Europeans have opted for the quiet life - but they are in for a big shock

The EU will remain politically impotent - my greater concern is that it will lose the economic game too

The Treasury has just produced a report about what has gone wrong with the European economy. It argued that "the creation of a stronger, more resilient and more dynamic Europe" was particularly urgent at a time of "global economic and political uncertainty". Among the specific things it criticised were continental levels of unemployment, EU competition policy and the failure to create a single market for services. Its big message, though, was that Europe was failing to make any headway towards the Lisbon summit plan to try and catch up with the US over the next decade.

It is of course embarrassing for European politicians to have to admit that the US is opening up an increasing economic lead over the EU, for among other effects, it means that Europe will become less important in world politics as well as world economics. But if European voters do not want to catch up with the US, does that matter? Europe self-evidently is unable to speak with a single voice on global political matters; and it is a military pygmy. So should it worry about falling further behind in economic terms?

The argument that is right to prefer a quiet and comfortable life has been well made by Adair Turner, the former director general of the CBI, in a lecture at the LSE earlier this month. His argument is that if you allow for shorter hours worked, European productivity is not much below that of the US. GDP per head in the EU is lower, but that is largely because we choose to take more leisure. And our take-home pay is further reduced relative to the US because we pay for more of our services through the tax system rather than paying for them directly. (The UK, as usual, is somewhere in between the continental and the US models.)

"Europe" argues Adair Turner, "is making social choices which are rational and natural for human beings in mature, already rich, and peaceful societies." His main doubt is whether the world can be peaceful enough to sustain these choices – he hopes and believes it can be, but he acknowledges that this is debatable. His is a powerful argument which cuts to the very core of the clash between Europe and America, at the moment over the Middle East. But the division is not just about what should be done about Iraq. It is about what sort of society we want to live in.

Many of us would find it pretty tough to have to work in the US. Having only two weeks holiday a year would not go down too well. It would not be much fun to have to worry about the adequacy of one's medical insurance. And while it might be harder to find a job in much of continental Europe than in the States, at least when people lose their jobs in Europe (and for that matter the UK) there is usually a better cushion to tide them over than there would be in most US states.

But is the European model sustainable? Adair Turner has two caveats. One follows from Europe's ageing society: the implications for pensions and so on, the other is that point about global power.

It seems to me that the power game is already lost. It is very hard to see any set of circumstances where Europe collectively will be able to exert much military or even political power in the world over the next generation. In another quarter century, when the US population is expected to pass the EU one, the imbalance of power will become even wider. For the time being, the larger European nations can individually have some modest influence – Tony Blair really does have more influence over the US than most Britons would give him credit for – but the EU as a body is and will remain impotent. If we have not yet learnt that harsh lesson we soon will.

My greater concern is that Europe will lose the economic game too – its model is simply not sustainable. There are two broad reasons for believing that. One is the ageing point made by Adair Turner; the other, the implications of labour mobility – particularly of the highly-skilled – for high-tax, high-benefit societies.

The implications of ageing on the European social welfare model, where the current generation of working people pay the benefits of the current generation of retirees, have been so widely recognised that there is a danger of "pension fatigue" overtaking electorates. The core problem is that welfare systems that were developed at a time when there were more than four workers for every pensioner cannot function when there are fewer than two. (In the case of Spain and Italy, there will actually be fewer workers than pensioners when the present 20-somethings retire.)

But that is a known problem. Europe has not done much about it, but at least people are aware of the problem. Europe is much less aware of the problem created by the increased mobility of the highly-skilled – and the increased demand for such skills.

We are aware of this phenomenon in Britain, particularly in the South-east, which has become a magnet for ambitious young Europeans. London is also an attractive market for young Americans, Australians and Canadians. By contrast the professional job pool in most continental cities is filled by nationals. If you talk to continental business executives, they will often acknowledge that they can rarely recruit senior staff from the UK or the US.

At the moment there is no crisis. Germany finds itself short of skilled people, particularly in IT, which is pretty astounding given the high level of unemployment generally. And there are complaints from top managers that their best people want to go to London or New York. Italy, too, is losing a lot of young professionals who cannot find jobs locally. But the exodus of talent is manageable for now.

The danger is that the exodus will become so serious that the tax base will be eroded. So movement of labour will compound the adverse effect of an ageing society. The best young will leave – even if it means putting up with only two weeks holiday in the US or London public transport – and there will be even fewer workers to pay the swelling pension bill.

Europeans can reasonably choose to cede the active role in world policing to the US. They can reasonably chose to have greater leisure and lower take-home pay. Equally, they can chose to pay high taxes and get in return high benefits.

The danger is that the consequences of these choices are not being made fully clear. At a political level, it is not being made clear to Europeans (except brutally by Donald Rumsfeld) that the sole superpower will not pay much attention to what they think. At an economic level it is not made clear that the present levels of pensions cannot be sustained. Most important of all, it is not being made clear to young people that their living standards – if they stay in Europe – will almost inevitably be lower than that of their parents.

The danger is that much of continental Europe will suddenly reach a tipping point, when taxes rise, deficits rise, unemployment rises, public services deteriorate, deflation takes hold – and the best of the young depart, leaving the old and the poor to cope as best they can.