A road map for European economic reform

By Martin N. Baily, Diana Farrell

To maintain adequate social programs, Europe must restore full employment and generate economic growth through regulatory reform.

To address the current political crisis, Europe's leaders must improve the region's economic performance—but no one can agree on how.

Many European officials believe that competition and market forces are hindering economic growth and that reform will mean the elimination of their social safety net. Their solution is to protect the region against competition, to maintain regulations that prevent companies from restructuring and making layoffs,and, perhaps, to invest more in research and development.

History has shown those solutions won't work. There is no full-employment economy in the world that is innovative, dynamic, and growing that also maintains rigid regulations and restrictions on competition.

MGI studied six major European economies and found that a lack of technology is not the reason for slow growth. Instead, boosting competition—often through regulatory reform—is the impetus that Europe needs to improve its productivity.

MGI proposes four areas of reform that are needed to boost European productivity, growth and jobs: Finish liberalizing the service sector, encourage economies of scale, increase work incentives and labor market flexibility, and end the bias in land use policies.

Europe won't have to abandon its social programs, however. Many European countries may have to modify their social benefits programs to restore the incentive to work, but, as Denmark has shown, governments can provide income support to the unemployed while encouraging them to find new jobs.

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