Europe’s Illusion of a `Welfare Paradise`

Since World War II, European nations have adopted a welfare model under which citizens receive state support from the cradle to the grave. Such a generous welfare model has collapsed due to the fiscal crisis facing southern Europe, however. Shocked by the crisis that has spread from Greece to Spain, European nations have rushed to cut salaries, raise the retirement age, increase working hours, and reduce health insurance and pension benefits. Though they face numerous obstacles such as strong resistance from unions, the recognition is that the European welfare system is unsustainable.

An aging population is the biggest cause of the European fiscal crisis. The European Commission said the share of people aged 65 or over will almost double on the continent by 2050. In the 1950s, seven economically active people supported one pensioner but that will fall to 1.3 in 2050. The European Union’s public welfare spending was 21 percent of GDP in 2005, far higher than 15.9 percent of the U.S. The aging population, falling birth rate, and decreasing labor productivity have forced corporations to relocate factories out of Europe to Asia, compounding Europe’s growing unemployment and weakening economic vitality.

After World War II, Europe shared the burden of national defense expenditures with the U.S. and member countries of the North Atlantic Treaty Organization. At the time, Europe’s system of a planned economy worked well and allowed the injection of lots of money into social welfare programs. European nations imposed high taxes and allocated a large part of their budgets to welfare. Yet they continued to recklessly pursue the ideal of a “welfare paradise” not supported by economic growth even when annual expenditures exceeded tax revenues in the wake of the 1973 oil crisis. Europeans took early retirement, generous unemployment benefits, and free health service for granted instead of asking who would financially support the welfare system.

The Conservative-Liberal Democrat ruling coalition of the U.K. announced a budget cut of six billion pounds (8.6 billion U.S. dollars) to reduce its fiscal deficit. London will also cut 300,000 to 700,000 public sector jobs through a hiring freeze. Germany, which is fiscally the healthiest country in Europe, has also introduced similar measures. For example, Berlin will cut tax breaks, grants to provincial and municipal governments, and welfare benefits while reducing its budget by 10 billion euros (12.2 billion dollars) per year from 2011.

World Bank President Robert Zoellick says the only solution to Europe’s fiscal crisis is growth. To recover from their fiscal crisis, Greece, Portugal and Spain should make their rigid labor markets more flexible and strengthen their competitiveness and growth potential. The recent developments in Europe prove that the continent`s welfare model, which had been considered ideal, is unsustainable when a fiscal crisis emerges and that welfare without growth is a mere illusion.