Can EU nations still afford expensive welfare programs?

To follow is an excerpt from the Overview of the CQ Global Researcher on "Social Welfare in Europe" by Sarah Glazer, August 2010:

Gema Díaz, 34, counted on a range of benefits to supplement her relatively low salary when she took a job as a purchasing agent with the city of Madrid. Now, as Spain initiates a fiscal austerity campaign, she is seeing those benefits eaten away. Her $2,000 a month salary, like those of all public employees, is being cut by 5 percent; her pension is likely to be frozen instead of growing with the cost of living as guaranteed by Spanish law; her subsidized child care will cost more. Even the $3,300 baby bonus she was depending on when her second child is born in August is being eliminated.[Footnote 1]

Governments across Europe are expected to cut back on their legendarily generous social welfare programs as they attempt to deal with the current economic crisis, most notably mounting deficits that threaten the integrity of the euro. Joining Spain recently in announcing cutbacks and higher taxes are Greece, Italy, Ireland, Portugal, Denmark, France and Great Britain.

Europe's cradle-to-grave welfare provisions — from universal health insurance and subsidized child care to generous unemployment and retirement benefits — have often been proudly touted as “social Europe” — a place where social solidarity and protection from poverty are assured, compared to the more individualistic sink-or-swim philosophy of America.

Conservative economists have long argued that generous welfare states are a drag on European economies, making them less dynamic and less productive than the United States. In exchange for a less secure system for those down on their luck, they argue, the United States provides greater mobility up the income ladder and a more flexible labor market. Historically, people are fired more easily in the United States than in Europe but also hired back more quickly following economic recessions.

Unemployment benefits, which are typically more generous and last longer in Europe, can be followed by welfare payments with no fixed time limit in countries like Britain, Germany and the Netherlands. “The more you spread the safety net, the easier it is to be unemployed and the more people will be unemployed longer,” says Vincent R. Reinhart, a resident scholar at the American Enterprise Institute (AEI), a conservative think tank in Washington. “Those economies that have more elaborate safety nets are ones that grow a little slower.”

Although the American economy grew faster than Europe's devastated nations in the aftermath of World War II, much of that growth in total national income, or gross domestic product (GDP), was due to America's expanding population and immigration. If measured on a per-person basis, most rich countries actually enjoyed their highest growth rates in the era of the big welfare state, 1975–2006.[Footnote 2]

Studies of the last 15 years show “European welfare states grew just as fast if not faster than the United States,” says Timothy Smeeding, a professor of public affairs and economics at the University of Wisconsin-Madison and coauthor of the new book Wealth and Welfare States. Smeeding and his coauthors argue that welfare programs plus capitalism “make nations rich.” When public education — not usually considered welfare — is counted along with health care and Social Security, the United States is one of the nations that has benefited from its welfare programs, though tilted heavily toward public education.[Footnote 3]

And going from rags to riches, long a staple of the American dream, turns out to be easier in welfare-state Europe than the United States, judging from recent international comparisons of men's ability to move out of their father's economic class. Although America boasted greater economic mobility than Europe in the postwar economic boom, since 1975 those at the bottom of the income ladder have had a harder time climbing up as the economy slowed.[Footnote 4]

One reason may be that the United States has lost its historic lead in education, including the percentage of citizens with college degrees. European countries, many of which offer free preschool education and free university education, have caught up and surpassed the United States, measured by college degrees and test performance.[Footnote 5]

“The well-to-do in America can afford to do anything they want for their kids (including paying for college). Others can't. We have less mobility in the United States because the main system for mobility — education — doesn't work as well,” Smeeding says. And almost all of the growth in income recently has been limited to those Americans with college educations.[Footnote 6]

Ron Haskins, a conservative champion of American welfare reform at the Brookings Institution think tank, used to believe that Europe was “socialist and soft” on unemployed welfare recipients, he says, but his recent research on work requirements has revealed that Europe “really wants to get people back in the labor force as fast as possible; that's the focus of their policy.” Recent trends suggest some European countries are more successful than the United States in getting adults back to work. Since 2002, the United States has dropped from first place in the share of its population that's employed to third behind the Netherlands and Britain, according to Organisation for Economic Co-operation and Development (OECD) data.

In the current economic crisis, to what extent will European governments rethink the generosity of their welfare systems? So far most of the attention has focused on freezing pensions and delaying retirement ages. Europe faces a growing retiree population, but declining fertility rates mean there will be a relatively smaller work force that won't be able to support social security systems funded by current workers' payroll deductions. Even France, whose government avoids the mention of fiscal austerity, has proposed raising the legal retirement age from 60 to 62.

Despite some proposals to cut other programs, like benefits for children, most experts think it unlikely that European governments will remove the foundations of the welfare state. “So far, I don't think you could find any cutbacks that are in any serious way undermining the cornerstones of the welfare state as such,” says Gøsta Esping-Andersen, a prominent welfare expert and sociologist at Pompeu Fabra University in Barcelona. He calls the cutbacks in Spain “desperate measures conceived of as a temporary stopgap” in response to pressure from international markets. “I don't think any of these reforms are aimed at long-term erosion of the welfare state.”

But the crisis has revived the long-standing debate over whether welfare states detract from economic growth or contribute to it by providing healthier, better educated, better paid workers. As the recent street protests in Greece, France and Spain indicate, changes to the welfare system could threaten social peace within European countries.

Tougher economic times could lead so-called Eurozone countries to turn against the more marginal members of their society who benefit from the generosity of welfare benefits. Denmark recently capped its monthly per-child cash benefits, a political move aimed at immigrant families with large numbers of children, Danish-born Esping-Andersen says. Denmark's coalition center-right government depends on the anti-immigrant Danish People's Party for support.

“The debate is pretty intense pitching to a rather strong electoral group that thinks we shouldn't coddle immigrants as much as in the past — that they are sucking too much out of the welfare state,” he says. The Social Democrats, Denmark's party of the welfare state, “see this as a direct threat to the basic values of solidarity and universalism,” he notes.[Footnote 7]

The European Union's economic interdependence, demonstrated by the current euro crisis, means rich European countries could become more like the United States — less willing to redistribute welfare benefits to poorer, failing countries outside their own homogenous “tribe,” Richard Burkhauser, professor of economics at Cornell University, predicts. “My sense is the Swedish tribe thinks they have enough moral cohesion to control all members of their tribe, so they don't have to worry about the behavioral consequences of a guaranteed income in Sweden,” he says. Employed Swedes are comfortable paying cash transfers to fellow citizens who don't work, because they attribute it to bad luck, not laziness, most experts agree. But as some countries face mounting debt and unemployment, “even the Swedes won't be willing to do that for the Spanish, let alone the Slovenians,” Burkhauser predicts.

Still others say the welfare states are crucial to keeping peace among the bloc's diverse countries. As the recent protests against welfare cuts suggest, if countries like Greece, Spain and Portugal find the violation of their social contract too disruptive, they could defect from the European Union, potentially threatening the euro and the common economic bloc. For some on the Left and much of the French political class, the fear is that “the high-cost social welfare model” can't be maintained by small individual countries in the face of global competition without the combined economic power of the EU, The Economist magazine recently noted.[Footnote 8]

The Issues:
*Do Europe's generous social welfare programs make its economies less productive than the United States?
*Do European welfare states have less social mobility than the United States?
*Can European welfare states afford their generous benefits?

For more information see the CQ Researcher report on "Social Welfare in Europe" [subscription required] or purchase the PDF

[1] Suzanne Daley, “Safety Net Frays in Spain, as Elsewhere in Europe,” The New York Times, June 27, 2010.
[2] Irwin Garfinkel, Lee Rainwater and Timothy Smeeding, Wealth and Welfare States: Is America a Laggard or Leader? (2010), pp. 32–34.
[3] Ibid., p. v.
[4] Julia B. Isaacs, “International Comparisons of Economic Mobility,” Chapter III, p. 1, in Isaacs, et al., “Getting Ahead or Losing Ground: Economic Mobility in America,” Brookings and Pew Economic Mobility Project, February 2008.
[5] See Garfinkel, et al., op. cit., pp. 80–84 and Organisation for Economic Co-operation and Development.
[6] Thirty-eight percent of 55-64-year-olds have an associate degree or higher-a higher percentage than most European countries for that age group. But for 25-34-year-olds, Norway, Ireland, Belgium, Denmark and France have a higher percentage of college graduates, and Spain and the United Kingdom have the same percentage-39.2 percent; “Education at a Glance,” Organisation for Economic Co-operation and Development, 2008; “Percentage of Adults with an Associate Degree or Higher by Age Group,” data from Timothy Smeeding.
[7] Denmark's ruling center-right Liberal Party governs Denmark in a coalition with the Conservative Party and the anti-immigrant Danish People's Party. The Social Democratic Party, Denmark's second largest, has been a strong supporter of redistribution under Denmark's welfare state. See “Denmark Freezes Welfare Payments,” Ice News, May 30, 2010.
[8] “Staring into the Abyss,” The Economist, July 10, 2010, pp. 26–28.