NBER: The European Model - by Alberto Alesina

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The European Model - by Alberto Alesina

Europeans talk about a "European model," something that Germans refer to as a "social market economy," and they contrast it to the Anglo-American free market model. Unfortunately, much of this thinking about a "European model" is fuzzy and ends up facilitating political compromises with privileged insiders. Europe does not have to adopt the American model; it certainly can have something distinct from it, say a system of efficient competitive markets coupled with extensive but efficient redistributive programs and social protection. Northern European countries are moving in this direction, but the major European countries are far from it. In these countries, the combination of regulation, protectionism, high tax rates, and redistributive programs end up creating unnecessary distortion and often directing flows of resources not to the truly needy but to politically powerful categories. Measure of effectiveness of welfare states in moving in the desired direction for income flows from rich to poor vary dramatically across European countries; northern European countries do relatively well, Mediterranean countries are the worst. Lack of swift reforms in many European countries does not depend only on the inability of their leaders. Europeans themselves remain very suspicious of market liberalization. An interesting case in this respect is Germany. This country has received recently the "political shock" due to the assimilation of former East Germans. Evidence shows that their Communist experience has accustomed them to extensive government intervention and, as a result, they have moved the preference of the average German in this direction. Europe faces great challenges in the near future. The need for reforms is clear; the political will is lacking.