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I don't think I'd use the word "decline" in describing the state of pre-Reformation Christianity as it seems the grip of the Church of Rome had never been tighter--which is what Luther reacted against. Christianity had become something very different from what it started out as; it had become profoundly intertwined with power and authority in a way that would have surprised and dismayed the earliest Christians; it had become a force of manipulation and coercion. This doesn't suggest decline to me; this suggests a diabolical swelling and growth, albeit in all the wrong directions.
As #7 and #8 have stated, Protestantism forever altered world history. One of the prime changes that occurred in some sects was that individuals were responsible for their own salvation, not any religious institution -- reading the Bible became paramount, which forced literacy rates to increase. Part of the reason Colonial New England insisted that all children, whether male or female, attend "grammar school" was so that they could learn to read and work out their own salvation.
The Church responded with the Counter-Reformation as a series of councils to correct and improve its functioning. The allowed excesses of earlier popes were curbed, and structural changes were made throughout. Ironically, it may have also inadvertently started the Scientific Revolution, when the Church attempted to modify the existing Julian Calendar and bring that up to date, using the services of one Nicolaus Copernicus (1473-1543.)
The Reformation contributed to fundamental changes in Europe, changes which accompanied the Commercial Revolution and overseas exploration and colonization. It created conflict in the form of numerous revolts and civil wars, and of course, the Thirty Years' War, partly because of politics and partly because, with the exception of a few sects, the Reformation did not emphasize religious tolerance or freedom, quite the opposite. It changed (and was shaped by) political dynamics in central Europe. In some of its incarnations, it removed the locus of spiritual power from the institution of the Church and placed it in the individual, who was responsible for their own salvation. It also encouraged literacy, as it placed more of an emphasis on scriptural than ecclesiastical authority.
I would say that the Protestant information had an enormous impact, not only on religion but on politics, psychology, and international relations. In general, it seems possible to argue that Protestantism, with its emphasis on individualism, helped promote a trend toward democratic and republican governments and poltical theories. For the same reason, it helped promote a great deal of introspection and self-examination, resulting, for instance, in an outburst of autobiographical writing. Finally, the Protestant reformation helped give the peoples of Europe one more thing to fight about, as the religious conflicts of the 16th and 17th centuries amply and unfortunately demonstrated.
Luther's break from the Roman Catholic Church after the posting of his Ninety-Five Theses in which he objected to the selling of indulgences, for instance, gave rise to purification in religious sects such as the Anabaptists who sought to rid Christianity of all the "frills" of architecture, sculpture, doctrine, etc. For one thing, rather than a hierarchy, churches began to have a more lateral structures.
Certainly negative effects came of the Protestant Reformation as England engaged in a religious civil war, and France expelled the Huguenots, members of the Reformed Church of France influenced greatly by the writings of John Calvin. These Huguenots moved to other Protestant countries such as England, Denmark, Switzerland, and the Dutch Republic. While Christianity was not in decline, it certainly had much dissension and death connected to it.
One of the key factors that led to the Protestant Reformation was the way in which more and more people saw the Catholic Church as being primarily about power and money. ( as pohnpei has said) The whole indulgences scandal, for example, which allowed people to buy forgiveness for future sins, was one that attracted the sharp criticism of Martin Luther.
I would say that the Protestant Reformation had an enormous impact. The spread of Protestantism all over the world today would not have happened apart from the Protestant Reformation. America was started in part by the theology and worldview of Protestants who wanted a new country where there was freedom of religion. Think of the Puritan in America; they are direct heirs of the Reformation - people like Cotton Mather and Jonathan Edwards.
For the sake of the debate, if for no other reason, I'd submit that the Protestant Reformation led some segments of society, at least, to reinvent themselves concerning the roles of church leaders and of individual persons. As splinter groups broke from the church, developed new organizations and set about finding ways of living to express their new ideas, European monarchies were impacted, governments were forced to pay attention, and migrations began as groups searched for locations in which they could live under their new sets of beliefs.
I'd say it was in decline because people were coming to see it as an institution that was more interested in money and power than it was in helping people either spiritually or materially. I don't know that the Reformation changed things much because after that religion ended up causing lots of wars and probably didn't help people's lives much.
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