Tuesday, September 27, 2011

Europe’s Illusory Economic Advantage, Or How I Learned to Stop Worrying and Love Wall Street Capitalism

by Dan Koev

In the book Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age, author Steven Hill argues for the superiority of the European economic, institutional and political structure over that of the United States as a model for sustainable prosperity in the 21st century. Hill argues that the US economy is characterized by “Wall Street capitalism” which tends to produce economic instability, income inequality, lackluster quality of life and long-term unsustainability. In contrast, European “social capitalism” is characterized by sustainable growth, stability and a high quality of life. While I agree that the US should be open to borrowing economic policies which have proven successful in Europe, I find the evidence for a systemic European economic advantage to be lacking.

According to Hill, the deregulated nature of the US economy makes it volatile and recession-prone, while European states are protected from such shocks due to their robust regulatory framework and social support structure. Let us accept the questionable premise that economic deregulation causes recessions and examine the economic track record of the US and the EU over time. Between 1996 and 2010, the EU-15 averaged 1.6% annual GDP growth, while US GDP grew at 2.4%. At the height of the Great Recession in 2009, the US unemployment rate rose to just over 10%, a statistic reminiscent of France, Germany or Spain during good economic times. It may be true that Europeans enjoy greater job security during recessions, but it is precisely this job security that routinely prevents young, educated citizens from entering the workforce. The US economic model has allowed it to reach a per capita GDP (PPP) of $47,084, roughly one-and-a-half times that of the EU average. There is no evidence to suggest that the European economic model is more conducive to facilitating economic growth over time. The US model may produce sharp recessions, but these recessions are balanced by an overall trend of robust economic growth.

But what about quality of life? The US may produce more wealth, but Europeans enjoy far more in terms of social benefits, as the state provides financial assistance ensuring a high standard of living from the cradle to the grave. What it doesn’t provide directly by itself, it mandates employers to offer, either through regulation or through enforcing policies such as co-determination. Businesses, we are told, are more than happy to subject themselves to such intrusion, because it’s a level playing field and everyone is subject to the same rules. While it’s true that Europeans enjoy a greater amount of welfare benefits, there is no such thing as a free lunch, and Europeans pay for these benefits through higher taxation and higher consumer prices. Further, the trend we’ve recently observed in Europe—especially following the financial crisis of ’08-‘09—is toward a reduction, not an increase in welfare spending. Most European states are coming to grips with reality and reigning in spending, while others are imperiling the very future of the EU by failing to do so. Why should the US increase social spending when momentum is clearly going in the opposite direction? And while European businesses may accept regulation due to the level playing field at the national or even European level, it is unquestionable that these regulatory shackles put them at a disadvantage in the global economy. This problem will only be exacerbated as developing nations acquire the human capital and expertise which will enable them to produce the very goods Europeans currently excel at manufacturing.

On the balance, the question of which economic model will prove more viable in the 21st century seems very much up in the air. While the US can certainly borrow some tested and proven ideas from Europe, it is difficult to make the case that Europe enjoys any kind of systemic advantage in this arena.

Dan Koev is a fourth-year Ph.D. student in the Department of Political Science and an EU Center FLAS fellow. His research interests have a regional focus in Europe and include ethnic politics, Euroskepticism and human rights. He is currently working on his dissertation which deals with ethnic political mobilization in Europe.


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