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European Social Welfare State Model Running Out of Time and Money

Europe’s debt crisis is sounding a warning that the European social welfare state must be downsized if it is to survive. But European voters are unlikely to relinquish their entitlements without a fight.

by
Soeren Kern

Bio

May 21, 2010 - 12:10 am
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European leaders are facing an uphill battle to restore confidence in the euro, after a €750 billion ($1 trillion) “shock and awe” financial rescue package failed to quell market fears that the sovereign debt crisis in Greece may spread across the European Union and possibly unravel Europe’s single currency. Although European stocks and bonds briefly rallied after the bailout fund was announced on May 10, European markets have since erased those gains and the euro, which has become a key indicator of confidence in Europe’s economy, has fallen to a four-year low against the U.S. dollar.

A close examination of the EU bailout fund shows that it is actually only a short-term fix — it merely uses new debt to pay off old debt and does not change the fact that all European countries will remain top-heavy with unsustainable debt. German Chancellor Angela Merkel admits that the EU rescue plan will do nothing more than buy time and put off a painful day of reckoning. But fears are mounting that European authorities are running out of options to prevent a full-scale financial meltdown.

Europe’s debt crisis is now calling into question the economic viability of the European social welfare state itself. Indeed, the biggest unintended consequence of the crisis is that it has proved the economic foundation of Europe’s much-vaunted social model to be far more unstable than previously imagined.

All across the continent, countries large and small are straining under the weight of debt caused by comprehensive “cradle-to-grave” social welfare. At least four trends, some of which are unique to Europe, are conspiring to bring down the edifice of the European social welfare model. They are demographics, chronic unemployment, cultural idiosyncrasies, and profligate politicians.

What follows is a tiny selection of sundry data that sheds some light on why European public finances are in so much trouble:

Demographics: The birth rates in many European countries have fallen to below replacement levels at a time when life expectancy is increasing and populations are aging. As a result, ever-diminishing pools of workers are bearing the growing financial burden for swelling ranks of retirees, who in many cases collect pensions and draw on state health care until well into their 90s.

In Germany, for example, which is the largest country in the EU, the total population is forecast to drop 20 percent from about 82 million currently to approximately 65 million in 2060, according to the German Federal Statistics Office. At the same time, the average age of the German population is set to increase. Within the next five decades, for example, 34 percent of the population will be older than 65, up from 20 percent today.

Hence the number of pensioners that will have to be supported by working-age people in Germany will nearly double by 2060. While 100 workers provide the pensions for 34 retired people today, they will have to generate income for 67 pensioners in 2060.

In Greece, which has one of the lowest fertility rates of any country in Europe, the 65-and-over population has soared from just 11 percent in 1970 to 24 percent today, and is projected to grow to one-third of the population by 2050, according to the Hellenic Statistical Authority. By contrast, Greece’s working age population has reached its peak and is projected to decline 20 percent over the next 40 years. At the same time, Greece has one of the highest longevity rates in Europe — with an average life expectancy of 77.1 years for men and 81.9 for women.

In Spain, meanwhile, the government is trying to boost the country’s stubbornly low birth rate (which has been below the population replacement level for nearly two decades) by means of a €2,500 “baby check” that is designed to bribe couples into having children.

Chronic Unemployment: In most European countries, chronic unemployment and early retirement are two sides of the same coin. Early retirement essentially is a labor policy that artificially drives down the unemployment rate. The downside of early retirement is that it reduces the tax base while it increases the burden on the social security system, especially in the context of increased longevity.

In Spain, the government spent twice as much as it took in during 2009, with unemployment benefits (the unemployment rate is stuck at 20 percent, which translates into more than 5 million Spaniards on the dole) constituting the largest single component of government expenditures.

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