Golden Growth: Restoring the Lustre of the European Economic Model

This post was written by Paul Walsh

This World Bank report was written as part of the first Polish Presidency of the European Union Council. The report was launched on January 24 2012 in Brussels. I feel it is a good approach to take a European View of the Crisis.  We will see solutions, and problems, differently if they wear our EU hat.
The press release says: The report documents the impressive achievements of the European growth model over the last 50 years. Accounting for the stresses it is experiencing and assessing the longer-term challenges that Europe will face, the report then evaluates the six principal components of the model: Trade, Finance, Enterprise, Innovation, Labour, and Government. It finds that the European growth model has been a powerful engine for economic convergence, helping developing countries in Europe catch up to their richer neighbours and become high-income economies. But recent  changes in and outside Europe necessitate change. The report proposes the adjustments needed to make trade and finance work even better, to encourage enterprise and innovation in parts of Europe which have begun to lag, and address shortcomings in the functioning of labour markets and governments. The changes proposed would restart the European convergence machine, make Europe’s enterprises competitive, and help Europeans afford the highest standards of living in the world.
I was a co-author on Chapter 7 (Government), written by Kaspar Richter, Ewa Korczyc, and Paul Walsh.  My personal view:  Clearly the Economist has picked up on the magnitude of the debt problem facing the EU relative to the rest of the World.  It is also important to note that the size and structure of government spending, particularly social spending, while generous compared to the rest of the world, exhibits huge differences across EU member states. The current debate around the fiscal compact is about aggregate fiscal deficits and debt dynamics. Yet the degree to which member states are so different in the level and structure of their social spending is not really appreciated.  Tax harmonisation is one thing but maybe some thought should be given to divergences in social spending.  As EU citizens facing a potential Fiscal Union, a movement to Eurobonds and increased Political Reform, should Education, Health and Social Welfare supports not be the same for all? Depending on where you live in Europe, and your demographic, and now your debt level, your entitlements can be very different. Some states can deliver a high level of public service and economic growth, even in a high taxation environment, others seem to struggle.  Many countries, and the EU as a whole, seem to need a good deal of Political Reform.   All these good ideas around growth, and reform of taxation and spending, are all fine but can only be implemented with a major restructuring of Political Institutions at the National, EU level and Global Level.  The lack and poor quality of Political Institutions at every level can be blamed for our current situation. Reform of Political Institutions needs to happen to get us back on track.  Ireland can contribute at every level in this reform process. 
Report can be found on the below.
http://www.worldbank.org/goldengrowth

22 Responses to “Golden Growth: Restoring the Lustre of the European Economic Model”

  1. Eureka Says:

    I smell a neocon political agenda here

  2. The Dork of Cork Says:

    The European market state model has been terminally ill for some time - it started when sovergin states began to have a aversion to CB defecit spending in the 70s.
    Let me give a local example.
    The Whitegate refinery was privatised over 10 years ago now for the sum of 100 m pounds or so.
    http://www.rte.ie/news/2000/0731/oil.html
    Fair enough - Now maybe the corporation in question had better expertise and the perhaps there was union trouble and the like.

    But a sovergin state don’t need no private corporation money - it can make the stuff itself - so at least money was not the real reason for sale although the ret…. people in Goverment might have thought so.
    Anyway that slightly off point.
    Now here is where it gets a bit more complicated.
    Suppose the Goverment decided it needed to build a railway line to the refinery to reduce distribution costs.
    Well there would be 2 problems with this now - first this would amount to direct subsidy of the corporation & second the goverment would have to go to a private bank to get the privallage of using the stuff which is by itself a very simple task.
    So the taxpayer gets screwed from both ends.
    First it would gift capital towards private Industrial shareholders & also it would need to pay interest on the money created.
    Quite rationally the goverment may choose not to invest in this capital creation and also the private corporation could not rationally invest in the commons given the fiduciary duty it has to its shareholders.

    What follows is the slow capital decay with have witnessed in Europe since the Break up of Bretton Woods.
    Natural Monopolies are monopolies for a very good reason - its just a question of who owns the turf

    Honestly Europe is dead already - it is just experiencing a out of body experience because of extreme capital / oxygen depletion.
    The Capital is all drained out of the victim I am afraid.
    The Terminal disease has now manifested itself as a cold lifeless slab on the table.
    When the soul of Europe realizes this there will be turmoil.

  3. The Dork of Cork Says:

    PS - I have no idea who is involved in the oil distribution business as opposed to the refinery business in this country - I am just using the Conco thingy as a example of a natural monopoly - It would be interesting though.

  4. The Dork of Cork Says:

    Just to finish - this is a demand crisis because the corporations have all the cash.
    Witness the absurd Heineken “investment” in the Beamish site because Cork people have no money for Beer!!!
    Who would have thought this possible a few years ago ?
    And yet we have post menopausal women lecturing us about how we should cut back our Beer consumption.
    Give us a break.

  5. DOCM Says:

    @ Paul Walsh

    A very interesting report, on the basis of a quick glance through, with the chapter on government being of particular interest.

    I wonder, however, if there exists such a thing as the “European Economic Model”?

    Intuitively, people that are sufficiently informed, have a pretty accurate picture of the global economy. Credit Suisse did a very good report on global wealth which tends to confirm this.

    https://infocus.credit-suisse.com/data/_product_documents/_shop/323525/2011_global_wealth_report.pdf

    Each society has to be left to make its own mistakes. The idea of a general concept of good government is Utopian. One must assume that the ideal to be aspired to is democracy. I recall a saying that the essential feature of democracy was the capacity to change one’s leaders peacefully. By this measure, the situation globally has not improved very much.

    With regard to Sweden as a role model, it would be interesting to compare Sweden in international wealth rankings since the 1920’s. This would reveal that it has slipped considerably. It is recovering ground because of major changes in policy direction by a conservative government and by the more than happy accident of staying outside the euro area.

    But the general message is clear; there has been an enormous growth in wealth inequality in the developed world, led by the US, and if this is not corrected it is impossible to say where events may lead us.

  6. DOCM Says:

    @ Paul Walsh

    Wolfgang Munchau linked today in the FT to a very pertinent article by Richard Koo.

    http://www.paecon.net/PAEReview/issue58/Koo58.pdf

    As the current controversy in the UK about the extraordinary and totally blatant raiding of the public purse by the management of RBS reveals, the global economy appears, in a major role reversal, to have become the servant of the global financial industry.

  7. PR Guy Says:

    Coming out of the Euro summit just now:

    “Towards growth friendly consolidation and job friendly growth.”

    Hurrah. We’re saved.

    http://www.irishtimes.com/focus/2012/eu-statement/index.pdf

  8. PR Guy Says:

    And here’s JMB’s presentation to that summit:

    http://ec.europa.eu/commission_2010-2014/president/pdf/20120130_jmbpresentation_en.pdf

  9. Bunbury Says:

    “Tax harmonisation is one thing but maybe some taught should be given to divergences in social spending.”

    I ‘taught’ academics would have basic English.

  10. seafóid Says:

    “this is a demand crisis because the corporations have all the cash.”

    http://monthlyreview.org/2012/01/01/the-center-will-not-hold

    “The United States, Europe, and Japan are involved in a descending spiral. Up to now, capital of generalized monopolies has retained the initiative and tirelessly pursued its sole objective: the growing accumulation of monopoly rent, which, in turn, produces the runaway growth of inequality in the distribution of income. Moreover, the growth of the latter itself is weakening. This inequality increases the impossibility of monopoly rent finding an outlet in expansion of the productive system and leads headlong into the growth of the public debt, which offers a possible outlet for the investment of excessive surplus profits. The austerity policies implemented do not permit reduction of the debt (which is their avowed objective) but, on the contrary, produce its continuous growth (which is the real, but unacknowledged, objective).
    Reproduction of the accumulation of monopoly rent requires, in fact, pauperization of workers in the centers and of peoples in the peripheries.”

    That covers upward only rent reviews as well

  11. PR Guy Says:

    Hmmmm this could screw up anyone’s model. Burden sharing Greek style.

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_5_29/01/2012_424895

  12. DOCM Says:

    @ PR Guy

    Don’t knock it! If it represents a growing realisation that the cul-de-sac identified by Richard Koo has to be avoided, all the better!

    Further evidence of a change in direction is to be found in the reported changed wording on the structural deficit target from “with the annual structural deficit not exceeding 0.5% of the GDP at market prices” to “with a lower limit of a structural deficit of 0.5% of the GDP at market prices”.

  13. Joseph Ryan Says:

    There was a compact decreed
    For the feckless, to bind them in deed.
    Their purses to tighten,
    Their bodies to lighten,
    The bankers of Europe to feed.

  14. DOCM Says:

    @ All

    Probably the near final, final version of the fiscal pact!

    http://www.lastampa.it/_web/tmplframe/default.asp?indirizzo=http://www.lastampa.it/_web/download/pdf/Fiscal_27.01.2011.pdf

  15. Jesper Says:

    @DOCM,

    your ‘analysis’ of Sweden is simplistic and plain wrong.

    Sweden rich in the 1920s? Where did you get that idea?

    Conservative government recovering ground? The accurate description is that it has been selling the public assets that previous governments built up over decades. Some of the one-time proceeds went to the lowering of taxes - makes a government popular in election years, not so good for the public over the long term.

    The biggest political party in the conservative minority government published last year a pamphlet about their early 20th century history. In it they claimed to have been pushing for suffrage and womens rights. Pamphlets from that period actually show them opposing both suffrage and womens rights. The political party refuse to disclose who is funding them. Both the Swedish PM and the Swedish finance minister has recently had ‘articles’ published in major newspapers that seem written by a north-korean propaganda specialist.

    & while you like to bash Germany for the Hartz IV reforms, I’m fairly sure you have no clue what the FAS 3 reforms meant for Sweden. FAS 3 is worse and it was introduced as a policy by your heroes, the Swedish conservative government. It is almost ironic that they, as the party with the slogan - ‘It should be monetarily rewarding to work’ has created what was previously unkown in Sweden: working poor and a group of subsidy hogging ‘capitalists’ exploiting them and the general public.

    Staying out of the euro a factor? Did you read the 200+ page report comparing and contrasting the economic outcome of Sweden and Finland?

  16. grumpy Says:

    This ring any bells?

    From the FT:

    ” Alesina and Drazen (1991) present a model in which organized groups with a strong influence on the polity manage to postpone reforms, even when the latter are necessary and unavoidable, to try to switch the costs on their opponents. The resulting wars of attrition delays fiscal adjustments. Strikes, contributions from various lobbies, press campaigns are all means which can enforce (or block) policies above and beyond voting at the polls. For example imagine a public sector union that goes on strike to block reduction in government spending on the public wage bill. They may create disruptions and may have consequences which may be too costly to bear for a government. Not only, but public sector unions may have connections with parts of the incumbent coalition and block fiscal adjustments. Similar considerations may lead to postponements of pension reforms. In many countries pensioners developed a strong political support even within workers’ unions. The latter would then water down the adjustment to placate this particular lobby even though the “median voter” might have been favourable to the tighter fiscal policy.”

  17. DOCM Says:

    @ Jesper

    You may want to update this Wikipedia entry!

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

    By the way, you were informing the readers of this blog some time ago that Sweden would not sign up to the fiscal pact!

  18. DOCM Says:

    @ grumpy

    You do realise, of course, that “industrial peace” is advanced, notably by Labour ministers, as one of the advantages of the Croke Park Agreement i.e. the legitimacy of breaching such peace in order to retain rent-seeking advantage is taken as a given and not open to being questioned.

  19. DOCM Says:

    @ Jesper

    Readers of this blog may also be interested in the Laval case. I take no positions either on the left or the right of the political spectrum. I am simply not a fan of a la carte dining at the EU set menu.

    http://www.eurofound.europa.eu/eiro/2010/01/articles/se1001019i.htm

  20. Michael Hennigan - Finfacts Says:

    Sweden today is Europe’s leading machine innovator - - rock drilling, tunnel boring, air compressors etc.

    From a century ago, it developed a reputation for the quality of its steel. The rock is hard and coal was scarce and it focused on the quality end of the market.

    The Wallenberg family who founded Stockholms Enskilda Bank (SEB) in the 1850s invested directly in companies with potential and it has stakes in most of the leading companies today.

    Swedish companies had a strategy of having their own sales companies in countries, no matter how small.

    I worked in an engineering group of 1870s vintage for a period.

    The Social Democrats generally had a positive attitude to the private sector.

    By the 1990s, however the state services were in need of an overhaul.

  21. Gavin Kostick Says:

    @ Michael Hennigan

    “I worked in an engineering group of 1870s vintage for a period.”

    Ah come on Michael, you haven’t been around that long.

  22. Jesper Says:

    @DOCM,

    I see you’re up to your usual rethorical tricks, strawman arguments and all :-)

    The Swedish no that I referred to:
    Since then the leader of the opposition has been replaced. Their position changed from:
    -No, unless 4 demands are met
    to
    Yes, if 4 demands are met.

    The government coalition-partners have gone public with complaints about what is seen as a solo-run by the big party in the coalition.
    The opposition has publicly stated that the process is being rushed and that the normal legal advise being: If you’re not given time to evaluate an agreement then the prudent thing is not to sign. They’re being called into telephone-conferences where they are being asked to read and then agree. Reflect and evaluate appear to be an unimportant nicety.

    The prime-minister is happy though. His demand to be invited (at least once a year) to euro-group meetings and demand to be allowed to also speak(!) has also been met. What is giving up sovereignty for valuable items like that….He’s publicly stated that the opposition demands have been met. The opposition has not yet issued a statement. Maybe Sweden will sign, until the opposition has spoken we don’t know. Anything can happen until the final draft has been decided.

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