What Went Wrong with Western Europe? An Essay on the Causes of Its Economic Decline and on Possible Remedies

This paper deals with the causes of the economic crisis of Western Europe (WE) by taking a very long run and classical approach to the slow build up of structural imbalances. It maintains that the growth beyond acceptable levels of the state sectors and labour costs and the fact that the BRIC have learned how to produce industrial goods are among the main causes. The collapse of communism, the market oriented policies of China and a very high degree of forward shifting of taxation onto wages in WE have also played an important role. The long run growth of government expenditures and taxation and their effects on wages, employment, investment and economic growth are analyzed. The crisis has also a cyclical component linked to successive waves of tax increases and to high real interest rates. Only a drastic rethinking of the role and functions of the state sectors can bring back prosperity and freedom in WE.