The European Welfare State Is Collapsing
European governments overlooked the necessity of fostering economic growth and productivity to finance the welfare state.
By Daniel Lacalle
The welfare state was never sustainable but was created as an affordable luxury that rich economies could finance with strong economic growth and a solid productive sector. However, European governments overlooked the necessity of fostering economic growth and productivity to finance the welfare state.
Furthermore, as left-wing populism permeated all segments of the European political landscape, politicians started to include more and more so-called “rights,” which became entitlement costs and subsidies, in a trend that led Europe to forget to create wealth and focus entirely on extractive and confiscatory policies.
We have seen a gradual destruction of the productive sector, asphyxiated by constantly raising taxes and bureaucratic and regulatory limitations, while government budgets expanded without control.
The economy of the European Union operates on an inverted economic model. It puts entitlement spending as its pillar, instead of seeing that the welfare state is, at best, a consequence of wealth creation, not a cause. Without a thriving private sector, there is no welfare. Politicians should understand that you cannot provide citizens with social programs if the productive economy is weakened by political design.
In the latest Eurostat estimates, the ratio of social insurance pension entitlements to GDP was between 200% and 400% in European economies. Unfunded financial commitments are so large they will only be paid in a massively weakened currency if the current economic policies continue.
France is the prime example of this “upside down” approach to the economy. Putting entitlement spending at the forefront of economic policies has led to decades of stagnation, high debt and deficit, and social discontent. Taxpayers are tired, and recipients of entitlements are relegated to a dependent subclass.
The trick is the following: Government spending soars, and everything spent is justified under the banner of “social spending.”. Deficit and debt rise, so the government increases taxes to balance the budget. If the economy grows, spending grows faster, and if the economy enters recession, the government spends even more to “protect” citizens. Thus, taxes rise even faster.
The constant process of expropriation of productive wealth becomes a burden on growth, investment, and productivity. Furthermore, more taxes generate lower incremental revenues and a demotivated business and workforce community that finds it impossible to thrive alongside the burden of bureaucracy and taxation.
Macron says that Europe is “underleveraged.”. The statement is incorrect, of course, but it is even less believable when we look at all the unfunded commitments.
Europe needs to abandon the current high taxes and bureaucracy and cut unnecessary spending so the pension and healthcare systems remain viable. This means slashing budgets and eliminating political spending. However, no political party wants to do it because thousands of their members depend on government jobs. The situation is so desperate that European nations cannot even increase the much-needed defense budget despite acknowledging the urgency of improving investment in security.
Europe’s welfare state became the welfare of the state at the expense of its businesses and taxpayers. The European Union has human capital, great businesspeople, and entrepreneurs. However, it is being destroyed from the inside by a political class that would rather see high inflation and a weaker currency than reduce its grip on the economy.
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About Daniel Lacalle
Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers “Life In The Financial Markets” and “The Energy World Is Flat” as well as “Escape From the Central Bank Trap”. Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE. View all posts by Daniel Lacalle
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