A wakeup call for Europe

• Author: Alberto Alesina and Francesco Giavazzi

The Future of Europe Reform or Decline

MIT Press, Cambridge, Massachusetts, 2006, 186 pp., $24.95 (cloth).

"A wakeup call." The title of the last chapter captures the thrust of this very readable book on Europe's need for reform. In the book, Alberto Alesina and Francesco Giavazzi cast aside the academic genre-though not their academic grounding-to better convey a sense of urgency. They focus on a short list of core issues and in each case identify the broad direction of reform. Their tone is incisive, even militant, and the book proceeds at a brisk pace with many original insights.

Some of the problems have received a lot of attention elsewhere. The continuing decline in working hours belies the increasing old-age dependency ratio. The labor markets in many European countries protect insiders at the expense of the unemployed. Monopolies and other forms of protection reflect the large rents enjoyed by existing firms and the weakness of independent regulatory agencies. And the judicial system fails to provide for the cost-effective enforcement of contracts.

The authors look at other important issues as well. They rightly recognize immigration as "one of the important questions for Europe in the next decade, if not the most important issue." While mindful of the social problems associated with ethnic and racial diversity, they advocate a selective immigration policy, attuned to the needs of the labor market in each country.

They also roundly denounce conflicts of interest in the financial system and, interestingly, trace them to the resistance of national central banks to their loss of power following the introduction of the euro. And they convincingly argue that the main cause of the decline in the quality of advanced education and research is not a lack of resources but a lack of competition.

But the book's most original contribution is its focus on the role of European institutions. The authors argue that policy coordination is beneficial when government activities present significant economies of scale, which is the case in areas such as the European Union's (EU's) single market, its common foreign policy, and its fledging common defense policy. But policy coordination...