GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

---

The European Union is facing a crisis of historic proportions. Its infamous social model is failing as new trends in the industrialized world -- globalization, ageing, and rapid technological change -- threaten to permanently destroy the European way of life.

At the heart of the EU’s feeble and inadequate economy is the slow pace of change. This week’s European Spring Council offers the Continent’s leaders a chance to add urgent impetus to the reform effort. Even the most ardent proponents of the "Lisbon Agenda" -- a strategy for transforming Europe into the most dynamic knowledge economy in the world by 2010 -- admit the formula of regular, top-level peer review has been a blunt instrument. The EU is obsessed with process and susceptible to bureaucratic stagnation, and often fails to achieve tangible outcomes.

Meanwhile, national leaders have failed to formulate a coherent program for structural reform. Some on the Continent even yearn for their own Margaret Thatcher.

It is naïve to imagine that EU institutions could substitute for strong political leadership at home. To the contrary, under-performance within the member states fuels the legitimacy crisis of the European project as a whole. Liberalization, enlargement and immigration are blamed for destroying jobs and living standards. Brussels cannot cut itself off from rising ethnic tensions in Europe’s cities, or widespread anxiety about the competitive threat of India and China.

Only reforms rooted in social justice can be sold to the public. But social justice must be understood as providing equal opportunities for all rather than just simply generous transfer payments. Then it will compliment rather than stifle competitiveness in a globalizing world. Yet none of Europe’s models of welfare capitalism even remotely lives up to this concept. That’s why Europe’s traditional ideas of welfare have to change. Full employment no longer exists in most member states, and hasn’t for decades. Even high employment countries like Sweden and the U.K. face rising claims for sickness, invalidity benefits, and an increasing proportion of households without breadwinners.

Europe’s traditional welfare systems were a success in insuring people against the risks of the 19th and 20th century, such as unemployment, sickness, industrial injury, and poverty in old age. But these systems are now struggling with a demographic time bomb and a rising fiscal burden. What’s more, the traditional welfare state is ill-equipped to deal with the risks of modern life: single parenthood and rising life expectancy.

Finally, fairness between the generations is breaking down as pensioners tend to fare better while young families usually do worse in terms of income distribution. Shockingly, child poverty rates are rising in the EU: A recent study by the sociologist Gosta Esping-Andersen shows that over the last decade child poverty has been on the rise in Europe, particularly in the U.K., Germany, and Italy. Opportunities in today’s society often remain as powerfully rooted in class background as in the past.

Neither the EU nor member states have acknowledged the gravity of these injustices, exacerbated by an ageing society, social changes such as the decline of the traditional family, and tensions resulting from an ethnically and culturally diverse society

Weaker economic performance has added to the strains on the social model. Pessimists, and we tend to agree with them, believe that Europe’s growth potential declined to less than 1% by 2002-03 from 2.4% in the early 1990s. The squeeze on public finances further intensifies reform "immobilisme." Active welfare measures to raise employment participation rates require substantial investments.

This week’s summit in Brussels must agree on a clearer road-map for change with a limited number of realistic yet pan-European targets for reform. For instance, there needs to be greater flexibility in the so-called Stability and Growth Pact -- the rules limiting public deficits -- for those countries undertaking genuine reforms. The European Commission should also amend the EU budget, providing added incentives for change and rewarding governments that implement tough reforms. For example, member states that ease hiring and firing rules should receive a rebate on their contributions to the EU budget.

Centralizing action at the EU level is counter-productive, but incentivizing reform in a way that goes beyond the traditional method of peer review is essential. The core difficulties facing the "European Social Model" are not specific to any one country. In a globalizing era, solutions can often be generalized.

Where necessary, member states must devise strategies to reduce public expenditure as in the early 1990s even the Nordic countries had to do. Institutions must be reformed to make labor and product markets more competitive through targeted measures in childcare, training, and incentives to work that widen access to the labor market. And they need to boost long-term productivity and growth by encouraging innovation, the diffusion of new technologies, and the expansion of higher education. A reformed social model would move from negative to positive welfare: instead of compensating people reactively for past misfortunes such as unemployment or sickness it would pre-emptively invest in their skills and capabilities, encouraging self-reliance. It would promote active work participation, free choice and healthy lifestyles.

It is not the absence of ideas, but the inability to act that is Europe’s greatest weakness. The EU is sleep-walking toward an abyss as the decline of the European economy and social model fuel populism and xenophobia. Europe’s leaders must finally heed the clarion calls for change.

Mr. Diamond is a transatlantic fellow of the German Marshall Fund and a former adviser to British Prime Minister Tony Blair. Mr. Giddens is professor emeritus of sociology at the London School of Economics. This article is adapted from their research paper to be published by Policy Network tomorrow.