Europe's Social Democracies Jump Ahead of the United States on Market-Based Reforms

WASHINGTON, February 26, 2008 -- When former U.S. defense secretary Donald Rumsfeld referred to traditional NATO allies like France and Germany as "Old Europe," he expressed a widely held American stereotype. In this view, Europe is sclerotic and calcified--resistant to change and forever looking back on its past--while America is the polar opposite: dynamic, innovative, and eager to embrace its future.

So Americans might be surprised to learn that "Old" Europe is actually ahead of us in tackling many of the most vexing domestic policy challenges. Without much fanfare, Sweden, Holland, and other countries known for their social-democratic welfare states have adopted innovative, market-based reforms on issues such as pensions, transportation, and education. What's more, while U.S. politics remains paralyzed by partisanship, European parties on the left and the right have teamed up to implement free-market policy ideas that are criticized by the American left as extreme.

These developments were the focus of a recent American Enterprise Institute conference. Leading European reformers explained how they were able to overcome political obstacles and make far-reaching changes. Some of the issues they addressed included:

• How Sweden's Social Democrats, centrists, and conservatives joined forces to adopt personal pension accounts paid for by tax dollars, an idea nearly identical to the one President Bush proposed in 2005 to the unanimous disdain of congressional Democrats.
• How center-right and center-left parties in the Netherlands made common cause with employers and labor unions to reform their country's bloated disability insurance system, a decision that cut or eliminated benefits for nearly one out of every seven Dutch adults.
• How France reduced its energy dependence by making nuclear power the basis for its electricity generation.
• How Sweden's disparate political blocs agreed to establish a nationwide school voucher program, which, over the past 15 years, has led to a tenfold increase in the number of Swedish students attending private schools.

The degree of political cooperation necessary to achieve these reforms is perhaps the most striking feature of the European experience. American journalists often decry the way in which partisan politics prevents Washington from addressing important problems or "getting things done." When they call for "bipartisanship," however, it often seems little more than a call for Republicans to accept Democratic priorities.

In Europe, parties on both sides of the political aisle have learned the art of genuine compromise. Take the case of Swedish school vouchers and pensions. School vouchers were enacted by a conservative-led government in 1992. Initially, every Swedish student had the option of using a private school voucher equivalent to 85 percent of per-pupil spending at the local public school. When the Social Democrats took power in 1994, they could have repealed this law. Instead, they chose to increase the amount of the voucher to 100 percent of public school expenditures--but they forbade private schools from charging tuition on top of the voucher amount. This compromise fused the conservative goal of full public funding for educational choice with the socialist goal of equal spending on all children.          

Swedish parties reached a similar compromise with regard to pension reform. The talks that began in 1989 under a Social Democrat-led government continued through a period of conservative governance and were concluded during another stretch of Social Democratic rule. The eventual reform included features that the left wanted, such as the continuation and full funding of a large, purely public pension regime, along with features that the right demanded, such as a free-market system allowing all Swedes to invest a portion of their tax dollars in up to 800 different private sector pension plans.

Free markets teach people to monitor their competition continually, and competition among countries for jobs and capital is no different. As the evidence from Sweden and elsewhere shows, Europe is gaining ground on the United States. The question is if and how America's political classes will respond.

--HENRY OLSEN

This summary originally appeared as an article on The American. For video, audio, and more information about this conference, visit www.aei.org/event1664/.

AEI's National Research Initiative supports, publishes, and disseminates research by university-based academics and other intellectuals engaged in the exploration of pressing public policy issues.

For more information about AEI's National Research Initiative, contact Jon Flugstad at jon.flugstad@aei.orgor 202.862.4878.

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