A specter is haunting Europe -- the specter of the Reagan revolution. Europe -- both Old and New -- has felt the aftershocks of the Reagan revolution more than even its greatest supporters could have ever predicted. While anti-Americanism has reached fever pitch as never before, the economic policies of European governments are increasingly echoing those of the man most universally despised in Europe. Thirty years after the launch of Margaret Thatcher's free market revolution, even socialist Sweden is starting to abandon its much vaunted Nordic model. France's surrender to Reagan was uncharacteristically late. Yet there is little doubt that the election last Sunday of Nicolas Sarkozy as French president is yet another nail in the coffin of the European welfare state.

Europe's Reagan Revolution: The Case of Sweden

Consider the case of Sweden, widely touted as the humane alternative to heartless U.S. capitalism. The Wall Street Journal recently wrote about the case of Lotta Landström -- a 35-year-old former teacher in Sweden -- who until last month had been living off of government-funded disability. She, along with hundreds of other Swedes, had been diagnosed as suffering from "Electro-hypersensitivity" -- an allergy to electricity. Even members of the Stockholm chapter of the Hell's Angels weren't as rough and tumble as their reputation would suggest. Over 70% of the biker gang went on disability pay after the same doctor had certified them all as suffering from depression.

Here's the paradox. On the one hand, Swedes are among the healthiest people in the world. On the other, one out of eight working-age Swedes live on some type of disability benefit. That's the highest percentage on the globe. Last year, disability payments consumed 8% of Sweden's budget, or 4% of the country's gross domestic product. The OECD calls it "Sweden's single biggest economic problem." It also means that Sweden's real unemployment rate is closer to 17% than the official figure of 5.6%.

Enter Sweden's new Prime Minister Fredrik Reinfeldt, who has introduced a range of incentives designed to put Sweden back to work. Until recently, Sweden offered recipients of disability benefits-pay 80% of their previous salary, up to a maximum of 25,183 Swedish kronor, or $3,735 a month. That's equivalent to about a $70,000 per year job (after taxes) in the United States. No wonder small armies of Swedes jockey for space on Spain's sunny beaches for much of the year. Being on disability in Sweden has been like being on a perpetual, fully-paid spring break.

Sadly, for Ms. Landström, her disability benefits have been cut off recently. Turns out "Electro-hypersensitivity" isn't recognized as a medical condition anywhere in the world outside of Sweden. Once her (still additional) 300 days of unemployment benefits run out, Ms. Landström will have to go back to work. The Hell's Angels are luckier. The welfare authorities are still deliberating whether to press charges.

Europe's Reagan Revolution: The Psychological Costs

Labor market reforms are about more than just productivity and GDP figures. The elephant in the room is the enormous psychological costs of the culture of dependency. Some Swedish benefit-junkies have been home so long that they have become reclusive and out of touch with reality. One Swedish woman didn't want to go back to her former job in a lighting store because she couldn't "deal with" always having to be nice to customers. Government munificence notwithstanding, sick leave for psychological conditions such as depression, burnout or panic attacks in Sweden has rocketed over the past decade. Over 20% of the Swedish population complains of anxiety syndromes. Yet once pressed back into work, many benefit-junkies see their depression lift miraculously.

In Sweden, the old Protestant work ethic has been replaced by a belief that it has become culturally acceptable to feel unable to work and to live on government benefits. By coddling them cradle-to-grave, the Swedish system encouraged Swedes to treat everyday problems as clinical issues requiring sick leave. And Swedish doctors obliged, signing off sick notes authorizing benefits with impunity.

In this way, the Nordic Model has much in common with the now extinct centrally planned economies in Eastern Europe. There, perverted incentives led to the implosion of the entire social, political, and economic system -- as well as a disintegration of common sense values. Consider the case of Hungary. In a country that boasts of its disproportionate share of Nobel prize winners, developing mind-numbingly elaborate scams to rip off the government is not only a national pastime, but also is viewed as a greater sign of savvy and intelligence, than, say, something as prosaic as winning a Fulbright scholarship to an Ivy League university.

Europe's Reagan Revolution: The Good News

Common sense policy reforms -- like reducing taxes and perversely high welfare benefits -- aren't peculiarly "American" and translate across all cultures. In the 1990s, the United Kingdom began requiring people receiving unemployment benefits to actively pursue work or training. The Netherlands has cut back on generous early pensions that led many people to retire at 55. Germany slashed benefits for the long-term unemployed to push them back into the workforce. The result? The United Kingdom has recorded 15 consecutive years of growth; the Netherlands is know for having one of the most flexible workforces in the world; and German unemployment is as low as it has been in recent memory.

Ditto with tax policy. A few years ago, high tax and socialist Austria was forced to reduce its corporate and personal taxes. Too many corporations were moving operations to neighboring Bratislava in Slovakia -- a virtual suburb of Vienna -- with its 18% flat tax. After Slovakia joined the EU three years ago, the border completely disappeared. The result of Austria's reforms? Its growth rates are double those of Germany. And Slovakia -- once the industrial laggard among the Central European Tigers of Poland, Hungary, and the Czech Republic -- has now surpassed Hungary in terms of per capita GDP.

Here's the good news. There is tremendous leverage in an economy when policies change to provide the right incentives for people to work. As U.S. welfare queens did in the 1970s, Swedish electricity allergy frauds of the 2000s will become relics of the past. And European governments will then pat themselves on the back for their enlightened and humane reforms -- and their success in catching up to the United States.

That being said, gratitude is the least heartfelt of emotions. The one man who won't get any credit for inspiring Europe's reforms is Ronald Reagan. Today, the only statue of Reagan in all of Europe -- the one who called on Gorbachev to tear down the Berlin Wall -- stands in Budapest thanks to the efforts of an American entrepreneur. The second will be unveiled by native Poles in Warsaw on July 4.

That's just about the same time London gets its first statue of Adam Smith -- 216 years after his death.

Sincerely,

Nicholas A. Vardy
Editor, The Global Guru

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