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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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In France, where the budget deficit as a percentage of GDP is exceeded only by Greece, Spain, and Ireland, state coffers are being depleted by high unemployment, coupled with early retirement and longer life expectancy. The country’s pension system will lose €10.7 billion in 2010, up from €8.2 billion in 2009 and €5.6 billion in 2008. The shortfall will rise to €14.5 billion in 2013 and €50 billion in 2020, according to the Labor Ministry.

In Greece, the average retirement age is 61, although workers in many professions classified as “arduous and unhealthy” (such as hairdressers, who may be exposed to chemicals in hair dyes and hair perms) can retire as early as 50.

In Italy, which is the fourth most indebted country in the world, only 50 percent of males over the age of 54 are still active in the workforce. In Austria, public servants and those in the semi-public sector, such as postal and railway workers, can retire at age 52.

Cultural Idiosyncrasies: The European social welfare state is also under strain thanks to myriad European cultural idiosyncrasies, such as 35-hour workweeks, six-week paid vacations, bloated public sectors, and widespread tax evasion.

In Greece, the shadow economy (which is made up of untaxed trade in goods and services) is 25 percent of gross domestic product. The Federation of Greek Industries estimates that the government may be losing as much as €25 billion a year to tax evasion.

In Spain, the shadow economy is equivalent to 23 percent of GDP, and is growing faster than the real economy, which contracted by 3.6 percent in 2009. Overall, Spaniards avoid paying taxes on income of €240 billion annually, which deprives the government of as much as €25 billion a year in tax revenue. In Italy and Portugal, the shadow economies are around one-fifth of GDP. (By way of comparison, in the United States, the shadow economy is around 7 percent of GDP.)

In Sweden, more than 30 percent of the labor force is employed either by the government or by public sector companies. In France, Spain, and the Netherlands, over 20 percent of the labor force works in the public sector. Spain has 3.1 million bureaucrats, or 25 percent more than the number of workers employed by private industry.

In Sweden, where the tax rate is nearly 60 percent, parents are entitled to a total of 480 days paid leave per child, with both mothers and fathers entitled and encouraged to share the leave. The leave can be taken at any time until the child reaches the age of seven.

Profligate Politicians: Europe is run by an unwritten social contract by which voters defer questions of public policy to the elites, in exchange for bread and circuses in the form of “cradle-to-grave” social welfare entitlements. This has institutionalized a weak political class that specializes in bribing voters with never-ending amounts of borrowed cash.

In Spain, for example, Spanish Prime Minister José Luis Rodríguez Zapatero’s 2008 reelection promises totalled €22 billion, or a whopping 2.1 percent of Spain’s GDP. For the 1.7 million Spaniards eligible to vote for the first time, for example, Zapatero promised rent subsidies, and for the under-30s he promised to build 150,000 low-cost homes. In a bid for the female vote, he proposed that working women should pay less tax than men. And for low wage earners, he promised to exempt them from paying income tax altogether.

Zapatero also promised to raise pensions and the minimum wage, to create 300,000 new child care slots, to increase autonomy for the region of Catalonia, to financially compensate companies that adapt their working hours to those of schools, to provide new fathers with one month of paternity leave, and to plant 45 million new trees (at one for each Spaniard, the Socialists will have to plant 30,821.9 trees every single day for the next four years). Another €3.5 billion will go towards the post-modern-sounding “Liberty, Coexistence and Rights in a Globalized World.”

In Britain, the national debt will reach more than £900 billion ($1.3 trillion) in 2010, which is equivalent to nearly 60 percent of the country’s entire annual economic output — the biggest proportion for more than 30 years. The national debt will soar to £1.1 trillion in 2011, and will comprise 80 percent of GDP in 2014. The interest on the national debt will cost almost £45 billion in 2010, which is more than Britain spends on defense.

At the same time, the British government is expected to hand out more than £180 billion in welfare payments in 2010, which is more than it will collect in income tax. Housing benefits alone cost British taxpayers £15 billion every year. Fraud, waste, and abuse are rampant. In one case, a family was paid nearly £200,000 of public money to live in a seven-bedroom house in one of Britain’s most expensive areas. In another case, taxpayers have been accommodating a single mother of seven children from Afghanistan, in a seven-bedroom, £1.2 million house at a cost of £12,458 a month in rent. Elsewhere, a single mother of six is living in a £2 million London house at a cost of £7,000 a month courtesy of the British taxpayer.

As Europe teeters on the brink of financial meltdown, suddenly there is a grudging realization among some quarters that the European social welfare state must somehow be downsized if it is to survive. But there is a great gulf between rulers and the ruled over how to proceed. Weaned on decades of socialist largesse, workers across Europe are taking to the streets to prevent governments and private companies from imposing austerity measures. Any changes to the status quo will come at the cost of social unrest.

The European social welfare state increasingly resembles a giant Ponzi scheme that is running out of cash. But former Conservative British Prime Minister Margaret Thatcher warned it would be so. In prescient remarks, Thatcher once said: “Socialist governments traditionally do make a financial mess. They always run out of other people’s money.”

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Soeren Kern is Senior Analyst for European Politics at the Madrid-based Grupo de Estudios Estratégicos / Strategic Studies Group. Follow him on Facebook.
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