This [poor performance] 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.

Having identified the symptoms and their roots causes, Shelburne prescribes a dose of what many Europeans and their governments will consider bitter medicine, i.e. systemic and thoroughgoing changes that will prove painful and which must be permanent.

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.

So even though his prognosis is encouraging, like any doctor, he clearly recognizes that the patient's state of mind plays an important role in his ability to regain his health.

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.

When Shelburne says "assuming a perfect world", I think he is alluding to that persistent and well-documented social utopianism of the European elites, that he is alluding to that political orientation devoted to impossibly idealistic schemes of social perfection, to that "faith in the possibility of a final and unceasing rationalisation of the social aspect" despite the fact that neither nature, markets, nor man are fully rational. He is reminding us about the consequences of that same social utopianism that lead the Continent into two Wars in the last century, three counting the Cold War.

And it is precisly this state of mind which has been vividly on display the past three weeks in the heart of Europe, in its largest and most moribund economy. If it is nothing else, the political crisis in Germany is a crisis whose roots lie in the inability of the German people to decide how to resolve their persistent economic malaise while still maintaining a generous social welfare system. It is an outstanding instance of cognitive dissonance on a national scale. It is the quintessential example of a group of people who refuse to face the obvious, i.e. that they can't have their cake and eat it too. And if this persistent and willful denial of economic reality is anything close to indicative of the mindset of the rest of the Continent, then the symptoms may get a lot worse before they get any better.

If I come across as pessimistic or negative, it is not because of schadenfraude. Rather it is out of genuine concern for the health of the broader global economy over the next few decades. It is out of concern for the survival and perpetuation of the Anglo-American model of capitalism which, unfortunately, still has yet to really catch fire in Continental Western Europe. It is out of concern for the desire to see our beloved European cousins pursue the wholistic option while time still permits and thus avoid having to endure the torment of the economic chemotherapy that may one day be necessary.

Further Reading

If the "businessmen" of Europe are "sick" there is at least one healthy and bright young women entrepreneur there with ideas about what the future of economic climate ought to look like. A continent with vibrant young men and women like this has a bright future.

For a tad bit more on the doom and gloom side see this report by economist Dirk Chlench of the German Bank, Essen Hyp. The report was written right around the time Schroder ran for re-election. There is very little difference between it and what has been written this fall.

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