Europe’s socio-economic systems are heading for their severest test ever. The unique philosophy of social support and inclusiveness on which they rest now threatens to become a fatal handicap. The danger is real: a number of powerful forces are working to destabilize systems that already impose heavy costs on corporations via high labor charges and limited operational flexibility. In addition, the growing burden of an aging population will, if nothing is done, consume an unsustainably large share of GDP. But no corrective action can prove effective unless it allows, enables, and encourages private firms to create the wealth on which all social systems are based. In practice, this means that the perpetual battle to improve productivity will, more than ever, become the major determinant of Europe’s future welfare, social as well as economic.

Western Europe’s uniquely supportive social systems have long been seen as models for other countries to emulate. The paradigm they offer for the relationship between governments and their citizens (and companies and their employees as well) stresses inclusiveness and social justice—a "third way" between the extremes of socialism, which most recognize to have failed, and capitalism, which...