Authors Iain Begg | Gabriel Glöckler | Anke Hassel ... - The Europaeum

Europe’s relative loss of efficiency in the production process has been
largely attributed to overly restrictive regulation of product and labour
markets, leading to lower market entry rates and reduced competitive
pressures on incumbent firms, as well as inhibiting industrial restructuring.
This has discouraged investment and innovation 4 , but also given rise to
hysteresis effects. These are primarily associated with long spells of
unemployment which lead to severe losses in human capital endowments.
The implication is that the crisis may therefore result in a reduction in
labour utilisation. Besides, Europe’s relative shortfall in labour input,
particularly its shorter working year, has been related to the distortionary
impact of taxation or to work-sharing practices 5 . Such practices are mostly
induced by trade unions’ demands, 6 although genuine preferences for
increased leisure time have also been invoked as an explanation. 7
Some academic economists have urged European governments to embrace
comprehensive structural reforms, effectively emulating the US model of
market flexibility, or otherwise risk the decline of Europe. 8 Having
underpinned economic growth for most of the second half of the twentieth
century, European economic and social institutions may have become less
relevant in economies which have reached the technological frontier,
where instead of importing technology and accumulating capital, they
have now come to increasingly rely on knowledge and innovation.
Consequently, reform must be systemic in character. It must deal with the
complementarities and network-type dynamics associated with thick and
complex institutional structures, whilst aiming to facilitate mobility and
change the once privileged stability and continuity. 9
Yet this hardly implies that the European economic and social model
should be dismantled. Asymmetric information, coordination failures
and, probably above all, the fact that preferences for redistribution are
stronger in Europe than in the US “land of opportunity”, 10 all cast doubt
on the desirability, let alone political viability of radical deregulation.
Instead they call for the “recalibration” of the welfare state. 11 Complete
deregulation of the European economic and social system may, following
the crisis, seems to be even less justified and politically feasible, with the
blame being put on market failures and/or excessive market optimism on
the part of policymakers.
Market policy and institutional reform has dominated the Lisbon process,
its rationale being not only that economic performance might improve,
but that the European economic and social model might also increase its
relevance and better withstand the financial pressures which mostly
Chapter 6 – Nikos Koutsiaras 91