Europe's Problem Isn't the Welfare State -- It's Political Will

Last Updated May 12, 2010 1:31 PM EDT

There's a lot of hyperventilating about how the European welfare state is ending, or needs to end, since the EU and the IMF agreed to a nearly $1 trillion package over the weekend. But don't give in to the temptation to view Greece as a proxy for all of Europe.

Some of this bloviating emanates from predictable sources who take the facts of a crisis and reach some very flawed conclusions about the welfare state. Larry Kudlow, a devoted rightist, gives plenty of this on his blog. James Pethokoukis, who sometimes refers to Kudlow as The Great One, echoes it on his own blog:

The euro currency has been compromised and the European welfare state continues. Not good.
Then there's the Washington Post, which opines on A1 about how the European social contract has been "generous to workers and retirees but has become increasingly unaffordable." A little later you get a gentle qualification of this generalization -- "particularly in the south," the Post's Howard Schneider says -- but the article then steams ahead with its thesis.

Fiscal adjustment = dismantling of welfare states. It's the kind of logic that led Karl Marx to call ideology a camera obscura -- an intellectual device that distorts your view of reality.

So, some useful realities before we sound Taps on the European welfare state, or rather, some ideologues' caricature of it:

  • There's a reason the German Bund is a benchmark bond issue -- Germans don't default. And the Germans, under Bismarck, invented the modern welfare state. The two can go together.
  • Some European states with large welfare states do quite nicely. Denmark calls its model "Flexicurity," and marries generous unemployment benefits to minimalist hire-and-fire laws. The Netherlands has the Polder Model. Austria makes the classic continental model do rather well. All fiscally sound too.
  • When you talk about the fiscally unsound European welfare state, is it universal health care you object to? Well, don't. There is no economically rational reason to argue it is bankrupting Europe when Europeans manage to be healthier than Americans at a lower cost. (Employer-provided benefits are a competitive disadvantage for U.S. firms, too).
  • Finally, the European welfare state has, in many countries, undergone a degree of transformation that would have been hard to image 20 years ago. After a year on unemployment in Germany, you get knocked back to a bare-bones existence. The Germans agree with Ronald Reagan: the best thing for society and the individual is productive work.
The problems that led European leaders to hash out their rescue package reflect other problems.

One, obviously, is the problem of uneven economic development within a single currency zone. The euro shielded Greece from market discipline until it was too late, and then prevented the traditional adjustment -- devaluation -- that's called for at a time like this. The rules Europeans designed to stop this from happening failed; they need better ones.

Then there's the question of political will. Greece resembles a failed state. Not that a measure of social security cannot work, it's that repeated governments in Athens have failed to rise to the challenge, especially when it comes to the country's bloated pension system.

In short, Europe's problems have less to do with the fundamental economic model than a governance problem at both the national and supra-national level. Does the welfare state work by itself -- "Look ma no hands!" -- without proper attention?

Of course not. No system does. In fact, pretending that you can simply let unbridled capitalism rip and roar is what got us a financial crisis in the first place.

Image from wstera2 via Flickr

  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.