Martin Wolf has an interesting column in the Financial Times in which he explains why the so-called "European social model" is unsustainable and risks failure:
The time has come for Europeans to ask themselves the unthinkable: can their vaunted social model endure? It is a question I have wished to avoid. But it is irresponsible to persist in doing so. Something is rotten in the state of western Europe. The continent retains valuable assets from the past. But these are showing symptoms of decay. The underlying cause seems increasingly evident: the hypertrophy of the state.Do read the whole thing, which has more interesting charts and in which Wolf compellingly expands on these themes. The book he cites approvingly is called European Dawn by Johnny Munkhammar and looks really interesting. What caught my eye is that it seems to approach the subject of Europe's dismal economic perforamance in a positive light: focusing on how much better things could be if the appropriate free-market reforms were implemented. I’ll see if I can get my hands on a copy.
Symptoms are not hard to find: this is a continent of high and persistent unemployment, declining productivity growth, rapid ageing and growing fiscal strains; it is also one whose once-proud role in knowledge-creation is in decline.
If one is to assess this possibility one must look not at where the model works least well but where it works best. The maternal state is most fully developed in the Nordic countries and particularly in Sweden. In a forceful new polemic, Johnny Munkhammar of Timbro, a free-market Swedish think- tank, convinces me that trouble abounds even in Sweden’s social democratic paradise. Indeed, its long-run performance shows this.
What, then, are the failings of the big state? The answers include: fiscal unsustainability; mediocrity of provision; slackening work effort; slowing productivity growth; resistance to economic adjustment; flight of valuable economic resources; difficulties in absorbing immigrants; and even the undermining of the family. A social system that protects people from the consequences of their own decisions is rife with moral hazard: in the long run, it changes not just behaviour but even values in a less productive direction.
Fourth, since 2005, productivity in the EU has been losing ground to the US after a long-period of catching up. Some small countries did quite well. But the US should be compared with Europe as a whole: between 1995 and 2005, US productivity per hour rose one percentage point a year faster than in the EU. Robert Gordon of Northwestern University notes that between 1995 and 2003 western Europe lost a fifth of its catch-up on US average living standards of the years between 1950 and 1995.