In a June 23 speech before the E.U. Parliament, British Prime Minister Tony Blair delivered a stinging rebuke to European critics who charged him with wanting to “abandon Europe's social model.”
What type of social model is it, Blair pointedly asked, “that has 20 [million] unemployed in Europe, productivity rates falling behind those of the USA; that is allowing more science graduates to be produced by India than by Europe; and that, on any relative index of a modern economy - skills, R&D, patents, IT, is going down not up... Of the top 20 universities in the world today, only two are now in Europe.”
Blair had it quite right. The Western European welfare states are very much in need of political reforms. Our economies are stagnating, our citizens have stopped working, and our big governments are as bureaucratic and inefficient as ever. Indeed, if the prime minister can be properly accused of anything, it is indulging in understatement: Unemployment in the European welfare states is actually higher than Blair indicates in his speech.
Rather than tackling unemployment, however, European governments have learned to hide it. For instance, in Sweden, state officials claim that the unemployment rate stands at 5.5 percent. But a recent report by an economist working for Sweden’s largest labor union gives this rosy prognosis, showing that the real unemployment rate is between 20 and 25 percent. Things are little in better in the big powers of Western Europe—Germany and France—where official statistics have for many years showed double digit unemployment rates.
Why unemployment rates are so high in Western Europe poses no mystery. Our governments pay citizens when they don’t work and tax them heavily when they do. Government regulations hinder companies from increasing employment and prevent entrepreneurs from starting businesses. Regulations and labor unions keep the cost of labor higher than the market price, which inevitably creates unemployment.
These problems persist as the labor unions and socialist forces oppose almost all reforms that seek to open up the labor market and make it more lucrative to work. Even when reforms are being implemented, government involvement in the economy is seen as the solution to all problems. For example, the French government recently initiated a program to stimulate the creation of low-wage jobs in the domestic service market. On its face, this may sound like a good idea. Except that, rather than relying on market mechanisms, the French have created a state agency to oversee the domestic service market.
Political systems that reward dependence on government and punish hard work inevitably destroy the foundation for entrepreneurship and depress employee morale. This fact is starkly demonstrated in the 2004 Global Entrepreneurship Report, which shows that entrepreneurial activity in the US is about twice that of France and Germany and more than three times that of Sweden. Summing up the report’s findings this April, the Economist magazine noted that the “report argues that the German economy is not stuck in a particularly vicious cyclical slowdown. Rather, its structural problems, particularly the highly regulated labor market, have reduced trend growth (the average growth rate of the economy) to a meager 1.1%, in contrast to roughly 2% for the rest of the euro area, and about 3% for the United States. Unless these trends reverse, Europe’s largest economy could eventually wind up as its economic backwater.”
It is perhaps unsurprising that Western Europe has fallen far behind the USA. The Swedish think tank Timbro concludes that if the EU were a state in the USA, it would belong to the poorest group of states. Germany, France, Italy and Great Britain all have lower per capita GDP than all but four of the states in the US. In fact, the only E.U. country to have a higher per capita GDP than the USA is Luxemburg. The escalating discrepancy between America’s dynamic economy and Europe’s languishing welfare states is further illustrated by the fact that the average American consumes 77 percent more than the average citizen of the original 15 EU countries. (Notwithstanding the demonstrable success of the U.S. economic model, the American left still aspires to reform it in the mold of Western Europe’s failed experiment in socialism.)
And the gap is growing. Looking at almost all economic indicators, the American economy is more vital and stable than those of Western European countries. Labor productivity growth in the US has gone up from one percent between 1987 and 1995 to almost three percent between 2000 and 2004. During the same periods, labor productivity in the 15 original EU countries has declined from two to one percent. One is thus led to wonder: What would happen to Western Europe if the flow of technology, ideas and investments from the USA were to stop? Would Europe’s economies grow without the USA as the locomotive that drives the world economy?
For the time being, Western Europeans persist in cherishing their ignorance of such questions. A survey that recently was conducted among French schoolchildren showed that 70 percent of them aspired to become bureaucrats rather than captains of industry. In a sense, this is to be expected: Western Europe has chosen to reward government bureaucrats rather than entrepreneurs; it has chosen to reward dependence on welfare programs and punish hard work. The new generation of Europeans has adapted to this reality and, consequently, their working morale is at an all-time low. And if that remains the case, the question must be asked: Who will save Europe from itself?
Nima Sanandaji is the president of the Swedish think tank Captus and the editor of the Captus Journal (www.captus.nu). He will soon start graduate studies in biochemistry at the University of Cambridge.