The Coming End of the European Welfare State and What It Means for America

When the Maastricht Treaty created the European Currency Union in 1992, many observers expected it to propel Europe to a preeminent position in the 21st century. Its architect believed that creating a common currency and a master central bank would lead the way toward European countries giving up national sovereignty and uniting under the rule of faceless bureaucrats. The goal was to become as strong as the U.S., but with a progressive central government.

As implemented, the “eurozone,” which is essentially the European Union minus the UK, is the world’s largest economy, with the United States in second place and both China and Japan lagging well behind. However, the euro did not create a “United States of Europe.” Each country maintained its own industrial policy, welfare system, and national character. Rather than developing into a powerhouse, this union has led to a socialist empire that is swiftly collapsing. Notably, the weak central government has been ineffective in avoiding the decline.

The collapse is being driven by two factors in addition to ineffective responses:

1. First, as reported in previous Trends issues, a demographic hurricane is battering Europe. In fact, the continent is losing 700,000 people each year, and will lose 3 million more each year by 2050.1 This population implosion flies in the face of a widely held fear that a harmful population explosion is looming. This once-a-millennium phenomenon is a major factor behind the European crisis.

2. A closely related factor is that older citizens are making up a larger and larger share of that dwindling population. A report by the U.S. State Department and the National Institute on Aging reveals that there are nearly 500 million people around the world who are aged 65 and older. By 2030, the number is expected to double to 1 billion, or 1 in 8 people.

Combined, these two factors mean there are already fewer workers in the prime productive age to pay taxes and a growing segment that requires care. The result is enormous and growing stress on economies, particularly ones in countries that require favorable economics and demographics to sustain their welfare states.

In Italy, for example, 18 percent of the population was over 65 in the year 2000. In 2010, that number had risen to 21 percent, and some experts predict it will increase to 34 percent by 2050. The proportion of the population over 65 closely mirrors Italy’s numbers for most of the European Union’s 27 countries.

A report issued in 2006 by the European Commission made an even more dire prediction.2 It suggested the ratio of working-age European citizens to elderly citizens will be down to 2-to-1 by 2050.3 Even the Nordic countries that so far have been spared from any deep effects of the sovereign-debt crisis will suffer from this demographic shift.

These figures reflect large segments of the European population that are counting on promised benefits, and get irate at even the hint of cutbacks. But regardless of what this population segment thinks or wants, the demographic decline has put welfare spending into overdrive, while economic growth has been sapped. Faced with this situation, politicians in each country have been making decisions that appease voters, rather than making hard choices that could correct the problems over the long term.

The result has been a flood of rules, regulations, and entitlements, as well as mounting debt and out-of-control immigration from the developing world.

§§§§§§§§§§

Yet, voters don’t seem to care that the eurozone is heading towards a cliff. This is demonstrated by the recent French presidential election of Socialist Francois Hollande and votes against austerity in Greece. In a very real sense, these voters have doubled-down on an already untenable situation.

§§§§§§§§§§

In France, general government spending makes up roughly 56 percent of GDP, placing the country near the highest of any economy in the world and indicating how far it has already gone down the path to socialism.4 Greece is not far behind, with government spending at 49 percent.

In spite of these warning signs, the eurozone ? including some parts of Germany ? is resisting the necessary cutbacks in government spending and privatization. This resistance reveals a lack of economic education. Few people in Europe understand the role the welfare state and a rapid expansion of state spending plays in creating an economic crisis.5

During times of strong economic growth, salaries (and therefore pensions) also grow, as do government expenditures and social-security systems. But, when the economy shrinks, as always happens in historical cycles, pension bills tend to remain at the same elevated levels, even as wages and government revenue fall.

Given this trend, we offer the following forecasts:

First, the only path moving forward will be for the economies that are in crisis to greatly cut back their welfare states and generate trade surpluses.

For example, Spain will need to cut state spending by at least one quarter, and Greece will need to see spending rolled back to less than half of what it was before the crisis.

Second, it is foreseeable that Greece will exit the eurozone.

Greece will find it nearly impossible to deal with its high foreign debt without running a large long-term trade surplus. However, a low-productivity country cannot typically run a trade surplus with high-productivity countries without a free-floating currency. Unfortunately, as part of the eurozone, Greece has given up the right to have its own currency. It can either choose to cut government spending by over half, while privatizing most industries, or return to the drachma and let it float against world currencies. This will keep domestically produced products like food affordable, even as prices of imports soar out of sight. Both remedies will be painful, but the latter is more politically manageable. It could serve as a wakeup call, showing the other PIIGS ? that is, the other weak eurozone nations of Portugal, Italy, Ireland, and Spain ? that some pain now is justified in order to avert a great amount of pain later.

§§§§§§§§§§

A third alternative involves Germany and France putting together “a bailout package” that will defer the problem to a later date rather than solving it. A fourth, and even harder-to-envision solution, is for the eurozone to morph into a genuine United States of Europe with common industrial policies, welfare policies, and social norms. Markets are already reacting to the resistance of European populations to take any corrective steps, but instead voting to deepen the problem. Globally, stock prices have fallen, and the euro is weaker. Unfortunately, it will take more than these reactions to shake the PIIGS and their creditors out of their complacency. In fact, Mario Draghi, the head of the European Central Bank, warned recently that the euro currency union is inherently “unsustainable” without stronger political and financial ties. The Trends editors argue that it will only happen once the leaders of these nations see a disaster right before their eyes, such as Greece experiencing a complete meltdown.

§§§§§§§§§§

Third, socialism will not win the long-term battle for Europe.

Margaret Thatcher famously said, “Socialism ends when you run out of other people’s money.” Enough politicians and citizens will soon come to recognize that Europe has collectively run out of other people’s money. The example of Greece in turmoil and the thrashing about being tried by France will become lessons in reality that shift people away from thinking austerity measures are unnecessary. As the follies of socialism are revealed, it will become clear that the only effective way out of the crisis is more capitalism.

Fourth, 20 years from now, social systems in Europe will be very different than they are today.

Benefit programs will still exist; however, they won’t be nearly as generous. Furthermore, a larger portion of social security systems will be privately run, with welfare services such as health care benefiting from the effects of competition. European countries won’t be divided by North and South or left and right, but rather by the way they respond to the crisis by either transitioning away from the universal welfare state in a controlled and diligent way, or by dragging their feet to the point that events force them to change the hard way.

Fifth, the United States is likely to be the big beneficiary of Europe’s decline.

Although the U.S. itself has recently taken major steps down the path of socialism, the very nature of who we are will spare us the fate of Europe. We have:

- A history of self-reliance that makes dismantling the welfare state easier to sell.

- A very expensive, but still less pervasive, social safety net.

- A greater mistrust of government than private enterprise.

- A much larger reserve of wealth in the form of accessible natural resources.

- At least 230 years of experience attracting and assimilating productive immigrants.

- The best environment for entrepreneurship and innovation in the world.

Adding to Europe’s downward spiral is the accelerating flight of capital from Europe to America. In the end, the dismantling of the European welfare state will be a vindication of our free market system. And the longer it takes, the more it’s likely to benefit the United States.

References List :
1. Fewer: How the New Demography of Depopulation Will Shape Our Future by Ben J. Wattenberg is published by Ivan R. Dee. ⓒ Copyright 2004 by Ben J. Wattenberg. All rights reserved. 2. To access the report “Why Population Aging Matters,” visit the National Institute on Aging website at: http://www.nia.nih.gov 3. Washington Examiner, January 23, 2012, "Europe: The Canary in the Welfare-State Coal Mine," by Conn Carroll. ⓒ Copyright 2012 by Clarity Media Group. All rights reserved. http://washingtonexaminer.com 4. RealClearPolitics, May 10, 2012, "Dead Cat Bounce for Socialism," by Brian Wesbury and Robert Stein. ⓒ Copyright 2012 by Real Clear Politics. All rights reserved. http://www.realclearpolitics.com 5. Bloomberg News, April 18, 2012, "To Thrive, Euro Countries Must Cut Welfare State," by Fredrik Erixon. ⓒ Copyright 2012 by Bloomberg L.P. All rights reserved. http://www.bloomberg.com