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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
I blame Angela Merkel. In the early 2010s, the former German chancellor was fond of saying that Europe accounts for 7 per cent of the world’s population, 25 per cent of its GDP and 50 per cent of its social spending. She would wield these statistics to warn about the effects of a bloated welfare state on Europe’s competitiveness. Ever since, an army of armchair philosophers has accused Europeans of being work-shy layabouts, degenerately dependent on welfare instead of doing an honest day’s work.
According to these accounts, laziness explains much of Europe’s sluggish growth and only a proper crisis will wake the Old Continent up. The argument is, of course, pejorative nonsense. The truth is far more interesting.
For welfare to be Europe’s growth problem, the following must be true. Europe must have more welfare than other similarly developed economies; it must have lots of people idling with a lower employment rate; this worklessness must be greater in the higher-welfare north of Europe; and the problem must be getting worse, because Europe’s growth deficiency compared with the US has been growing.
The first condition is largely met. Social spending has grown rapidly in all advanced economies but is higher in Europe. The difference between Europe and the US is smaller than often thought because inefficient US health expenditure dwarfs that in most European countries, offsetting the more generous social safety nets.
But when it comes to employment rates, the argument fails. It does not matter whether you use EU or Eurozone data, prime-age adults (between 25 and 54) in Europe are more likely to be in work than those in the US. Older people (between 55 and 64) also have higher employment rates in Europe. Younger people (between 15 and 24) are more likely to have a job in the US, but that results from Europeans educating themselves for longer. The proportion of young people not in education, employment or training is higher in the US than in Europe. So welfare is not stopping work.
More than that, the higher-welfare north of Europe tends to have higher employment rates than the south, although there is convergence within the Eurozone. Spain, in particular, has enjoyed rapid improvements.
Most important of all, however, is that European employment rates have improved hugely, overtaking those in the US after being vastly lower at the turn of the century. Welfare cannot therefore explain Europe’s growth underperformance. Steady economic reform in the areas of pensions and labour markets (largely outside the scope of the EU) made this possible.
Relative to the US, Europe has managed to increase women’s prime-age employment rates and solved its 1990s early retirement problem without any loss of employment among younger people. This has been a triumph of quiet reform, improved incentives and learning from more successful economies, exactly as envisaged by the 1995 OECD jobs strategy. And there is no sign that European labour market success is slowing, so the gains appear to have further to run.
The triumph of gradual, consistent reform is perhaps best demonstrated by the relative employment rates in France slipping behind the rest of Europe, after its repeated failure to raise retirement ages. (France, too, has caught up with US employment rates among older workers.)
When we are looking for explanations of growth underperformance or questioning which countries face greater debt sustainability threats, it is vital to examine the economies that actually exist rather than lazy and imaginary stereotypes. What the Old Continent needs is consistent and careful reform, improving efficiency and avoiding a destructive crisis. There is no need to be pessimistic. Europe’s labour market miracle proves it can work.
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