I'm from a country which has Protestantism as an official state religion and a state controlled church. Ideologically I am of course against this, but the progressive in me support it. Just check out the list of the current state of religion:
-The Prime Minister, and many of the politicians, are publically atheists.
-Abortion is a non-issue, legal to week 12 and state sponsored.
-Gay marriage is allowed (priests can choose if they wish to perform it).
-Gay priests can be in a partnership (but not married).
-Gay adoption is allowed.
-There has been a lesbian bishop.
-The Church does not accept the teachings of evil or the concept of hell.
-There is generally little mixing of religion and politics.
-Mentioning religion in public is generally frowned upon.
-The Christian Democrats is one of the strongest proponents of social benefits and generally align with the environmental movement.
The effects (as per 2008) were recently summarized in an article:
-14% of the population over 18 answered "I previously believed in a God, but not any longer". 3% replied the inverse.
-'Definately no belief in God' increased from 10% to 18% from '91 to '08. Inverse declined from 20% to 15%.
-Active Church goers (at least 1x/month) declined from 11% to 7%. People who only go for occations (i.e. funerals, marriages) decreased from 45% to 38%. (Note that going to Church on Christmas is a strong tradition).
-The largest decrease in religion was among those aged 55-65 (not just the young!).
-Number of Baptised has decreased from 81% to 68% (Baptism strongly rooted in tradition).
-Only 22% of recently confirmed 14 year olds would concider further Church activites (Confirmation strongly rooted in tradition).
I am not suggestion that my arguments are valid for every country, there are definately a number of local factors affecting the continual and fast decrease in the popularity of religion. Also, there are negative aspects I haven't dealt with such as a blasphemy legislature, Christianity lessons in school, and automatic membership in the state church upon birth. However, take it as evidence that the major problem may not be the mixing of state and religion. Rather, it is the mixture of religion and politics which cause undesirable results.