COMMENT & ANALYSIS: Being flexible about flexibility: Europe does not need to abandon social democracy to match the economic performance of the US, argues Leif Pagro
For a decade now, the ability of the US economy to direct resources into highly productive areas of the economy has left Europeans puzzled and envious. While the US boom defies all expectations, Europe is struggling to shake off persistent high unemployment and lack-lustre growth.
Conventional wisdom lays the blame at the door of Europe's high social ambitions, which are assumed to produce inadequate incentives and inflexible markets, not to mention suffocating levels of taxation. The obvious conclusion is that Europe should abandon this old-fashioned welfare state model and instead imitate the US.
European self-confidence is low, undeniably. But while the growth gap between the two continents is real, the apparent contradiction between social protection and a strong economy needs to be questioned.
If too much social protection were to blame for Europe's lack of flexibility and anaemic growth, the Nordic states would be the worst affected. Sweden, with the world's highest taxes, should be performing worst of all. Instead, the Swedish economy is thriving. Seventy-four per cent of the population of working age is in paid employment - a level far above the European Union average and on a par with that of the US. Nevertheless, inflation is about 1 per cent, only a fraction of that in the US. Industries in the so-called new economy have expanded vigorously.
Nowhere is investment in information and communications technology as high as it is in Sweden. According to The International Data Corporation/WorldTimes Information Society Index, Sweden last year overtook the US as the world's leading information technology nation.
If high taxes and public spending were the problem, its economy could not exhibit such flexibility. The Swedish example shows that even if high economic growth for almost a decade is still an American speciality, its prerequisite - flexibility - is not. What is more, contrary to received opinion, public spending can promote flexibility.
As we enter the knowledge-based economy, we should expect this effect to intensify. It is evident that labour regulations and the taming of trade unions are not the only ways to greater flexibility. We must also include the promotion of education, skills and adaptability.
Sweden's success suggests there are two main ways that public spending enhances the performance of a modern market economy: first, by providing a broad-based education to increase the employability of the entire workforce; and second, by a welfare system that makes citizens less fearful of change.
Sweden spends a larger share of gross domestic product than any other country on education. Not only are good public schools and universities free of charge, but massive programmes for adult education and retraining are tax-financed. Unemployment benefits ensure a decent standard of living if a factory closes.
The results are rewarding: Sweden ranks first in the Organisation for Economic Co-operation and Development's Literacy Survey. In most advanced economies, including the US, more than 15 per cent of adults lack literacy skills, making it "difficult for them to cope with the rising skill demands of the information age", the OECD says. In Sweden, only 8 per cent of adults have such defective literacy skills.
Investment in education also pays off in terms of producing "early adapters" - people capable of welcoming change and curious about new inventions. Having access to the world's most advanced customers has proved to be a competitive advantage for Nordic companies.
As Europe aims for a leading role in the knowledge-based economy, economic developments in Sweden provide food for thought. Flexibility is important for low inflation and long-term growth. But flexibility is more than what we see in the US.
There are ways to achieve flexibility other than by deregulated labour markets and more powerful incentives. Education and social security are vitally important - policy areas that are costly. But if such spending promotes flexibility and growth, it justifies the taxes needed for its financing.
The Swedish example shows that the supposed contradiction between social protection and a flexible economy is, if not false, at least greatly exaggerated. An ambitious public sector can be part of the solution, rather than part of the problem. The challenge is not to dismantle the European model, but to modernise it so as to provide Europe's citizens with security in support of change, instead of security against change.
At the Lisbon summit this year, European heads of state declared an ambition to make the EU the "most competitive and dynamic knowledge-based economy in the world" by 2010. If Europe follows the US example, it should achieve that aim. But that does not mean that Europe's approach must be identical to that of the US.
The writer is Sweden's trade minister.