Before reading this book I had ambivalent expectations. On the one hand, I had read Alesina's "Fighting Poverty in the US and Europe" and found it pretty reasonably argued. On the other hand, the words on the back cover sounded like banal conventional wisdom; the favorable review by Niall Ferguson, whose economic reasoning with regard to many issues such as imperialism and fiscal policy has been rightly ridiculed by Krugman and others, did not promise much either.



Luckily, this book turned out to be decent. It presents mostly standard neoclassical arguments about the problems of Europe. The arguments about inefficient universities, overregulated product markets and so on are pretty pretty persuasively developed. Moreover, the authors make valuable qualifications - they do not suggest Europe should get rid of its generous social safety net; instead they say it could be delivered much more efficiently. Nordic countries, routinely disparaged by neoclassical economists as a nightmare, get credit for efficient judicial systems and labor market flexibility. Furthermore, postwar European industrial policy gets credit for high postwar growth (something many neoclassical economists try to deny), although the authors believe that its continuation is one of the reasons why European economies are sluggish. Basically, the strength of this book is a pretty nuanced exposition of traditional arguments about Europe's economic problems.



However, there are some parts that are not so persuasive or well argued. The authors' general admiration of the American financial system is laughable in the light of the current crisis. Their suggestion that European countries should have bigger military budgets since many technological innovations in the US come through military projects sounds like a joke. Although it is true that many technologies came about this way, doing it through the military involves immense waste and handouts to private industry (Chalmers Johnson has recently provided some scathing coverage of the issue). As Alesina and Giavazzi seem to be concerned about crowding out in general, it is strange that this concern is forgotten when it comes to military spending. Finally, their assertion that Americans work more and make more is problematic, too, as is their meritocratic picture of compensation in the US. Up until recently about 40% of all profits in the US economy went to the financial sector (employing only about 10% of the population) which would imply it was the most productive industry. However, now we know that bloated compensation in the US financial sector had little to do with productivity. Furthermore, most Americans work more than Europeans because for the past three decades real wages have stagnated for everybody but the really well off and in order to keep consuming more most people had to work more.



This book is decent if one wants to read a coherent exposition of the neoclassical position. However, do not expect too much - there are quite a few silly arguments, too.