It's About Jobs; The riots in France tell us less about a clash of civilizations than about Europe's economies, still stuck firmly in neutral.(Cover Story)

Byline: Rana Foroohar (With Stefan Theil in Berlin)

To understand why young Muslims in French slums have been burning cars and buildings over the past two weeks, consider the economics of hairdressing. On the streets of New York and London, beauty salons employing immigrants who speak little or no English are omnipresent. (Hairdressing is, in fact, one of Britain's fastest-growing professions.) The equivalent is not true in France, where you need a special degree and years of training to legally wield a blow-dryer, let alone a meat cleaver or any number of factory tools. That's a problem, since about a quarter of those who take the exam required for such positions don't pass, and never receive a diplome . The point? Simply this: the French riots aren't about a culture clash. They are about jobs.

To say that economic possibilities for the people living in the housing blocks of suburban Paris are limited would be an understatement of Eiffelian proportions. "They really feel they have no future," says Dominique Moisi, a senior adviser at the Institute for International Relations in Paris. Unemployment is high in many parts of Europe, and it is particularly so in France, especially among young people. Indeed, joblessness often tops 40 percent in places where the recent riots erupted--underscoring the fact that youth unemployment is the labor problem for France, as it is for many of its neighbors.

The causes are well known: An artificially high minimum wage, which discourages companies from creating new jobs. A two-tiered labor system in which it's nearly impossible for younger, less-qualified workers to find secure employment. High payroll taxes and regulatory red tape that make it extremely difficult to start and run new businesses. Yet for all these difficulties, a sort of magical thinking around economic issues still pervades Europe. Even with 20 million people out of work on the Continent, it's almost an article of faith among French, German and Italian voters that their woes can be put right by simply tinkering with the system. Minor evolution of Europe's social system is required, not revolution. Anyone suggesting that a more radical overhaul might be needed is instantly "Merkelized."

That's a new verb sending shudders through Europe's liberal economic elite. The quagmire of the German elections ensures one thing: Europe's largest economy will not become a catalyst for broader Continental reform, as many once hoped. Angela Merkel stomped onto the campaign trail promising change--change so dramatic it scared her own rank-and-file Christian Democrats, who actually have more in common with the rival Social Democrats and their determination to preserve the German welfare state than with their own leader. The result is clear. To become chancellor, Merkel had to shed her apostate's mantel. But the costs are clear, too. Had she stuck with her original reform vision, speculates the Bank of America, yearly GDP growth in Germany would have risen as much as a quarter of a point immediately, with cumulative benefits that might have greatly reduced the ranks of the country's record 4.5 million jobless. Instead, future Labor minister and vice chancellor Franz Muntefering and others wag their finger at "locust capitalists" from abroad who buy up good German companies and lay off good German workers--ignoring the fact that globalized German companies are doing the same, and that those restructurings have saved tens of thousands of German jobs.

It's the same story in France, where Jacques Chirac's blunt warnings about the dangers of "Anglo-Saxon capitalism" resonate much more deeply than any neo-Thatcherite posturing by Dominique de Villepin or Nicolas Sarkozy. Such talk is dangerous because, as Morgan Stanley's chief economist Stephen Roach puts it, "The French riots mark the most important economic moment for Europe in decades." He says the riots present France with both a ...