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Four Faces of European Welfare Capitalism

Four European modelds: / Comment & analysis / Columnists - Martin Wolf: Europeans can look to each other: Is the “European model” broken? To many outsiders the answer is a strong yes. Increasing numbers of insiders are beginning to agree. They fear that a supposedly savage Anglo-Saxon liberalism will overwhelm the civilised European economy. Happily, this dichotomy is grossly oversimplified.

What is true is that, in Europe, the birth-pangs of the modern economy were slow and agonising.... After many disasters, Europeans struck a successful balance between individual effort and collective responsibility after the second world war. All western Europeans share a commitment to what is, by global standards, generous, state-organised social welfare. But André Sapir, the Belgian economist, notes there are at least four quite distinct models of how to do so.

The “Nordic model”... the highest public spending on social protection and universal welfare provision. Labour markets are relatively unregulated but there are “active” labour market policies, while strong unions deliver a high degree of wage equality.

The “Anglo-Saxon” model... generous social assistance of last resort, with cash transfers going mainly to people of working age. Unions are weak and the labour market relatively unregulated.

The “Rhineland model”... social insurance... pensions. Employment protection is stronger than in the Nordic countries. Unions are also powerful or enjoy legal support for extension of the results of collective bargaining.

Finally, the “Mediterranean” mode... public spending on old-age pensions. Heavy regulation protects (and lowers) employment, while generous support for early retirement seeks to reduce the number of job-seekers....

European countries tend to trade off high levels of employment protection (in the Mediterranean model) against high coverage of unemployment benefits (in the Anglo-Saxon and Nordic models).... How well then do these different approaches work in terms of two fundamental European objectives: high levels of employment and elimination of relative poverty? On the former goal, both the Nordic and Anglo-Saxon models perform well and the Rhineland and Mediterranean models relatively poorly. On the latter objective, the Rhineland and Nordic models do well and the Mediterranean and Anglo-Saxon models poorly....

[T]here is no doubt about the success of the Nordic countries. But all these (relatively small) countries have highly educated populations with a shared commitment to exceptionally high levels of state-financed welfare.... [I]ts applicability to the Mediterranean countries is questionable.... [I]f the Nordic route is difficult, the Anglo-Saxon one is no easier. The (implicit) goal of Rhineland and Mediterranean welfare models is to protect the jobs and earnings of the male heads of household. The Anglo-Saxon model does not achieve this....

Europe has models of economic policy that seem to work tolerably well and offer something very different from “savage capitalism”. This is dramatically true of the Nordic model. The question is how far other European countries can adopt either of the apparently superior alternatives. Italy, for example, could never turn itself into either Finland or the UK.... It may be difficult for Europeans to learn from one another. Not to do so could prove even more painful.