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Whilst many people blame the welfare state for sluggish performance in Europe, the real reason is the woeful level of labour productivity which compares very poorly with the more dynamic American economy.

There is a 32 per-cent per capita output gap between the US and Europe. When you look at particular sectors in the private economy you get a better picture of the poor European performance.

For example, French and German productivity lagged 15 and 22 per cent respectively behind that of the US. Europe is particularly poor in this regard in auto, road freight, banking, electric-power generation, clothing and fixed-network telecommunications.

A large proportion of the productivity gap is accounted for by the fact that European workers work fewer hours: 1,564 annually as opposed to 1,819 for the average worker in the US.

Europe will get poorer as it ages unless it takes some drastic steps. It should liberalise the EU through the single market structure already in place and end the protection of favoured industries in particular states.

Companies need to be able to enter and exit markets freely. Further, the EU should integrate its capital markets which would expand the amount of funding available to all-sized businesses.

Regulations should not be done away with but rather they should be implemented intelligently and within a framework of good governance, a factor that has helped some European sectors such as telecommunications catch up with the US.

Europe should also focus on developing the sectors in which it has a comparative advantage such as luxury goods, green technology, health care and high-quality capital goods. Finally, it should use the welfare state to put money into key growth inputs such as education and research.

Source:

Europe's productivity challenge
By Heino Fassbender
The McKinsey Quarterly Online, June 2007
Review by Morice Mendoza