
We should use these opportunities and challenges to promote a new climate of hope and confidence in the ability of our democratic governments to bring about orderly change internally and to provide the world with a clear vision of a more predictable and desirable future.
1 Martin Feldstein, Chairman of President Reagan's Council of Economic Advisors, "Adjusting the Dollar," The New York Times, June 2, 1983, p. A23.
2 George de Menil and Anthony M. Solomon, Economic Summitry, New York: Council on Foreign Relations, 1983; Helmut Schmidt: "Helmut Schmidt's Prescription: The World Economy at Stake," The Economist, 26 February-4 March 1983; Valéry Giscard d'Estaing: "A Communiqué for Williamsburg: For a useful summit," The Economist, 21-27 May 1983.
3 "Helmut Schmidt's Prescription: The World Economy at Stake," op cit.