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Former Clinton Adviser Suggests Ways for Europe to Boost Growth - 2004-09-15

Former U.S. President Bill Clinton's top economic adviser, Martin Baily, Tuesday released a study that includes proposals on how Western Europe can boost its competitiveness and increase what has been an anemic pace of economic growth.

Mr. Baily argues that if it is to boost growth and productivity, Western Europe must scale back its generous social benefits, raise workers' retirement age, and reduce regulations that hinder business activity. Now a fellow at Washington's Institute for International Economics, Mr. Baily concedes that the task is huge and politically unpopular.

But the more than 300-page study, Transforming the European Economy, lays out the impediments that have restrained growth, making it almost impossible to reach the European Union's goal of creating 21 million jobs by 2010. That target was set by EU leaders in Lisbon in 2000. It implies that three million jobs will be created annually. Last year the 15 EU members created only 412,000 new jobs and 740,000 the year before. The European Union, now expanded to 25 member states, is the world's biggest economic entity in terms of population and gross domestic product.

Mr. Baily applauds Western Europe for achieving a level of prosperity not anticipated 30 years ago. He says Europe is far ahead of the United States in having universal health care. But Mr. Baily says these very expensive programs can be maintained only at the cost of reduced growth. The early retirement age is but one example.

"If you have similar incentives in the United States as you have in Europe you'd have Americans behaving in the same way," he says. "If you have the option of retiring at age 55 with full health care costs and a good pension, then you'd have people retiring at age 55."

In Western Europe the average retirement age is 59 compared to 65 in the United States.

Mr. Baily's theme is the need to have incentives that cause people to want to work and work longer. Social welfare costs to government, largely health care and retirement, equal 31 percent of gross domestic product in Sweden and 29 percent in France, compared to 15 percent in the United States. The pattern is the same with the average number of hours worked per employee. In the 1960s and 1970s Europeans worked longer hours than Americans. Now they work considerably less, in part because paid vacations typically exceed four weeks per year compared to barely more than two weeks in the United States. France recently reduced the work week to 35 hours.

Mr. Baily applauds the European Union's call for labor market reform. But he says the changes have to be made by national governments. "We applaud the efforts of the EU to push forward on social reform and product market reform and the creation of a single market and so on," he says. "But at the end of the day Brussels just doesn't have authority over a lot of the stuff that really counts."

Repeatedly in his presentation Mr. Baily said there is much that is positive in the European economic model and he does not advocate that Europe blindly emulate the more market based U.S. model. He points to positive but modest reforms in selected European countries, notably Britain, Sweden, Holland and Denmark.