Threat to welfarism

Across western Europe, the ‘lifestyle superpower,’ the assumptions and gains of a lifetime are suddenly in doubt. The deficit crisis that threatens the euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II.

Europeans have boasted about their social model, with its generous vacations and early retirements, its national health care systems and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism.

Europeans have benefited from low military spending, protected by Nato and the American nuclear umbrella. They have also translated higher taxes into a cradle-to-grave safety net. ‘The Europe that protects’ is a slogan of the European Union.

But all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing climbing deficits, with more bad news ahead.

With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing working hours and reducing health benefits and pensions.

“We’re now in rescue mode,” said Carl Bildt, the Swedish foreign minister and a former prime minister. “But we need to transition to the reform mode very soon. The ‘reform deficit’ is the real problem,” he said, pointing to the need for structural change.

The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.

Changes that would have been required in any case have now become urgent. Europe’s population is aging quickly as birthrates decline. Unemployment has risen as traditional industries have shifted to Asia. And the region generally lacks competitiveness in world markets.

According to the European Commission, by 2050 the percentage of Europeans older than 65 will nearly double. In the 1950s there were seven workers for every retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to 1.
Figures show the severity of the problem. Gross public social expenditures across the EU increased from 16 per cent of gross domestic product in 1980 to 21 per cent in 2005, compared with 15.9 per cent in the US. In France, the current figure is 31 per cent, the highest in Europe, with state pensions representing more than 44 per cent of the total and health care, 30 per cent.

Aging workforce

The challenge is particularly daunting in France, which has done less to reduce the state’s obligations than some of its neighbours. In Sweden and Switzerland, 7 of 10 people work past the age of 50. In France, only half do. The legal retirement age in France is 60, while Germany recently raised the age to 67 from 65 for those born after 1963.

President Nicolas Sarkozy of France has vowed to pass major pension reform this year. There have been two contentious overhauls, in 2003 and 2008; the government, afraid to lower pensions, wants to increase taxes on high salaries and increase the years of work.

Jean-Francois Cope is the parliamentary leader for Sarkozy’s centre-right party, and he says that change is painful, but necessary. “The point is to preserve our model and keep it,” he said, while acknowledging that the word ‘austerity’ has become politically sensitive. “We need to get rid of bad habits. The Germans did it, and we can do the same.”

More broadly, many across Europe say the continent will have to adapt to fiscal and demographic change, because social peace depends on it. “Europe won’t work without that,” said Joschka Fischer, the former German foreign minister, referring to the state’s protective role. “In Europe we have nationalism and racism in a politicised manner, and those parties would have exploited grievances if not for our welfare state,” he said. “It’s a matter of national security, of our democracy.”

The problems are even more acute in the ‘new democracies’ of the euro zone — Greece, Portugal and Spain — that embraced European democratic ideals and that Europe embraced for political reasons in the postwar era, perhaps before their economies were ready. They have built lavish state systems on the back of the euro, but now must change.

Under threat of default, Greece has frozen pensions for three years and drafted a bill to raise the legal retirement age to 65. Greece froze public-sector pay and trimmed benefits for state employees, including a bonus two months of salary. Portugal has cut 5 per cent from the salaries of senior public employees and politicians and increased taxes, while cancelling big projects; Spain is cutting civil service salaries by 5 per cent and freezing pay in 2011 while also chopping public projects.

But all three countries need to do more to bolster their competitiveness and growth, mostly by making structural changes to deeply inflexible employment rules, which can make it prohibitively expensive to hire or fire staff members, keeping unemployment high.
In Athens, Iordanidis, the economics graduate who makes 800 euros a month in a bookstore, said he saw one possible upside. “It could be a chance to overhaul the whole rancid system,” he said, “and create a state that actually works.”