by Simon Tilford

The British tend to deride France as a hopelessly statist, anti-entrepreneurial country full of bolshie workers intent on extracting disproportionate rewards for their labour and a state too weak to resist them. This characterisation is not wholly inaccurate. But the implicit (and sometimes explicit) assumption is that the UK is everything that France is not. This is not the case.

In some respects, Britain now looks worse than France. For all its faults, France produces good public services and decent social outcomes, such as relatively low levels of poverty and high overall skills levels. Britain, by contrast, now combines a very big state, patchy public services, generally poor social outcomes and increasing barriers to wealth creation. This is a poisonous mixture. The situation can be rescued, but not without breaking some eggs.

The figures are arresting. Britain has gone from having one of the smallest states in the EU to one of the largest. In 2000, public spending accounted for 37% of GDP in the UK, just three percentage points above the US and a full 15 percentage points below France. By 2010 the OECD estimates that state spending will account for 49% of GDP in Britain, against 53% in France (52% in famously high-spending Sweden). Britain has already overtaken Germany and the Netherlands (44% and 46% respectively).

This unprecedented expansion of the British state would be less of problem if the UK now had Scandinavian (or even French) levels of public services or first-rate physical infrastructure. But improvements in British public services over the last ten years have been nowhere near big enough to justify the increase in expenditure. Most of the money has gone on increased employment and wages, rather than improvements in services. Perhaps unsurprisingly, given the stranglehold that the unions have on the public sector, productivity has stagnated.

It is also notable that Britain’s welfare-state is not comparable to that of Germany or the Netherlands, let alone France or Sweden. Unlike in these countries, many of the ordinary Britons currently losing their jobs will receive only derisory sums in unemployment benefits because these are means-tested. And only a forensic scientist could spot significant improvements in the country’s physical infrastructure. Britain’s roads remain as congested as ever and its railways expensive and unreliable.

Of course, the tax burden in the UK is still lower than in France. In 2008, taxes accounted for 49% of GDP in France compared to just 42% in Britain. But the gap between tax and expenditure in Britain is completely unsustainable, given the parlous state of the country’s public finances. How it is closed will to a large extent determine Britain’s economic prospects. If the gap is bridged by cutting expenditure, the UK stands a chance of returning to a relatively strong growth path. But if it is closed primarily through increased taxes, Britain will have a bleak future. The tax burden will be among the highest in the OECD, but public services (and the country’s social outcomes) will be nowhere near good enough to justify the tax take. In short, Britain will have Scandinavian levels of taxation and American levels of public services and social welfare.

The Labour party is poorly placed to sort out this mess because of its close links to the public sector unions. Under Labour the public sector has become a privileged class that is impervious to change and reform. By way of illustration, public sector wages are currently rising by close to 4% a year at a time of economic crisis. And this despite the fact that public workers are on average better paid than their private sector counterparts and enjoy generous pension entitlements. What about the country’s physical infrastructure? On the government’s forecasts, public investment will halve over the next 4 years. In fact, the only significant cuts the government intends to make are to investment.

The Tories stand a better chance of taking on entrenched public sector vested interests, but it will be a battle. Moreover, they will need to avoid the mistakes of the 1980s when they reduced spending by cutting services and investment rather than by increasing public sector efficiency. If they do this again, UK taxes will remain very high relative to what those taxes deliver in terms of services.

Britain still has strengths, of course. It is straightforward to set up a business in the UK and the labour market remains flexible. But overall Britain looks increasingly like one of the sick men of Europe, and certainly as sick as France. The French state is an efficient provider of services and quasi-state institutions construct and manage first-rate physical infrastructure. France, unlike Britain, has bitten the bullet on public pensions, increasing the retirement age to 65. The French have no qualms about allowing private companies to provide healthcare. Even the Tories do not appear to have the stomach for dismantling the NHS’s near monopoly on the provision of public healthcare.

The British need to get over the idea that they took all the difficult decisions in the 1980s and that Britain is an example for others to follow. It has a huge state, yet has poor social outcomes. Much of its growth in recent years has been down to a turbo-charged financial services industry and an unsustainable expansion of the public sector. Both trends have now run their course and the public sector has become a dead weight on the economy. Britain needs to concentrate on improving the climate for wealth creation. This will require much better public sector productivity and high levels of investment in human capital and physical infrastructure.

Simon Tilford is chief economist at the Centre for European Reform.

by Katinka Barysch

Unbundling the supply of energy from its transport, moving Europe towards a low-carbon energy system, and getting the Nabucco pipeline built – these were the priorities of the last energy commissioner, Andris Piebalgs. His successor, Günther Oettinger, will write his own to-do list. The EU now has a dedicated climate change commissioner, Connie Hedegard, with whom Oettinger will have to work closely. When it comes to the EU’s internal energy market and security of supply, Oettinger will also have to rethink.

Twelve years after the EU passed its first law to open up gas markets, and seven years after adopting a second package, there is still no EU-wide market for gas (electricity looks a little better). In France, Germany and other EU countries, big, vertically integrated energy companies have resisted the Commission’s successive attempts to create real competition. The last big push to break up these companies ended in a truce: the third energy package, adopted in 2009, allows gas companies to keep their pipelines, provided they run them as truly separate entities.

Oettinger and his team in the EU directorate-general for energy will have their hands full to make sure that EU countries implement the third package by the 2011 deadline. There is little appetite for re-opening the unbundling debate for now. If and when Europeans start talking about the fourth gas package, their focus will probably shift towards infrastructure and market regulations.

It has become clear that passing laws on liberalisation will not in itself deliver a European energy market. The physical links between national markets are missing. Moreover, the 2009 gas crisis illustrated that a functioning internal market is not only needed to deliver reliable, low-cost energy to European households and factories. It is also the EU’s main tool for improving security of supply. Gas links allow countries to switch suppliers in case of emergency.

The EU budget allocates only around €250 million a year to energy infrastructure (under the trans-European networks for energy, or TEN-E, programme). The EU’s economic recovery programme from last year earmarked €2.4 billion for energy projects, parts of it for the so-called interconnectors between national power grids and gas pipeline networks. Now the Commission has suggested that the EU should set up a new fund for the next EU budget period, which starts in 2014. This ‘energy security and infrastructure instrument’ could dispatch €1-2 billion a year.

Energy experts disagree whether public money is needed to build interconnectors, and if so, how much. The market alone will probably not deliver all the links needed for a Europe-wide network. But it should deliver most of it. The Clingendael Institute, a Dutch think-tank, reports that over the last decade, Europe has added a mere 1,000 kilometres to its trans-national pipeline network. In the US – where unbundling was completed by the early 1990s – private companies have built around 30,000 kilometres of new pipelines over the same period (in response to approximately the same gas demand growth).

The difference between the European and the American gas market is not only its size and the degree of liberalisation but also the way the market is regulated and run. Even if EU companies were fully unbundled, different regulations and licensing procedures in the various EU countries would still make it unnecessarily hard to build infrastructure that straddles borders. Harmonisation is needed here. Moreover, the EU may have to allow those companies that build cross-border links higher returns on their investment. To figure out which connections would make most sense for the EU as a whole, a Union-wide infrastructure plan is needed.

The EU has asked a new group of network operators (called ENTSO) to draw up a European infrastructure priority plan. And it is establishing a new ‘agency for the co-operation of energy regulators’ (ACER) in Slovenia. However, ENTSO’s plan may well be subject to the same national horse-trading that has characterised the allocation of previous EU infrastructure money. And it will not be binding on companies or governments. For economic and energy security considerations to take precedence, ACER should be given a stronger say in defining infrastructure priorities and driving harmonisation of licensing regimes forward. Only then could the EU justify setting up a new multi-billion euro energy infrastructure fund.

Katinka Barysch is deputy director of the Centre for European Reform.