Flexicurity: a modern Danish Fairy-Tale?
How in the country of the blind the one-eyed man became king.

Most European countries continue to face chronical unemployment and slow growth. Meanwhile the rest of the world enjoys the advantages and opportunities of globalisation and is booming as seldom before. Denmark remarkably outperforms mainland Europe as to its participation rate. So the rest of Europe plans to fight unemployment with the recipes of the Danish flexicurity model. At first sight the Denmark does indeed combine high participation with decent social protection and a flexible labour market.

But economists of the IMF and the Itenera Institute caution the Danish reality is bleaker than it appears. The most fundamental warning for the flexicurity-hype has come from Brussels'  Free Institute for Economic Research. In the latest edition of their bi-annual study of Westen social models they analyse the effectiveness of public policy and found Danish performances deplorable. Obligate employment in low-productive jobs ruins productivity and leads to social regression. They warn flexicurity is a painfull and totally useless exercise and that the social cost is high. Flexicurity means late retirement, early school leave, loss of job security, shrinking leisure and time for a decent family life and lacking opportunity for the children's education. Flexicurity is not an economic miracle nor the social paradise some want us to beleive. The institute found the Irish model by far the best performing alternative.

The European stagnation lasts for over a decade now. None of Europe's great projects have yielded the benefits promised at the launch. The anticipated boosts from the Lisbon Agenda, the Enlargement and the Common Currency all fail to materialise. The opinions as to the causes and the cures for Europe's stagnation differ most widely between economists and politicians.

The political elite understandably believe Europe's poor growth and the failure of earlier plans must be remedied by even more government action, and that new and better plans are needed to save Europe from its existential crisis. Europe's politicians have not learned the lessons from history. They fail to understand that central planning such as the Lisbon Agenda are only likely to make things worse, and that freeing the economy from government interference is the better way to achieve prosperity and happiness.

Since the publication of a number of revealing studies economists increasingly realise Europe's slow growth is related to its oversized public sector and the excessive public interference with the economy. Among economists the consensus is growing that Europe's pampering welfare state and its demotivating tax structure are killing incentives, undoing the economy from the motor of progress. In doing so Big Government is excluding Europeans from the massive productivity gains globalisation brings about. Economists also caution that Europe's outdated social models are unsuitable for coping with ageing populations and warn for a possible collapse of the unfunded pension schemes.

So the choice of a new social model for Europe is at the centre of the political debate. Despite contrary indication and massive evidence of poor Scandinavian performance, Europe's political elites continue to push the Nordic Model which stands for big government, coercive redistribution and central planning. On the other side of the political spectrum free market economists call for an Anglo-Saxon social model based on Adam Smith's free market principles of laissez-faire, either on the pure American version or on the softer moderate European version thereof typically found in Great Britain and Ireland.

Let's compare the key economic Indicators.
Although today both the Scandinavian and Anglo-Saxon models have moderated their earlier versions, very substantial policy differences subsist between both types of policies as the table below clarifies. The most obvious and central characteristic of the Scandinavian model is indeed the huge size of its public sector and its poor economic performance. Scandinavian growth of prosperity is indeed slow, and so is their job creation rate. Over the last 20 years Scandinavian governments spent on average 56.9% of GDP. Danish governments spent 56.6%, Finish 52.1% and Swedish no less than 62.14% on average from 1985 to 2004. No wonder that the Scandinavian economy came close to standstill in the early nineties and on average booked the slowest growth of Europe over the last 20 years.

The slow Nordic growth is remarkable as Scandinavians work and think hard. Not only do they have the highest research budgets of Europe, they also have the longest working hours. Scandinavians work on average 767 hours/Year per inhabitant, as opposed to only 695 hours in continental Europe and 706 hours in the UK and Ireland. This is due to Scandinavians having the highest participation rate in Europe. Following the near-collapse of their economies in the early nineties Scandinavians introduced non-indulgent retirement rules as well as very strict limitations on unemployment benefits, resulting in late retirement. The high tax burden on family income also necessitates two wage earners per family, resulting in the highest participation in Europe (48,4%) as opposed to 42,6% on the European continent and 40,9% only in Ireland and the UK.

Ineffective Redistribution structures.
Unlike the Anglo-Saxon tax structure, both Scandinavian and Continental European tax revenues rely predominantly on direct taxes. Scandinavia gets 65,4% of its total tax revenue from profits, income, and social security contributions. This is more than 11,1% in excess of the Anglo-Saxon countries with 54,3% direct taxes only. The Scandinavian tax structure has undoubtedly succeeded in topping-off incomes of the highest income groups better than the UK and Ireland, who put more emphasis on consumption taxes. The Scandinavian wealthiest 20% earn indeed only 36.4% of total income as opposed to 40.4% in continental Europe and 43.6% in the Anglo-Saxon countries. However the effectiveness of the Scandinavian redistribution system in transferring the tax revenues to the poorest has proved extremely limited as the poorest 20% Scandinavians earn only 9.0% of total income; merely 2.6% in excess of the 7.4% the continental European poor earn.

The overwhelming importance of choosing the right social model is most evident when we compare the long-term growth differentials under the different social models. Let's compare the evolution of prosperity and new job creation of Scandinavian countries with Ireland, and with a typical continental European country: Belgium.

In 1970, Sweden's wealth level was 25% above the Belgian. Sweden then occupied 4th place in the OECD ranking, just behind Switzerland, the US and Luxembourg. By 2004 Sweden had fallen to the 13th place, one rank behind Belgium. In 1970, Denmark was the 5th most prosperous economy in the world. By 2004, Denmark had fallen to the 10th rank. Finland did badly as well. From 1989 to 2004, while Ireland climbed from 21st to 4th place, Finland fell from 9th to 15th. The three Scandinavian EU-members are together with Italy the worst performing economies in the entire Union.

Why does the political elite not learn from the poor Scandinavian records and the undisputable success of Ireland?  From 1970 to 2004 Sweden and Denmark lost 9 and 5 places in the prosperity ranking.  Ireland  gained  no less than 18.Rather than taking Scandinavian countries as an example, we should shun their recipes, and look at the policies of best pupils of the OECD class: Ireland.

If there is anything Danes are good at it is fairy tales. It is indeed impressive how the Danes succeed in keeping alive the myth of their social paradise when so much evidence testifies of their social regression. Their poor economic performance is indeed not limited to slow progress of prosperity. The Danish stagnation also resulted in extremely poor job creation over the last two decades. While The EU-15 created 24% new jobs on average between 1981 and 2003, Sweden and Finland could hardly create any jobs at all. Denmark performed marginally better with 12% new jobs in this period.

Denmark improved its employment record through activating its labour market by means of a strict flexicurity policy. Flexicurity includes measures such as easing hire-and-fire and unemployment benefits being restricted time. Some of the measures were really hard to swallow by the Danish workforce. For workers in the construction industry for example the term of notice was reduced to no more than five days. Young people as well as the long-term unemployed, also are excluded from benefits if they dare to decline a job offered, however unproductive, low-paid, and far below their level of education it may be.

All these measures certainly added to the much-needed flexibilisation of their rigid labour market and have indeed helped to lift Danish participation rate above the European average. Much of the Danish participation however is window-dressing, concealing the huge hidden unemployment. Danish participation rates are blown up by the creation of no less than 240.000 new government jobs between 1996 and 2005 (+37%). High numbers of partially employed also, and non-profit jobs in numerous activation programs and heavily subsidized employs in the social sector

Social Regression: the social Cost of Big Government.
A closer look at the participation figures reveals the harsh reality behind Danish flexicurity, and how much the overall participation rate has gone at the expense of obligate employment of the very old and very young age groups. Danish employment rate in the 15-24 year olds stands at 62.3% as opposed to 39.8% only for the EU-15 average. The social decline behind Danish flexicurity is indeed agonizing. Their high overall participation rate is the result of very late retirement, unnaturally high proportion of two-wage-parent families, and early school leavers Danish compulsory attendance at school is in fact limited to a mere nine years of education whereas Danish legislation allows to employ children as young as 15 years in full legality.

Increasing participation rates through public employs and legal enforcement obviously is not the way to boosting growth and productivity. The main reason behind Denmark's failure was the un-employment and un-investment trap caused by the lack of positive incentives. Decades of over-taxation and over-regulation have indeed deeply demoralized both Danish employers and workers alike. The excessive tax burden and the detrimental business climate have deterred the private sector from investing and creating the productive jobs providing the indispensable non-inflationary finance for progress.

The IMF has recently warned against the Danish window-dressing and cautioned against the flexicurity euphoria. Even the Danes themselves finally realized that social regression through labour enforcement is not the way to proceed, and that Big Government and the excessive tax burden were the true causes of the Scandinavian Disease. In 2002 Danish policy makers finally decided to reduce their oversized government and introduced a strict budget freeze implying that taxes, whether expressed in fixed nominal krone terms or in percentage terms, cannot be raised. An important element in the new fiscal strategy was to set strict targets for the growth of public consumption. Under the new fiscal strategy, the key target variable for public consumption was set at a maximum growth of 0.5% per year from 2005 to 2010, markedly lower than the projected growth of the economy. Under a nominal tax freeze, the effects of growth and inflation gradually but steadily reduce the tax burden, both in real terms and as a share of GDP.

Public spending, which still stood at 54.9% of GDP in 2002, is due to fall to 50.8% in 2007. At this rate of change, the size of Danish government will be reduced to the OECD average (±40%) by the year 2015. So in the end the Denmark might become a fairy-tale social paradise after all. Not by virtue of their long praised Big Government - Flexicurity model, but because in 2002 the Danes finally decided to dump the ballast from their oversized welfare system and to introduce some Irish free-market ideas in their outdated social Model.