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Monday, March 13, 2006

Hooray for the Euro Welfare State!

Vive la welfare state! The case for Euro-optimism -- by Christopher Shea

IN A DOOMSAYING essay in this month's issue of The New Criterion arguing that Europe was either about to shrink into global irrelevance or get overrun by angry Muslim immigrants, the Canadian journalist Mark Steyn offered some impressive supporting evidence. ''The CIA," he wrote, ''is predicting that the EU will collapse by 2020."

Dramatic stuff. But Steyn's claim, which made its way into the blogosphere (the article also appeared on the Wall Street Journal's website on Jan. 4), was less than half right. Last year, the National Intelligence Council-not the CIA-outlined possible scenarios that could befall the world by 2020. If Europeans didn't have the courage to cut their welfare spending and make their labor markets more flexible, the report said, an economic crisis would force such changes. And if politicians were crazy enough to ignore such a crisis, then collapse was possible.

Not quite the end of Europe. Still, there's no denying the report was far from sanguine about current European economic trends-or that many economists share that pessimism. ''The welfare state is dead," Edward Prescott, the 2004 Nobel laureate in economics and a professor at Arizona State, said via e-mail. European nations, he added, must either slash their health and unemployment benefits and pensions systems or be left in the dust.

But is the outlook in Europe really that grim? In the face of rampant Europessimism, some contrarian scholars insist that European countries can thrive without embracing American-style labor markets (where most people can be fired at will) and relatively lean social programs.
Two years ago, the MIT economist Olivier Blanchard made news with an article claiming that Europe was gaining on the United States. True, gross domestic product per person was only 70 percent of America's, a gap that has existed for a generation. But by the measure of output per hour of work, Europe had reached 90 percent of American levels. Europeans were simply choosing to work fewer hours, Blanchard suggested-not an obviously dumb move. They were trading income for more leisure.

Now, in the book ''Inequality and Prosperity: Social Europe vs. Liberal America," out this month from Cornell, the Princeton political scientist Jonas Pontusson goes even further in holding up European economies as viable rivals of the United States.

For comparison's sake, leaving aside outliers like Estonia and Cyprus, Pontusson places European economies into two categories: ''continental social-market economies" (Germany, Austria, the Netherlands, Belgium, and Switzerland) and ''Nordic social-market economies" (Sweden, Denmark, Finland, and Norway). Among other differences, the continental countries tend to have fewer workers in unions than their Nordic peers and less state-run day care to make it easier for women to join the workforce. (For complicated reasons, France, Italy, and Spain don't fit comfortably into either of these models, he says-but he discusses these countries individually. Critics might object that omitting these high-unemployment countries gives Europe an unearned lift.)

Despite his subtitle (''Social Europe vs. Liberal America"), Pontusson says it's unfair to compare Europe to the United States alone. So his third category is the ''liberal-market economies": America, Canada, the United Kingdom, Ireland, New Zealand, and Australia.

Within this framework, it's not clear that liberal economies generate more wealth. Americans do make more per capita than anyone else: $36,100 a year in 2002, for example, but social-market Norway is right on its heels, at $35,500, and most of the other nations fall into a narrow band of $26,000 to $29,000. All of which makes the supremacy of either social or liberal approaches far from obvious.

Then there's inequality. Correcting for purchasing power in each country (which helps the United States), Pontusson comes up with a poverty rate of 15 percent in the liberal-market economies, more than three times that in the other two groups. The American rate is 11.7 percent; the rates in liberal-market Ireland, Australia, and the United Kingdom are higher.

Even when it comes to unemployment-the pothole for European economies in recent years-the liberal- and social-market figures aren't as divergent as you might think. Germany had a dismal average unemployment rate from 2000 to 2003 of roughly 8.4 percent. But, overall, the continental social-market economies saw 5.2 percent unemployment over that period, compared with 5.6 percent for the liberal-market economies. (Pontusson doesn't weight the countries by size; if he did, Germany would drag down the European average.)

It's indisputable that Europeans stay unemployed longer than Americans-and that, in a not-unrelated phenomenon, Europe isn't creating many new jobs, an issue masked by stagnant population growth. Pontusson concedes that Europe needs to make it easier to fire people, which would make employers more willing to hire them in the first place. But he rejects the idea that deep cuts in health or employment benefits, or pensions, are imperative.

The so-called Dutch miracle, he says, shows the possibility of improving growth through tweaks, not wholesale abandonment of social programs. The Netherlands have created new jobs from 1995 to 2002 at an annual rate of 2.2 percent, more than any country in Pontusson's sample except Ireland. The main reasons, he says: Labor's collective bargainers moderated their wage demands and labor-market restrictions were relaxed.

Economists who think otherwise are unlikely to be convinced. Prescott, the Arizona state Nobel laureate, scoffs at the idea that Europeans work fewer hours than Americans because they like going to the beach more than Americans do. It's clear, he says, that high taxes, not some ''contagion of laziness," explain why Europeans work less. Across the industrialized world, he says, hours worked correlate quite closely with tax levels.

Pontusson is picking a fight with economists like Prescott. But the economists are so dismissive, it's not clear he'll get one.

(Christopher Shea's column appears in the Boston Globe’s Ideas biweekly. E-mail


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