« Paul Krugman: The Bush Tax Cuts and the Deficit | Main | Classic Liberalism in the Twenty-First Century »

Sunday, October 23, 2005

Increasing Market Flexibility Does Not Require Decreasing Economic Security

It's nice to see commentary on economic and social change in Europe recognizing that economic reform designed to make markets more flexible does not necessarily require sacrificing social insurance and economic security. In fact, as the article notes, such reform may be reason to enhance economic security. Most people writing about decreased interference in markets do not make such a distinction and blame the social model for the economic malaise in many European countries. This article takes exception to such claims:

Wolfgang Munchau: Why social models are irrelevant, by Wolfgang Munchau, Financial Times: The least helpful contribution one can conceivably make in any economic debate is to recommend that one country adopt the social model of another. ... These days, it is difficult to find a European think-tank that does not advocate adoption of the Scandinavian social model. But the notion that the social model in small, consensual, wealthy and ethnically homogenous northern European countries such as Sweden and Denmark should serve as a model for large economies with huge wealth and income differences and mass immigration such as Germany or Italy is surely bordering on insanity. Yet this is precisely the debate that European Union leaders will be having... Instead of focusing on reforms of the social model, they should look at reforms of the EU’s economic system. The latter refers to the regulation of markets and macroeconomic governance. The former relates to risk insurance and social transfer systems. In the European debate, we have been committing a big classification error by confusing these two systems. ... Globalisation requires ... more flexible markets and a more flexible economic policy. But more flexibility increases demand for more risk insurance and also for more social protection. The right answer is therefore to liberalise markets, while retaining welfare and insurance systems. Instead, Europeans have been doing the opposite. We have scaled down our welfare systems without opening up our markets.

There exists, of course, a relationship between social and economic policies. Social systems can, and sometimes do, adversely affect economic growth. But there is no evidence that Europe’s social model is the main cause for Europe’s astonishingly poor economic performance over the last five years. If that were the case, it would be impossible to explain why Germany, France and Italy had higher growth rates than the US and the UK until the early 1990s. Nor would it be possible to explain Austria’s magnificent economic performance despite its German-style social model. Instead, a far more likely cause of Europe’s bad performance is the combination of inflexible markets and an inflexible economic policy. This is where any intelligent economic reform programme should start. I could think of no better area for reform than full-scale liberalisation of Europe’s protectionist financial markets. ... The lack of an efficient financial market has economic consequences that go beyond the financial sector itself. First, it means that there is insufficient venture capital for new companies... Second, it means that there is not enough pressure for corporate restructuring; ... Third, it means that many European countries have not developed a well-functioning housing market... There is enough economic reform to keep us busy for several years. But instead, European leaders are wasting time debating the Scandinavian social model...

    Posted by on Sunday, October 23, 2005 at 12:24 PM in Economics, Regulation, Social Security | Permalink  TrackBack (0)  Comments (10)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Increasing Market Flexibility Does Not Require Decreasing Economic Security:


    Feed You can follow this conversation by subscribing to the comment feed for this post.