The Welfare Binge: Lessons from Europe

Column by Cristian Gherasim.

Exclusive to STR

It is often said that keeping a strong European welfare system is mandatory for retaining stability and social cohesion. Is there any backing to this statement? The Gini coefficient, the one measuring income dispersion, jumped in the US from 32% in 1980 to 40% in 2000. The same goes for the UK, where inequality has risen from 29% in 1980 to 34% in 2005[1]. By contrast, in 2001 in France and Germany, it declined to an all-time low of 27% and 25%, respectively. But has this affected the degree of social cohesion in the Anglo-Saxon world? No, it hasn’t. In spite of the low level of social spending, the average degree of interpersonal trust in the US exceeds that of the EU15. It remained stable during the ‘90s and peaked in 2005, reaching 40%. By comparison, France never managed to exceed a level greater than 25%.
The United States and Great Britain have always been well-known for their high degree of voluntarism activity. The US has the greatest number of associations from all the OECD countries, far greater than in Germany, France or Italy, for that matter. The Americans also tend to be happier and more satisfied with the life they lead than any other European nation. As for the United Kingdom, tens of thousands are still actively involved in charity work. These charitable organizations are staffed with unpaid volunteers, and rely on voluntary contribution from the public. There are more than 150,000 registered charities in the country today. Taken together, they have an income of more than 15 billion pounds. This voluntary activity is a basic part of British life. It has often been so effective that whole countryside networks have been set up without any government help at all. No wonder that many of the world’s largest and most well known charities like Oxfam and Amnesty International began in Britain.
The European social system has become so generous that it offers rewards only on the basis of citizenship. For example, some continental welfare states like Belgium and France provide a system of subsidies that are not conditioned to employability. The only requirement for receiving them is to be older than 25. It’s safe to say that some of the beneficiaries haven’t worked a single day but still receive hefty monthly allowances and profit from all state-subsidized services like universal healthcare and education. We have, for instance, the Scandinavian healthcare system, which is entirely government-funded. It provides health services to all, regardless of individual contributions or whether the beneficiaries are employed or not.
Can this system hold on any longer? Well, the signs aren’t good for European coffers: general strikes, falling country ratings, aging population. Money will become more expensive as governments will have a hard time borrowing at low cost. Trust in Europe’s economic efficiency will continue to dwindle. Keeping up these social perks will drive Western Europe into the red as deficit spending has already spiraled out of control. But probably most troubling of all is that sinking feeling lurking over decision makers. Every European politician knows that trying to trim down on social benefits, increase retirement age or liberalize the labor market could spell chaos.
And there’s also Europe’s demographic challenge. With an aging population, negative demographic growth and immigration restrictions, Europe’s future looks even bleaker. While the United States has managed to increase its population continuously through immigration and high fertility rates, European societies are facing a demographic time bomb. With low fertility rates, Germany and Italy seem incapable of maintaining their current population levels in the absence of immigration. And with immigration seen as a national threat, this problem will only get worse. The European Union doesn’t have a common immigration policy, so the task of dealing with the flux of migrants rests entirely on the member states. This creates a total confusion, as different national policies don’t allow for a coherent approach. That’s why we have policy anomalies like the one found in Sweden were even children born to non-Swedish parents aren’t entitled to Swedish citizenship.
Even though Europe’s welfare states spend huge amounts of money on social benefits, including public education, the rate of people who are either students or graduates is significantly greater in the US--around 30%--than in Germany, France, or Italy. This huge difference regarding access to higher education is also reflected in the level of employment. In 2006 the US had an employment rate of 72% vs. 66% for the EU.
So, why are the results regarding social cohesion and well being so poor in countries like Germany and France despite having big social spending? I believe there are at least two good reasons for that. First, there is the aspect of government efficiency. Based on data compiled by The World Bank, government efficiency in the United States is slightly higher than in Germany and significantly better than in France.[2] It seems that funds allocated for social programs in the US are better spend. Second, and most important, in Germany and France people are more afraid of globalization and the market economy than in the US. That really takes its toll on overall productivity, affecting the ability to innovate and care for economic dynamism. For example, in France most of the students try to find jobs in the public sector rather than in the private one. This is due to job security and the benefits package that the state has to offer. On the other hand, American citizens are more receptive to liberal values and to a free market based system. They work longer, take fewer days off, complain less about working conditions and are ready to live a riskier life than the rest of EU citizens would consider. In America’s competitive job market, most salaried workers would never dream of telling their employer that they expect to work no more than 40 hours a week. Americans are lucky if they get more than 10 paid days off per year, even though they work many more hours per week than their European counterparts.
Changing the European welfare system will prove a hard nut to crack. In 2005 in Germany, when politicians tried to reform the social system, citizens voted for leftist and extreme right populist parties that promised higher social spending and less economic risk, opting out from any kind of free-market orientated policies. I don’t believe that Europeans will give up their comfortable art de vivre any time soon. They will continue pressuring politicians into keeping high social spending and state guaranteed incomes.
There’s only one way out of this: stop using social perks as electoral bribery! All European leaders should leave populism aside as they slash social expenditures together with encouraging entrepreneurship, innovation and private sector development. When they will all agree on these things, there will be no politician left to blackmail. Voters will thus have no option but to yield to a new kind of economic behavior: less government intervention and a free market system.
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