The Lesson Of The European Social Welfare System

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You may remember in the darkest days of the financial crisis here in America some media types talking about how Europe, particularly Northern Europe didn’t seem particularly affected by the global recession. The reason commonly advanced for this seemingly contradictory state of affairs was that the automatic stabilisers built into the European economies kicked in as their economies started to crumble and kept money flowing to consumers thus preventing demand from falling off the same cliff it did in the US.

Not often explicitly stated, but nonetheless implied was the thesis that if America had these sorts of social policies in place we would have mitigated the effects of the crisis. Essentially, the oft repeated criticisms of Europe’s welfare state were misplaced.

A couple of examples.

From the NYT on March 26, 2009:

Last month Frank Koppe gathered together all 50 of his employees at Koppe-Apparatebau for coffee, cake and the kind of bad news that has lately become all too familiar. He told them the small company’s business, designing and manufacturing custom equipment for industrial plants, had been sliced nearly in half.

But rather than resorting to layoffs, Mr. Koppe asked half his employees to come in every other week. The government would make up roughly two-thirds of their lost wages out of a fund filled in good times through payroll deductions and company contributions.

The program — known as “Kurzarbeit,” which translates as “short work” — and others like it lie at the heart of a heated debate that has erupted on the eve of next week’s Group of 20 meeting of industrialized and developing nations and the European Union, creating a rift between the Obama administration and European governments. The United States is pressing for a coordinated package of stimulus plans by member countries to encourage economic growth, something that Prime Minister Mirek Topolanek of the Czech Republic, which holds the European Union presidency, has called “a way to hell.”

But virtually all European governments, led by budget-conscious Germany, are resisting the American pitch, saying the focus should be on stricter regulation of financial markets.

The Europeans say they have no need for further stimulus right now because their social safety nets, derided in good times by free market disciples as sclerotic impediments to growth, are automatically providing the spending programs that the United States Congress has to legislate.

And Yves Smith’s Naked Capitalism on August 14, 2009 as well:

It was conventional wisdom in the US and UK financial press that Europe was dong a hopelessly bad job of responding to the economic downturn, that it needed to do vastly more in the way of fiscal stimulus, that it was consigning its citizens to continued recession, and the Te Germans in particular were to blame for their conservatism re emergency fiscal measures. German readers begged to differ, pointing out the Germany (and the rest of Europe) has large automatic stabilizers (very generous unemployment insurance, for instance), making discretionary fiscal spending less necessary.

I was traveling along the Danube and Rhine in June, and saw far fewer signs of distress (like vacant retail stores) then I see is TARP-supported Manhattan. I thought this was merely sample bias, the vagaries of being in tourist areas (albeit before tourist season was in full swing) and discounted my impressions.

Turns out my sample may not have been so unrepresentative. The Wall Street Journal reports that Europe appears on the cusp of a bona fide recovery, with France and Germany both showing decent second quarter growth, while the US is trying to pretend that “things are getting worse less quickly” is tantamount to recovery.

Now are any of the Euro bashers about to give the EU authorities some credit? I doubt it.

And this disparity, if it persists, points to a much deeper issue. The US chose to deregulate across a wide range of activities and let the devil take the hindmost. Europe cares more about institutional frameworks and collective outcomes. US commentators regularly describe Europe a sclerotic. But if the EU winds up delivering better growth, what justification do we have for a system that seems best at redistributing income to teh top>

Now, of course, a large swath of the Continent is in the process of trying to renegotiate its social contracts with the electorate and things are not going well. Sclerosis is the least of the problem as the PIGGS discover that they simply can’t afford, or rather the debt markets will not allow them to deliver the promises made.

The point here, however, is not to scorn those who bought into the meme that the European social welfare state represented a higher level of evolution. Hell, I was tempted by that train of thought. It is to recognize that the critics of that system were more right than wrong.

The point that has been brought home with great force is that the European system is too expensive to maintain. In too many cases, it’s been funded with debt rather than current revenues and absent vibrant economies or bubbles pretending to be vibrant economies it drags down economies. Yes, the automatic stabilisers work at the outset but they quickly become a sea anchor in protracted downturns.

While a lot of this is obvious or becoming so, that hasn’t stopped a movement in the US towards a European sort of solution. The perpetual extension of unemployment benefits threatens to turn that system into a welfare program at not inconsiderable cost. The recession has brought home in graphic relief the problems within pension systems at the state and municipal level throughout the country. And, the Obama health care initiative while promising to be self-financing is based on assumptions and projected future actions that are dubious at best.

The current state of the EU should be a wake up call. It isn’t necessarily an argument against a judicious expansion of the American social contract so much as it is a lesson in the peril of recklessly adding unfunded benefits. They bleed you slowly in the good times and have the potential to destroy your society when things go south.

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