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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

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.

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.”

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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