Abstract

Europe's economic performance has deteriorated continuously over the last two decades both in terms of its unemployment and its labor force participation rate; more recently its productivity has declined relative to the United States. This is due to a complex interaction between the how these welfare states are designed, the institutions created by the European Union, idiosyncratic factors resulting from linguistic differences, population dynamics and other cultural factors, and an increasing emphasis on non-economic objectives. Although structural reforms can provide a solution, it will be a long, difficult and costly process. A more successful approach involves a redesign of the macroeconomic framework in Europe. Aggregate demand stimulation should be given priority since it will not only increase employment directly, but, by slightly raising inflation, will allow negative real interest rates and separate real wages movements from nominal wages. More generally, EU institutions appear to have been designed assuming a perfect world; instead these need to be designed around existing national institutions and cultural practices.

Recommended Citation

Shelburne, Robert C. (2005) "Is Europe Sick?," Global Economy Journal: Vol. 5 : Iss. 3, Article 1.
DOI: 10.2202/1524-5861.1099
Available at: http://www.bepress.com/gej/vol5/iss3/1