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Europe Faces Reality

Posted By Derek Scissors, Ph.D. On May 12, 2010 @ 11:00 am In International | Comments Disabled

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The European economic model is dead. Don’t believe us? – Ask The Washington Post [2]. Yesterday’s front-page story reported that the loans being made to stave off the debt crisis come with conditions which, if enforced, would require “European governments [to] rewrite a post-World War II social contract that has been generous to workers and retirees but has become increasingly unaffordable for an aging population.”

There is an obvious and painful connection to the U.S. [3] and our economic direction. Unless we adopt a much better set of economic policies [4], the American version of Europe’s crisis is inevitable.

What’s worse, the Post and many other commentators have understated the failure of the European model. For two generations after post-war reconstruction, Europe and America have moved in different economic directions. The American model favored growth, income, and vibrancy; the European model was said to favor fairness, equality, and stability. The long-term superiority of the American model with regard to growth was well-established before the financial crisis, but the extent of that superiority may be surprising to some.

In 2008, the average resident of the troubled state of Michigan, as well as 40 other American states, was richer than the average resident of Austria. Germany leads the European bailout but the average German, and the average Brit, is poorer than the average person in Alabama. In terms of personal income, Germany bailing out Greece is equivalent to Alabama bailing out Mississippi.

It is especially relevant that Europe’s trouble spots – Greece, Italy, Portugal, and Spain – all have income lower than West Virginia, the second-poorest American state. They have been attempting to support a much more extensive welfare state than the U.S. on a much weaker economic foundation.

That worked when Europe was growing on its own and when Europe benefited from strong American growth, for example via German exports to the U.S. Now too much social spending and not enough growth has brought Europe less wealth and dynamism but also less stability and, many on both sides of the bailout would argue, less fairness. The European model is finished; the remaining question is whether the Obama Administration and Congress will realize this before it’s too late.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/05/12/europe-faces-reality/

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[1] Image: http://2.bp.blogspot.com/_otfwl2zc6Qc/S1C7-ttdD0I/AAAAAAAAMeo/CpePjzdmx1o/s1600-h/eu2008new.jpg

[2] The Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2010/05/10/AR2010051004897.html

[3] connection to the U.S.: http://www.foundry.org/2010/05/10/europe-2010-a-glimpse-of-america%e2%80%99s-economic-future/

[4] better set of economic policies: http://www.heritage.org/Research/Reports/2010/01/Why-Government-Spending-Does-Not-Stimulate-Economic-Growth-Answering-the-Critics

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