Europe’s Social Burden

For much of the post-war period, the European welfare state was the envy of the world. Everybody wanted to have the cradle-to-grave job security, education, healthcare and six weeks of paid vacation that Europeans enjoyed. The debt crisis now threatening that model has given free-market enthusiasts, dismayed by the implosion of Wall Street, something to cheer about. Here is proof, they note gleefully, that the welfare state is a flop. Amid anti-reform protests in Athens and Paris and the spread of gloom across the continent, the future does look uncertain. But it may be too soon to write off the long-entrenched social system that has become part of the European identity.


It has been known for some time that European countries have been providing their citizens a high quality of life by increasing their debt burden. Cheap money from the global capital markets insulated them from harsher realities. As long as the bond markets felt confident that European sovereign debt was a safe bet, governments could indefinitely postpone painful reforms. But the Greek crisis exploded like a thunderclap, with the lightning sharply illuminating the grave crisis facing most European Union (EU) countries. They had been living beyond their means, offering their citizens a lifestyle they simply could not afford.


The hybrid model developed in the post-war years, combining capitalist efficiency with social justice and equality, had run aground. The social burden has been exacerbated by slowing economic growth, a graying population and falling tax revenues (some countries have seen tax avoidance develop into a national pastime). Since unpopular reforms endangered politicians seeking re-election, they just postponed the day of reckoning through debt financing, and even by cooking the books, as Greece has done. But with credit rating agencies now watching like hawks, EU governments have suddenly got religion.


Meanwhile, the problem has been compounded by systemic worries about an ageing population. Longevity is increasing, but Europe’s working-age population is set to start shrinking from 2012, creating an imbalance between the population in retirement and those whose work will pay for their care. A recent study by the EU bluntly warned that in the next 50 years, the old-age dependency ratio will double to two working-age earners for every person over 65. This is a sure recipe for lower economic growth and an increased social burden. Britain and The Netherlands have even proposed raising their retirement age to 67 or even 70, though French are resisting making 62 the age to hang their képi.


Changing a lifestyle developed over decades, especially since the new EU members enjoyed the benefits of a strong Euro and easy credit, will not be easy. Yet governments across Europe have announced plans to drastically cut spending, excising their bloated bureaucracies. There have been and will be demonstrations, especially by public sector workers, but the reality is too stark for the population not to take note of. Public opinion polls show that a majority of European opinion is resigned to working longer years and receiving lower pensions than were offered in the past.


Sweden might offer a salutary lesson. In the 1990s, it enacted wrenching reforms to cut a runaway budget deficit (then 12 per cent of GDP) and prune its pension and other benefits. Yet it maintained its basic social programmes. Sweden is among the first in Europe to emerge from recession and post positive growth rates. Its adherence to its own currency may have spared it the contagion of a falling Euro, but the fact that it has the lowest sovereign debt is an important factor. Estonia and Luxembourg are the only other EU members to respect the EU rule of not running over 3 per cent deficit.


Of course, the political and social contexts, and the specific histories of other EU members are different. Sweden’s success in undertaking its painful reforms may be difficult to emulate in countries long used to a large and lethargic bureaucracy and lax financial management. Nor do Eurozone countries have the option of boosting exports by devaluing their currency, as Sweden had with its unshackled Kroner. Yet, nothing concentrates the mind like the fear of wholesale state bankruptcy. By forcing politicians to contemplate the bitter medicine they had long avoided, and by obliging citizens to accept it, the debt crisis may yet have given the European social welfare system a chance to survive.