Thursday, 27 April 2006

Beyond the European Social Model

EUOBSERVER / DEBATE – The trendy thing to make reference to in EU discussions right now is clearly the “Nordic model”. Acres of newsprint and gallons of ink have been used up in discussions of the Scandinavian knowledge economy, and “flexicurity.”

But hang on a minute. Just how well is the Nordic model really doing? Take Sweden for example. Back in 1975 Swedes were the fourth richest country in the world per head. Now they are 14th and falling.

If Europe needs a model to emulate, perhaps we should be looking west instead. In 1975 Ireland ranked 22nd in the world in terms of income per head, and it was widely seen as an sleepy economic backwater. Today Ireland is the fourth richest country. What happened?

What happened is that Ireland really had the Thatcherite revolution that Britain only thought it had. While public spending in Britain has varied up and down between 40% and 50% of GDP, Ireland had slashed the size of the state from 55% to 35% of the economy since the early 80s. This ignited a long boom which has seen the Irish economy grow by more 10% in several years.

But this isn’t just about the economy. All too often it is asserted that while the “social model” may mean a less dynamic economy, it guarantees a fairer, better society. This assumption deserves to be challenged.

It’s already widely appreciated that the EU has a serious problem with unemployment. Joblessness in Europe is roughly twice the rate in America. Worse still, long term unemployment is six times the rate in the US.

A new book out this week today – Beyond the European Social Model – finds that the “social model” is failing the poorest people in Europe in lots of other ways too. For example it has led to dramatically slower growth in incomes for the poorest. Over the last decade the incomes of the poorest 10% of the population have grown eight times faster in Ireland than in Sweden (and six times faster in Britain). As a result, so-called Anglo-Saxon economies like Ireland and the UK now have a smaller proportion of their population below the poverty line than Sweden for the first time.

The social model also means worse public services for the vulnerable. In the longer term, a high tax burden lowers growth and so ultimately means less money is spent on public services in real terms. For example Ireland has cut public spending as a proportion of GDP since the start of the 1980s, while the tax burden across the rest of the EU has stayed roughly the same. But because the tax cuts boosted growth so much, public services are taking a smaller slice of a much bigger pie. That’s why since the ’80s Ireland has seen real spending on public services increase nearly two and a half times as fast as the rest of the EU.

Towards a trimmer EU
Where does the EU fit into this debate? The European Commission likes to encourage the idea of a “European Social Model” for various reasons.

Firstly, Commission officials talk about the European Social Model to justify projects which could have no justification if the idea of “subsidiarity” were really taken seriously – for example projects like the forthcoming “EU globalisation adjustment fund”, (which even the UK is now backing). Such projects, and the political rhetoric which accompanies them, send the message to voters that globalisation is a negative process, for which they need to be compensated.

Secondly, the Commission has always been keen to define the EU against the outside world in order to build a common identity. Overt anti-Americanism is divisive within the EU, and for this reason it is now more common in EU circles to hear politicians and officials talk about the need to defend against “globalisation” – a catch-all bogeyman which rolls together fear of the US, multinationals, China and India, and even Turkey.

The idea of a “European Social Model” is a key key to this part of the attempt to build a common identity against the rest of the world.

This “fortress Europe” mentality has no future. If the EU is to help rather than hinder its member states undertake economic change, discussion in Brussels should be focussing on cutting trade barriers, hacking back EU over-regulation, and redeploying the €120 billion EU budget away from the ludicrous CAP, (which harms both the poorest in the thirds world and European consumers), and towards more useful programmes – or towards a trimmer EU.

EU leaders should stop tinkering around the edges with the failed “Lisbon programme” of marginal economic reforms. EU member states need to go for the plunge, and undertake the kind of free-market revolution which has transformed Ireland – and which can transform the rest of Europe too.

By Chresten Anderson and Neil O’Brien

Chresten Anderson is Director of the Copenhagen Institute and Neil O’Brien is Director of Open Europe.
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