Don't Blame the Welfare State for US-EU Productivity Gap
Heino FassbenderThe Productivity Gap
Europe still lags behind the US in per capita productivity by as much as 32%. Worse still, a transatlantic comparison by sector indicates that official statistics overstate European labor productivity by approximately 4%.
Fassbender’s data shows, however, that the welfare state—a favorite scapegoat for sluggish European growth in recent years—only accounts for about a fifth of the labor input gap. He points out that a much bigger part is the result of longer vacations, more time off and a shorter working week – in other words: choice.
What Europe Must Do
The author gives a clear roadmap of policies European bureaucrats must implement in order to remain competitive in the long-run. Four measures could close the output gap and protect the region from the coming demographic crisis:
1. Complete the single market
Entrepreneurs need a large, unfragmented market in order to maximize competitiveness. But the implementation of the single European market has been flawed: too often, governments still intervene to save large companies from the brink of failure. In addition, the integration of the financial services sector has been inconsistent, again due to national governments and regulators trying to preserve their influence by failing to implement EU directives in the intended spirit. Full financial integration could add as much as 1% to Europe’s overall added value.
2. Get smarter on regulation
- Delegate regulation for important, trans-national sectors such as aviation, communications, postal services and electric power to Brussels, away from national governments
- Establish an expert, independent institution to decide on whether a new EU regulations have clear purposes and cost-benefits
- Replace current rules and regulations with a framework of incentives with specific performance criteria upon which the success/failure of new regulation can be judged
- Set up an independent, Europe-wide regulatory authority to evaluate the impact of new regulation
- Establish an auditing body, possibly modeled along the lines of the US Office of Management and Budget, to review regulation
- Incorporate “Sunset” clauses—which expire unless actively renewed—into new regulation
3. Define Categories
Focus more on the sectors in which the EU has a comparative advantage and can define a new category: examples of already existing sectors which meet these criteria would be luxury goods, green technology, health care and high-quality capital goods. Examples of sectors in which Europe can develop future comparative advantages are nanotechnology and composite materials.
4. Reinvent the State
Many European countries allocate almost 50% of their economic resources to government expenditure, of which only about 22% goes to provision of social services; the remaining 28% are spent on social transfers and government-run insurance. Resources will need to be redirected into pensions and health care if Europe wants to be ready for the demographic challenge. Also, public spending in the US on areas vital to secure Europe’s competitive advantages, namely research and education, is more than 60% higher than in Europe – money will have to be found to address this.
The overall message of Fassbender’s analysis is that lack of intense competition lies at the heart of Europe’s productivity gap. But he also advises not to underestimate the willingness of the European public to tighten their belts in the name of reform.
This summary was prepared by the Atlantic Community editorial team from an article originally published in the Financial Times
Europe’s Productivity Challenge, _McKinsey Quarterly_Nr.2,2007 (registration required)
Related Materials from the Atlantic Community:
- William L. Silber on Will the Euro Dethrone the Dollar?
- Bruegel on The Global Accounting Experiment
- David Vickrey on Germany’s Innovation Dilemma
Prepared by Niklas Keller
