Financial Theory and Practice (Sep 2008)
Economic and Social Models in Europe and the Importance of Reform
Abstract
This paper contributes to the ongoing debate on European economic and social models. It provides a comparative assessment of fiscal and regulatory policies in 17 industrialised countries (the EU15, US and Japan) and presents the records of these countries in attaining key economic and social objectives. Social and economic systems that feature efficient public sectors and flexible market structures tend to experience reasonably sustainable public finances, high economic growth, education standards and employment, and well-functioning markets. Anglo-Saxon countries broadly fit this mould, albeit, seemingly, at some cost of income equality. A more pronounced emphasis on welfare state policies and the corresponding relatively high levels of public spending bring benefit to income distribution in the Nordic countries while the resulting inefficiencies in their economies are counterbalanced by flexibility in labour and particularly product markets. Also, a number of reform-minded European countries have improved their fiscal and regulatory policies while significantly enhancing the functioning of markets, fiscal sustainability and economic performance. This was generally attained without jeopardising social objectives. On the other hand, those continental and Mediterranean countries that maintain market inefficiencies and at the same time sustain expensive and inefficient welfare states generally suffer from low growth and employment and less well-functioning markets and face serious risks to their economies’ fiscal sustainability. The findings of this note support calls for the comprehensive reform of fiscal policies, as well as of product and labour markets.
