In recent months, the European social model has been under the spotlight following Greece’s economic meltdown and the fumbling efforts of European politicians to prop up other tottering European economies. To an unprecedented extent, the post-war European model’s sustainability is being questioned. Even the New York Times has conceded something is fundamentally wrong with the model they and the American Left have been urging upon America for decades.
Western Europe’s postwar economies were shaped by an apparent concern for the economically marginalized and the desire to realize more just societies. This inspired the extensive government economic intervention, high-tax rates and generous welfare states now characterizing most contemporary European economies. After 1945, Communists and Christian Democrats alike rallied around these policies. For Marxists, it was a step toward realizing their dream. For non-Marxists, it was a way of preventing outright collectivization.
Even today, words like “solidarity” and “social justice” permeate European discussion to an extent unimaginable in the rest of the world. If you want proof, just switch on a French television or open a German newspaper. The same media regularly contrast Europe’s concern for justice with America’s economic culture. America, many Europeans will tell you, embodies terrible economic injustices in the form of “immense” wealth-disparities, “grossly inadequate” healthcare, and “savage” competition.
But while such mythologies dominate European discourse, it’s also true that Western Europe’s economic culture is characterized by a deeply unjust fracture. Modern Europe is a continent increasingly divided between what Alberto Alesina and Francesco Giavazzi called in The Future of Europe (2006) “insiders” and “outsiders”.
The “insiders” are establishment politicians of left and right, trade unions, public sector workers, politically-connected businesses, pensioners, and those (such as farmers) receiving subsidies. The “outsiders” include, among others, entrepreneurs, immigrants, and the young. Naturally the insiders do everything they can to maintain their position and marginalize outsiders’ opportunities for advancement.
So how do Europe’s insiders maintain the status quo?
First, one needs to understand that Western European governments are largely managed by a political class that transcends ideological divisions. In France, for example, the main parties of right and left are dominated by people who went to the grandes écoles – elite educational institutions that are very difficult to enter but whose graduates supply most of France’s business leaders, politicians, and civil servants. It’s not untypical for a grande école product to work for a politically-connected corporation, switch to the civil service, return to the private sector, before eventually becoming a member of parliament.
France is an extreme case, but this situation manifests itself throughout Western Europe. Not surprisingly, this group – whatever their political differences – generally agree that they should be in charge. Indeed, Europe’s political class is exceptionally good at self-perpetuation. It’s common, for example, for politicians’ children to follow the same road to power. Take Greece’s current socialist prime minister, George Papandreou. His father and grandfather were also Greek prime ministers. In America, not even the Bushes have emulated this dynastic feat. Incidentally, Papandreou’s predecessor as Prime Minister, the conservative Konstantinos Karamanlis, had an uncle who was prime minister of Greece 4 times and president twice.
Second, there is the phenomenon of what the Nobel Prize economist George Stigler identified in 1971 as “regulatory capture.” As Alesina and Giavazzi demonstrate, European regulators invariably identify themselves with those they are supposed to regulate – sometimes in return for jobs in a post-regulator life – and work hard to limit competition from new businesses or entrepreneurs.
This is a manifestation of a third disorder: European insiders’ willingness to use state power to keep European outsiders marginalized. European unions, for example, could care less about the unemployed and immigrants. Instead they press governments to make it very hard for companies to fire anyone, especially union members. Employers are consequently reluctant to hire. Many young Europeans and recent immigrants are thus condemned to cobbling together part-time employment contracts with no benefits.
But perhaps the biggest problem is one of attitude . It is not as if European outsiders are, for instance, clamoring for labor market liberalization. When Paris’s streets were hit by student riots in 2005, the protests were against relatively minor efforts to unblock France’s highly inflexible labor market. Likewise, Spain’s 20 percent unemployment rate has not been greeted with widespread demands for labor market reform. Instead the cry is for the same permanent job security (irrespective of performance) enjoyed by the impossible-to-fire crowd.
Central-East Europe is different. After all, they endured forty years of dominance by the ultimate ‘insiders”: i.e., members of the ruling communist parties. Unfortunately, as the Economist recently observed , there is evidence of a West European-like insider-outsider dynamic asserting itself throughout the region
Of course every society has its elites. The real question is whether a society embodies the possibility of social mobility through hard work and accessibility to economic opportunity.
This is what makes modern Europe’s endless justice rhetoric so distasteful. All the tedious solidarity-talk and social justice-speak essentially masks a social stratification based on the highly-unjust foundation of proximity to government power – a situation which further incentivizes everyone to join the daily jostle to obtain state-mandated privileges.
It’s difficult to imagine a more damning moral indictment of Europe’s discredited economic culture.