Europe is in a political crisis. The rejection of the European Union's proposed constitution by France and the Netherlands was followed by an acrimonious meeting of EU leaders that culminated in a stalemate on the European Commission's budget. This development, in turn, has led to finger-pointing and vitriolic criticism of individual leaders.

Voters rejected the proposed constitution for many reasons, but the biggest factor was discontent over Europe's economic performance. The pace of growth in the European Union's core economies has been dismal, and the budgets of some countries are in deficit—a problem that threatens to get worse as the population ages.¹ In a recent speech, Vladimir Spidla, a member of the European Commission, summed up the problem: "We cannot accept 17 million unemployed, average economic growth of 0.6 percent in the old member states, and youth unemployment of 18.6 percent in the 25-member European Union. Change begins in our own minds."²

To address the political crisis, Europe's leaders must improve the region's economic performance—but no one can agree how. Many European officials believe that competition and market forces are actually hindering economic growth and that reform will mean the elimination of Europe's social safety net. Their solution...