Europeans should learn painful lessons from one another
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http://www.firstnews.com.ua/en/education/education.html?id=97425
Is the "European model" broken? To many outsiders the answer is a strong yes. Increasing numbers of insiders are beginning to agree. They fear that a supposedly savage Anglo-Saxon liberalism will overwhelm the civilised European economy. Happily, this dichotomy is grossly oversimplified. What is true is that, in Europe, the birth-pangs of the modern economy were slow and agonising. Moreover, those who suffered were not enthusiastic immigrants, as in the US (with the crucial exception of black slaves), but suspicious peasants. After many disasters, Europeans struck a successful balance between individual effort and collective responsibility after the second world war. All western Europeans share a commitment to what is, by global standards, generous, state-organised social welfare. But Andre Sapir, the Belgian economist, notes there are at least four quite distinct models of how to do so.*
The "Nordic model" (Denmark, Finland, Sweden, plus the Netherlands) has the highest public spending on social protection and universal welfare provision. Labour markets are relatively unregulated but there are "active" labour market policies, while strong unions deliver a high degree of wage equality.
The "Anglo-Saxon" model (Ireland and the UK) provides quite generous social assistance of last resort, with cash transfers going mainly to people of working age. Unions are weak and the labour market relatively unregulated.
The "Rhineland model" (Austria, Belgium, France, Germany and Luxembourg) relies on social insurance for those out of work, as well as for provision of pensions. Employment protection is stronger than in the Nordic countries. Unions are also powerful or enjoy legal support for extension of the results of collective bargaining.
Finally, the "Mediterranean" model (Greece, Italy, Portugal and Spain) concentrates public spending on old-age pensions. Heavy regulation protects (and lowers) employment, while generous support for early retirement seeks to reduce the number of job-seekers.
These distinctions are not watertight. Nevertheless, the typology is revealing. In particular, European countries tend to trade off high levels of employment protection (in the Mediterranean model) against high coverage of unemployment benefits (in the Anglo-Saxon and Nordic models), with the Rhineland model in between (see chart). The US is in another place altogether, as one might expect.
How well then do these different approaches work in terms of two fundamental European objectives: high levels of employment and elimination of relative poverty?
On the former goal, both the Nordic and Anglo-Saxon models perform well and the Rhineland and Mediterranean models relatively poorly. On the latter objective, the Rhineland and Nordic models do well and the Mediterranean and Anglo-Saxon models poorly (see chart). Prof Sapir argues, intriguingly, that the main reason for the underperformance of the Anglo-Saxon model on poverty alleviation is not the lack of fiscal redistribution but poor educational standards at the bottom.
The Nordic model is good for both employment and poverty alleviation and the Mediterranean model bad. Meanwhile, the Anglo-Saxon model is good on employment and bad on poverty alleviation, while the Rhineland model is the reverse. As Prof Sapir puts it, the Anglo-Saxon and Nordic models are efficient (at least for the labour market), while the Rhineland and Nordic models are equitable. He adds that the inefficient models may also be unsustainable. One indication is that the Rhineland and Mediterranean countries have higher ratios of public debt to gross domestic product, at 73 per cent and 81 per cent, respectively, against36 per cent in the Anglo-Saxon group and 49 per cent among the Nordics.
The significance of the Rhineland and Mediterranean countries is very large: they generate two-thirds of the gross domestic product of the entire enlarged European Union and 90 per cent of that of the eurozone. The conclusion is that they should become either more Nordic or more Anglo-Saxon. The core of the change would be the removal of explicit employment protection. Strict employment protection is particularly inappropriate at a time of rapid economic change, when old jobs and traditional practices become outmoded. It is better to promote employability than protect employment, while insuring against the short-term impact of unemployment.
The question, however, is how far such advice can be taken. In particular, how far could other countries go in the apparently successful Nordic direction? How far could those countries that are unable to manage the Nordic route be capable of the Anglo-Saxon alternative? Finally, what role, if any, can the EU play in these changes?
First, there is no doubt about the success of the Nordic countries. But all these (relatively small) countries have highly educated populations with a shared commitment to exceptionally high levels of state-financed welfare. In Denmark, Finland and Sweden, the ratio of public spending in GDP is above 50 per cent. The model may be relevant for Germany or France. But its applicability to the Mediterranean countries is questionable.
Second, if the Nordic route is difficult, the Anglo-Saxon one is no easier. The (implicit) goal of Rhineland and Mediterranean welfare models is to protect the jobs and earnings of the male heads of household. The Anglo-Saxon model does not achieve this, because of far greater earnings inequality.
Third, the EU is largely irrelevant to these decisions because the structure of welfare states and labour market regulations remain overwhelmingly national.
The conclusion is that Europe has models of economic policy that seem to work tolerably well and offer something very different from "savage capitalism". This is dramatically true of the Nordic model.
The question is how far other European countries can adopt either of the apparently superior alternatives. Italy, for example, could never turn itself into either Finland or the UK. But one thing seems clear: merely resisting change is economically and politically suicidal. It may be difficult for Europeans to learn from one another. Not to do so could prove even more painful.
* "Globalisation and the Reform of European Social Models", September 2005, www.bruegel.org
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