Southern Europe’s Woes, Failure of the Welfare State?

It is tempting for right-wing commentators to equate Europe’s debt crises with the failure of the welfare state which, across the continent, is becoming unaffordable.

Charles Krauthammer made this case on the Fox News’ Special Report last week. “In the end,” he said, “it took this horrible recession and financial collapse to expose that fact and to make it unsustainable.”

The problem with that analysis is that even core eurozone economies that are highly competitive, including Germany and the Netherlands, have welfare states that may be unsustainable in the long term. They have higher pension ages and less generous unemployment benefits but in both nations, government spending accounts for roughly half of gross domestic product. But they’re not drowning in debt.

It not that they are welfare states that sets the high debt nations of Southern Europe apart. It is that, far more than is the case in the north, the existence of extensive welfare provisions has fomented an entitlement mentality in the region that, in combination with a political system that is prone to clientalism if not outright corruption, makes for a deadly cocktail of decline.

Sam Bowman of the free market Adam Smith Institute hints at this when he explains why Southern European governments are so hostile to the fiscal and market reforms (known as “austerity”) which they are expected to implement as a condition for financial support.

Clients of the state — the various interest groups comprising interconnected banks, public-sector workers, pensioners, subsidized and otherwise protected businesses and others — appear to be so embedded in the political fabric of the eurozone states that policies for the good of the country, such as orderly bank defaults or radical competitiveness reforms, are impossible.

It is not something that can’t be overcome. Sweden, during the 1990s, demonstrated quite convincingly that even a country that is deeply ingrained in a philosophy of collectivism, can escape the cycle of self defeating corporatism if push comes to shove.

The Greeks, the Spaniards and, to a lesser extent, the Italians don’t seem prepared to accept the sort of changes that the Swedes enacted at the time and which have made theirs one of the most competitive and prosperous economies in the world.

Asia Times Online‘s Spengler columnist, David P. Goldman, believes that the critical difference between north and south in one of mentality. He writes, “the Mediterranean countries combine a premodern hostility toward central government with a postmodern indifference to the national future.”

At just 1.4 children per female, Italy and Spain have some of the lowest fertility rates in the world, which is to say that its citizens are unlikely to sacrifice their pleasures and prerogatives for a national future to which they do not contribute by raising children. Neither country’s elite evinces a sense of national obligation. To pay taxes is to play the fool.

This certainly applies to Greece in great measure where tax evasion is rampant and millions voted for a political party that promised to tear up the terms of the country’s €130 billion bailout even if they wanted to remain part of the euro.

But Spengler also points out that there is an exception. In Portugal, voters seem by and large resigned to the austerity measures that are being implemented in exchange for a €78 billion bailout. Portugal’s labor participation rate is much higher than Greece’s while the informal sector is smaller, something Spengler sees as evidence of a greater “public spiritedness” on the part of the Portuguese people.

So it’s not just the welfare state nor can we blame Southern Europe’s problems on a Mediterranean sense of civil duty (or lack thereof) for Portugal stands out. Then what?

Cameron Brings Northern Europe Together

During a two day Nordic Baltic Summit, the British prime minister said that, “right across the north of Europe there stretches an alliance of common interests.” He believes Britain, Scandinavia and the Baltic nations can lead in European job growth and prosperity.

Political and business leaders from Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden joined Prime Minister David Cameron for the summit in London. There is much the countries have in common, he professed. Read more “Cameron Brings Northern Europe Together”

Economic Freedom in Denmark and Sweden

Every year The Wall Street Journal and the conservative Heritage Foundation publish the Index of Economic Freedom which ranks countries according to ten indicators that affect market freedoms throughout the world.

For several years now, Australia, Hong Kong, New Zealand, Singapore and Switzerland have made up the top five of economically freest countries in the world. Government spending as a share of national income is relatively low in these states; property rights are well protected while investment and trade can take place with few restrictions. Much of the developing world ranks poor by comparison. North Korea is at the very bottom of the list.

What is notable is that otherwise extensive welfare regimes as Denmark and Sweden rank relatively well — eighth and twenty-second in the world respectively.

A closer look at these countries’ rankings reveals that while government spending is extremely high, more than 50 percent of GDP in both Denmark and Sweden, in most other areas, they perform exceptionally well. Taxes are high, especially in Sweden which has a “burdensome income tax rate” according to the Index, but otherwise both Scandinavian nations are very free economically.

With its economy open to global trade and investment, Denmark is among the world leaders in business freedom, investment freedom, financial freedom, property rights and freedom from corruption. The overall regulatory and legal environment, transparent and efficient, encourages entrepreneurial activity.

The same is true for Sweden, albeit to a slightly lesser degree. Whereas Denmark has flexible labor laws, regulations in Sweden remain rigid. “The non-salary cost of employing a worker is high and dismissing an employee is costly and burdensome.”

Both countries maintain open borders to trade and investment from abroad at the same time. Corruption is perceived as almost nonexistent while property protection is solid. Neither government interferes much in small- and medium-sized businesses. Starting a company is simple and straightforward. The business framework in both Denmark and Sweden is highly conducive to innovation and productivity growth.

It’s just too bad they tax their people so heavily.

The Rise of a New Right in Europe

Old-school socialists may allege that the credit crunch once and for all proved that free-market capitalism and globalization had failed yet across Europe, a new generation of liberal and conservative politicians is stepping up who favor even smaller government.

In the wake of the financial crisis, social democrat and labor parties across Europe lost ground to both their larger conservative counterparts as well as third or fourth party liberals who championed deregulation and austerity. As countries braced for spending cuts this summer, from Britain to the Netherlands to the Czech Republic, voters had greater confidence in candidates who were frank about the need to slash public spending than politicians on the left who resisted any suggestion of welfare reform. Read more “The Rise of a New Right in Europe”

Fear of Change Propels Populists to Power

Throughout Europe, fringe movements have been able to maneuver themselves into the political spectrum, rallying anti-immigration forces and a renewed sense of nationalism with considerable electoral success. While the world is globalizing and Europe becoming one, millions of people, from Finland to Italy, want to have no part of multiculturalism and change. Read more “Fear of Change Propels Populists to Power”