The Future of Europe: Reform or Decline (MIT Press)
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Last annotated on July 15, 2016
A recent poll taken in the European Union identified the United States as the biggest enemy of world peace, after Israel and North Korea, in that order.Read more at location 56
The truth is that Americans and Europeans are different, think differently, and are becoming more different.Read more at location 59
Europeans work less, take longer vacations, and retire early. Americans choose to work long hours. In August, Paris is a ghost town,Read more at location 61
Europeans view job security and stability as a fundamental right and a ticket for happiness. Americans are willing to endure the ups and downs, the bankruptcies, and the unemployment spells as a necessary part of a market economy.Read more at location 63
Europeans view any cut in the size of the welfare state as unacceptable. Americans view tax increases as an evil to be avoided at all cost.Read more at location 65
Europeans view inequality as a major problem. Inequality in the United States is on the rise, but Americans appear to be willing to live with it.Read more at location 66
Europeans believe that the use of force in international relations should almost never (read “never”) be used. Americans believe in the relatively frequent use of force.Read more at location 67
Europe is relatively closed to foreign immigrants. America is a country of immigrants.Read more at location 68
Europeans believe that society determines much of an individual’s fortune; Americans believe that individuals are responsible for their own fate.Read more at location 68
Americans believe that competition is critical for economic success and embrace it. Europeans are prompt to emphasize the benefits of a Soziale Marktwirtschaft (a social market economy), a model invented by Germany, which means putting restraints on market forces through government regulation.Read more at location 69
These differences are becoming more, rather than less, deeprooted.Read more at location 72
In the recent debate in France, ahead of the vote on the European constitution, both camps promised they would prevent the country from adopting a social system resembling the despised Anglo-Saxon “ultra liberalism.”Read more at location 72
Merkel, promised profound change but committed not to touch the basic characteristics of the German social model. All that her opponent had to do to avoid defeat was to scare German voters about the risks of market liberalism.Read more at location 76
We are very critical of many aspects of the European model. But let us be clear. We do not argue that European countries should simply copy the United States and adopt identical policies. America is far from perfect; on the contrary, it has very serious problems. For instance, the American health care system is explosively expensive and many Americans do not receive adequate health care. American inner cities are an embarrassment, and the correlation between poverty and race is disturbing.Read more at location 82
Are we then saying that there is a “third way” in between the American model and the European model? No, or at least not in the common way in which this is understood. Those who argue that there is a third way—and talk about European reforms but in the next sentence emphasize that Europe should be different from the “American free market”—are simply fuzzy thinkers, the typical example being the German notion of a social market economy.Read more at location 86
our view is that Europe should adopt very large scale reforms that would make its markets and its institutions (such as universities and banks) look much more like those of the United States than they are now;Read more at location 91
The most important lesson that the United States can give to Europe is a belief that people respond to incentives and most of the time markets work, or at least they work better than any other mechanism. Without serious, deep, and comprehensive reforms Europe will inexorably decline, both economically and politically.Read more at location 93
Think of Britain. It took the British people twenty years of economic and political decline to realize that their country was about to disappear from the world economic and political scene.Read more at location 98
Eventually Britain’s decline was stopped by the policies adopted by Margaret Thatcher:Read more at location 100
Europe emerged from World War II with a level of per capita GDP that was less than half that of the United States: 42 percent. In the first thirty years after the war, Europe reduced that distance to one-half. By the end of the 1980s, its GDP per capita was 80 percent of the US level. Since then convergence has stopped. As a matter of fact in the last twenty yeas Europe has lost ground:Read more at location 104
One is reminded of Britain in the 1970s, but we fail to see a new Mrs. ThatcherRead more at location 107
By 1970, Italy had reached a level of GDP per capita equal to 68 percent of the US level, a big achievement for a country that had started from 30 percent in 1950. By 1990, the ratio had reached 80 percent. Today, it is back to 64 percent, the level of the mid-1960s.Read more at location 109
This raises the issue of whether relative economic decline is really so bad.Read more at location 117
First of all, relative economic power matters in the area of international relations.Read more at location 121
Second, and perhaps more important, a host of economic and psychological research shows that individuals’ happiness depends not only on their own income but also on their income relative to others; it also depends on the growth of individual income.Read more at location 121
Third, societies that stop growing develop a “culture of stagnation,” which can have a host of negative social consequences, a theme explored in a recent book by Harvard economist Benjamin Friedman.Read more at location 123
Generous welfare provisions become difficult to sustain in a slow growing economy.Read more at location 126
In fact relative decline can turn into absolute decline. The experience of Argentina stands as a specter over Europe.Read more at location 127
the world changed, but Argentineans kept thinking that exporting corn and beef was enough to remain rich.Read more at location 129
In the late 1970s Japan was the model country and many thought that the United States was doomed:Read more at location 133
What happened to Europe? In the 1960s Europe looked like a model for the world.Read more at location 138
In the 1950s and 1960s Europeans worked very hard. Many European cities had been leveled during World War II. Factories were destroyed, and human capital was depleted by war casualties.Read more at location 140
Also the late 1960s was a period of political turmoil. From universities to factories, Europeans demanded less work with equal pay, labor regulations against firings, free education and free health care for everyone, and generous pensions to be enjoyed earlier in life.Read more at location 143
To prevent students and workers from being lured by the call of the extreme left—these were the years of Bader Meinhof and the Red Brigades—governments kept accommodating even after it had become clear that the resources were no longer there.Read more at location 147
In the 1970s the welfare state was paid for through inflation and in the 1980s by building up public debt.Read more at location 149
From those years Europe inherited large governments and the high taxes needed to pay for it.Read more at location 150
In 1960, total government spending (the average for the pre-enlargement EU 15 countries) was 29 percent of GDP (the level of the United States today); in 1970, it was 37; in 1980, it was 47; and in 1990, it was 50 percent of GDP.Read more at location 150
As economists Daron Acemoglu, Philippe Aghion, and Fabrizio Zilibotti argue in their academic work, European growth in the 1960s was—as Japan and Korea experienced later—largely of the catch-up type.Read more at location 155
Europeans started off, after World War II, far from the technological frontier: imitation of the best US technologies was enough for a fast pickup.Read more at location 157
As we will discuss later in the book, imitation works well with large incumbent and entrenched firms, a bank-centered financial system, long-term relationships, a slow turnover of managers, stable ownership of firms, and a hands-on approach by the government.Read more at location 158
Industrial policy did work in the 1960s in Europe, as it did later in Korea and Japan.Read more at location 159
But when Europe came closer to the technological frontier, and innovation rather than imitation became the critical factor for growth, Europe found itself ill prepared.Read more at location 160
Rather than speed up the destruction of old firms and favor the creation of new, innovative enterprises, Europeans kept on protecting incumbentsRead more at location 162
In Italy many believe that only tariffs can save their country from Chinese competition especially in the textile sector.Read more at location 169
To begin with, we say Europe but we really mean continental Western Europe.Read more at location 171
The French veto on the proposed new European constitution was partly a vote against Tony Blair’s alleged plans to reform the European social model along Anglo-Saxon lines.Read more at location 172
The Scandinavian countries, after suffering a deep crisis in the early 1990s, have been able to combine a far-reaching welfare state with market flexibility and decent growth.Read more at location 175
Hailing Nordic countries as an example of the superiority of the European economic model over that of the United States—an argument one often hears in Europe—is at least premature, but no doubt something very important is happening there. Unfortunately, the larger European countries—France, Germany, Italy, and Spain—do not show the political will and capability of adopting Nordic policies.Read more at location 176
Interestingly, while Americans and Europeans have different views, they both seem happy with the societies in which they live.Read more at location 181
However, the Europeans’ aversion to market liberalism is often strategically fostered by groups of insiders who benefit from market protection.Read more at location 187
In recent years numerous signs of dissatisfaction (still not well channeled politically) have been arising in France, Germany, and Italy.Read more at location 189
Crises often generate the impetus for reform, a slow decline less so. In Latin America, for instance, certain countries, and especially Chile, emerged from a near catastrophic crisis in the 1970s and a period of dictatorship with a new vigor.Read more at location 192
From the 1950s onward Europe had no big crises, no hyperinflation nor hyper recession. An old saying goes, if you put a frog in cold water and start warming the water slowly until it boils, the frog dies. If you throw a frog in hot water, it jumps out and lives.Read more at location 194
Partly because of high taxes, generous pensions, high unemployment benefits, and unions’ insistence for fewer hours of work and partly because of attitudes, Europeans work less and less.Read more at location 196
About one-third of Harvard’s economics department is Europeans who have fled their countries’ troubled universities.Read more at location 204
The immigrants allowed are not the smart people who in the United States have created the many innovative start-ups.Read more at location 205
“Wait ten years to open your borders to my fellow citizens,” recently said the then Romanian foreign minister, “and every smart Romanian engineer will have migrated to the United States: what you’ll get will be our uneducated peasants.”Read more at location 207
Europeans are growing older. Fertility rates are exceptionally low. Europe won’t thrive if only a few people work to support an increasing number of retirees.Read more at location 209
Because of its large social spending and the low growth rate, Europe cannot support a powerful military.Read more at location 212
Europe’s lack of military spending also affects growth directly, since much of cutting edge technology is developed in military contracts.Read more at location 225
Europe could prevent its rapid military and political decline by pulling together resources (political and military) with a true foreign policy through the European Union. But recent experience suggests that European countries are very far from reaching any resemblance of this,Read more at location 228
As an economic area the European Union has worked relatively well. As a form of political union, however, the rapid annihilation of the proposed constitution has shown the severe limits of this process.Read more at location 231
The hurdles that stand in the way of a United Europe also stem from one of Europe’s main advantages: its diversity—diversity of language, of culture, of historical experience, and of lifestyle.Read more at location 234
Diversity may prevent Europe from exploiting the potential of unity, but a diverse society could be in a better position to adapt to change.Read more at location 235
Instead, Brussels’ insistence on coordination and uniformity is in sharp contrast with the “Let a thousand flowers bloom”Read more at location 237
Our view is different. Europe does not need more public money in a myriad of programs. Europe needs reforms that create incentives and make its people willing to work hard and longer, take risks, and innovate. Europe needs more competition, not more public infrastructures.Read more at location 248
