Excerpt Of The Day: The Failure Of The European Economic Model

Given that Europe’s streak of economic underperformance can now be measured in decades, perhaps a better question to ask is: Why does anyone think that a system of generous welfare benefits, high taxes and harsh restrictions on hiring and firing would ever produce anything like a dynamic, growing economy? Why does anyone assume that there is such a thing as a “European model,” rather than just a collection of ill-conceived policies having a predictably depressing effect on the economy and job creation?

…In 1965, government spending as a percentage of GDP averaged 28% in Western Europe, just slightly above the U.S. level of 25%. In 2002, U.S. taxes ate 26% of the economy, but in Europe spending had climbed to 42%, a 50% increase. Over the same period, unemployment in Western Europe has risen from less than 3% to 8% today, and to nearly 9% for the 12 countries in the euro zone. These two phenomena are related; in a country with generous welfare benefits, rising unemployment increases government spending rapidly.

…Western Europe jumped the track and fell into an economic ditch in the 1970s along with the rest of the world. But the Thatcher and Reagan reforms that pushed Britain and the U.S. back onto the rails were never tried on the Continent, and most of those countries have been spinning their wheels ever since.

Rather than ask whether the “model” is doomed, it would be better to question how it ever attained the status of a model at all. The welfare state worked in Europe for two decades because so few people needed it; growth was strong, employment high and actual benefits paid were low. When the world economy hit a speed bump following the collapse of the Bretton Woods arrangement in 1971, both government spending and unemployment went up, and the system of incentives and benefits now enshrined as the “European model” was tested and found wanting. The result is permanently higher unemployment and taxes, a nasty mix. — Brian M. Carney

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