Dat ’t Europese Sociale Model haar maximale houdbaarheidsdatum heeft overschreden en inmiddels sterk aan bederf onderhevig is, zal voor regelmatige lezers van de Vrijspreker niet als een verrassing komen. Workforall, een Belgische denktank die al eerder een uitgebreide studie deed naar de overeenkomsten tussen collectieve uitgaven (de grootte van de overheid), belastingen en welvaart, presenteerde onlangs een nieuw rapport over Europa’s ziekelijke Sociale Model. De eindconclusie: Europa danst op de Titanic !
De econoom Hans Labohm schreef er een artikel over op TechCentralStation. Een must read – vandaar hieronder ’t volledige stuk:
Social Model Myths
Earlier I wrote about a report on the Celtic Tiger published by WorkForAll, a young, independent free market think tank, based in Leuven (Belgium), the town which is also home to the Ludwig von Mises Institute. Recently WorkForAll came out with a new report by Martin De Vlieghere, Eric Verhulst, and Paul Vreymans on Europe’s ailing social model. The message? Dancing on the Titanic!
The authors argue that the future of Europe’s generous welfare state model is at stake. It is not capable of coping with the challenges of globalization. While the world’s economy is booming at an average rate of over 4 percent, Europe is stagnating at just 1.5 percent. But even in the absence of those challenges, it is likely to collapse under the combined weight of its massive public debt and its hidden liabilities, as a result of Europe’s pay-as-you-go public pension schemes.
Unfunded pension liabilities now average some 285 percent of Europe’s GDP, more than 4 times the officially published public debt figures. Total public liabilities are causing runaway debt service. Referring to a study by Richard Disney, the authors point out that if social policies are kept unchanged, tax hikes by as much as 5 to 15 percentage points will be necessary over the next couple of decades, only to avoid the indebtedness from increasing any further. They fear that this will kill economic growth completely.
The experience over the past decades has proved that Keynesian expansionary policies, both budgetary and monetary ones, have failed. The only obvious effects have been asset inflation and speculative bubbles. As an alternative the authors advocate the strengthening of the supply side of the economy and the reduction of taxes. Referring to analyses by the American economist James Gwartney, they emphasize the close relationship between the tax burden and economic growth. The higher the level of taxation, the lower the growth rate, since high taxes have a negative impact on incentives.
Against this background it is no surprise that they regard Ireland as a role model for Europe. The Irish economy has been booming at an annual growth rate of over 5.6 percent for over 20 years now. In barely 18 years Ireland jumped from the 22nd to the 4th ranking position in OECD’s pecking order. At 33 percent, the Irish overall tax burden is the most moderate in Europe. Ireland also has a unique fair-flat-tax structure, which evenly spreads the weight of the tax burden over profits, labor and consumption. This unique tax structure is key to the Irish success. Contrary to the rest of Europe’s incentive-undermining tax structure, the Irish tax model provides positive stimuli to participation, saving, investment and enterprise.
What about the Scandinavian model(s)? Despite the overwhelming success of the Irish alternative, supporters of a sizeable role of the state in the economy continue to plead in favor of the Scandinavian model. But, as the authors argue, Scandinavian policies have proved to be particularly inefficient. Scandinavia has gone through a long period of steady decline with poor growth and low job creation. In 1970, Sweden’s level of prosperity was one quarter above Belgium’s. By 2003 Sweden’s position in the prosperity index had fallen from number 5 to 14, two places behind Belgium. According to OECD figures, Denmark was the third most prosperous economy in the world in 1970, immediately behind Switzerland and the United States. In 2003, Denmark was seventh. Finland did badly as well. From 1989 to 2003, while Ireland rose from 21st to fourth place, Finland fell from ninth to 15th place. Together with Italy, the Scandinavian countries are the worst performing economies in the entire European Union.
Rather than taking them as an example, Europe’s politicians should shun the Scandinavian big-government recipes. If there is anything to be learnt from the Scandinavian experience it is that Scandinavia succeeds in making a more efficient use of public resources, through investment and innovation. Nevertheless even their strict restrictive unemployment policies will never result in higher growth as long as they stick to big spending policies and oversized governments.
All in all, the new WorkForAll report offers a clear and forceful message. Those who have still confidence in big government will undoubtedly retort that not all government expenditure is waste and that besides economic growth, some degree of income equality is also a valuable objective in itself, which can only be achieved by a sizeable amount of government intervention. But then, of course, it raises the question whether the present European welfare state is sustainable. More likely than not, this is not the case. The combined burden of its public debt and (hidden) pension liabilities seems to become its Achilles heel.
Will Europe be able to act in time in order to extricate itself from its quandary? Witnessing the excessive public outcry in France against the proposed tiny little step to liberalize the labor market, the answer is still “no”, alas.
Hans Labohm is a TCS contributing writer.