European Modeling
A much-maligned region is far more heterogeneous than you might think.


France has been convulsed by violent demonstrations against modest pension reforms. Britain is imposing a tough fiscal “austerity” regime to plug a cavernous budget gap. Crisis-torn Greece is struggling to avoid a sovereign-debt default. Ireland, Portugal, and Spain are grappling with their own major-league financial woes. Is it fair to say that the much-ballyhooed European model is crumbling?

That depends on which “European model” you’re referring to. Though Western Europe is often lazily portrayed as a monolithic bastion of welfare-state sclerosis, it is in fact robustly heterogeneous. France has a brittle pension system and rigid labor markets, but the Dutch, Swedish, and Swiss pension systems are considered to be among the soundest in the world, and Danish labor flexibility rivals that of the United States. The aggregate tax burden is punishingly heavy in France, Germany, Italy, and the Nordic countries, but it is relatively light in Ireland and Switzerland. As for health care, the government-run systems in Britain and Scandinavia are much different from the consumer-driven Swiss model and the market-friendly Dutch approach, not to mention the French and German schemes.

Doesn’t Western Europe exhibit lackluster innovation prowess? And isn’t the region losing its global competitiveness? Some countries — such as Greece, Italy, Portugal, and Spain — are innovation laggards, but others are innovation leaders. Indeed, a 2009 Economist Intelligence Unit report classified Switzerland, Finland, and Sweden as three of the five most innovative countries on earth, with Germany placing sixth. Meanwhile, the World Economic Forum reckons that Switzerland and Sweden have the planet’s two most competitive economies.

According to the 2010 Index of Economic Freedom (compiled by the Wall Street Journal and the Heritage Foundation), three Western European countries — Ireland, Denmark, and Sweden — offer greater business freedom, trade freedom, monetary freedom, investment freedom, financial freedom, and property-rights protection than does the United States. In terms of overall economic freedom, Denmark (ninth) is virtually tied with America (eighth), which trails Switzerland (sixth) and Ireland (fifth). All of these countries — plus the United Kingdom (eleventh), the Netherlands (15th), Finland (17th), Sweden (21st), and Germany (23rd) — score well ahead of Portugal (62nd), France (64th), Greece (73rd), and Italy (74th).

Just as there is no uniform socioeconomic model in Western Europe, there is no uniform political culture. Transparency International’s 2010 Corruption Perceptions Index ranks Denmark, Finland, Sweden, the Netherlands, Switzerland, and Norway among the world’s ten least corrupt societies, with the Danes sharing the top spot. By comparison, France (25th) ranks behind Uruguay; Spain (tied for 30th) and Portugal (32nd) rank behind the United Arab Emirates; Italy (67th) ranks behind Rwanda; and Greece (tied for 78th) ranks behind El Salvador.

Not surprisingly, there is tremendous variation in the efficiency of individual Western European governments. Despite the massive size of their bureaucracies and the lavish generosity of their welfare benefits, the Nordic countries stand out for having some of the best-performing institutions. In its 2010 global competitiveness survey, the Swiss business school IMD calculates that the public sector operates more efficiently in Switzerland, Norway, Denmark, Sweden, Finland, the Netherlands, and Ireland than it does in America. But IMD also reckons that the French, Portuguese, Spanish, Italian, and Greek governments function less efficiently than those in Jordan and Russia.

As these findings indicate, there are stark economic and political disparities between Scandinavia and Mediterranean Europe, as there are between Anglophone Europe and Franco-German Europe, which makes it problematic to generalize about the “European model.” A fascinating new McKinsey Global Institute (MGI) study helps crystallize Western Europe’s diversity and illuminate its uneven embrace of structural reform.

MGI divides the original 15 members of the European Union (the “EU-15”) into three separate clusters: Northern Europe (Denmark, Finland, Ireland, Sweden, and the United Kingdom), Continental Europe (Austria, Belgium, France, Germany, Luxembourg, and the Netherlands), and Southern Europe (Greece, Italy, Portugal, and Spain). Northern Europe is characterized by high labor-utilization rates and productivity levels “in line with the EU-15 average,” though Danish productivity has recently declined, and Irish unemployment has skyrocketed since the global financial crisis triggered a calamitous housing bust. Continental Europe (Austria excepted) boasts strong productivity but suffers from low labor utilization, though the Dutch have made extraordinary progress in reducing structural unemployment. Southern Europe is plagued by anemic productivity, and its record on labor utilization is a mixed bag; in Spain, for example, the utilization rate was barreling upward until the Great Recession pushed it back down.