How Socialism Has Harmed Europe

From the Wall Street Journal:

“Jobs and economic growth” will be the focus at today’s crisis summit in Brussels, but judging by recent meetings European leaders will address the financial symptoms rather than the causes of their economic woes. For insight into the latter, they might do well to read a report on Europe published last week by the World Bank, of all unlikely places.

The study’s lead authors, World Bank economists Indermit Gill and Martin Raiser, conclude that the Continent’s basic growth model of the last half-century is seriously amiss, and that it will take more than well-meaning summitry to fix it.

Some of the news in the report is good. Europe, despite its woes, still accounts for one-third of world GDP with only one-tenth of world population. Before the financial crisis, half of the world’s $15 trillion in trade in goods and services involved Europe. Within the Continent, the single market has created a boom in cross-border trade and investment, raising the incomes of millions of Southern and Eastern Europeans over the last few decades.

As for the bad news, the first source of trouble is the labor market. European workers aren’t nearly as productive as they ought to be, especially in the South. Labor participation is low, and those who are employed are working less than they used to. In the 1970s, the French worked the longest hours among advanced economies. By 2000, they worked a month and a half less than Americans each year.

Europe’s demographics also aren’t on the side of growth. Populations across the developed world are graying, but Europe’s low productivity growth means that its future labor shortfall will be especially acute. It doesn’t help that Europeans draw social security benefits earlier and more easily than their developed-world peers. Pension commitments will strain national budgets even if Angela Merkel gets her way on handcuffing euro-zone public debt.

Which brings Messrs. Gill and Raiser to the other serious drain on European growth. Big government, by their calculation, shaves about two percentage points off growth once public spending passes 40% of GDP. Some welfare states are better-run than others—think Sweden and Germany—but the World Bank report highlights a few important connections between the welfare state and growth.

Today, European governments spend more on social protection than the rest of the world combined, thereby entrenching powerful disincentives to work and enterprise. Social protections have also come at huge direct cost to taxpayers. Europe’s giant debts arose because of “public spending to protect societies from the rougher facets of private enterprise,” the authors write. It’s rare to hear an institution such as the World Bank that is typically sympathetic to its political bosses put the matter so clearly.

A few policy fixes suggest themselves. Labor is still not as mobile within the EU as once envisioned. Easing restrictions on immigration from outside the EU is highly controversial, but it would help Europe face its demographic and economic shortfalls. Wealthy European countries have suffered a net drain of 1.5 million highly educated people to the U.S. alone in the last few decades.

But something deeper that needs adjustment. “From North Americans,” the authors write, “Europe could learn that economic liberty and social security have to be balanced with care: nations that sacrifice too much economic freedom for social security can end up with neither, impairing both enterprise and government.”

Messrs. Gill and Raiser call Europe a “lifestyle superpower”: It attracts tourists in droves, and its residents enjoy peace and a high standard of living. But it’s not getting richer. Unless it again puts income growth ahead of income security and redistribution, the Continent will continue to decline as an economic power.