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Lessons From The European Welfare State

May 27, 2016

By Allan Meltzer

Europe has become the model for how democratic capitalism can give way to the welfare state. Following a surge of market-driven growth after World War II, there was a rise across the continent in income redistribution and regulations intended to protect workers and consumers, and to achieve “fairness.” From the 1960s onward, high tax rates and heavy regulations slowed economic growth. And many welfare state programs became roadblocks to economic progress by resisting reforms and prolonging the current European recession. This essay neglects the immigration problem that complicates many of these issues, but immigration does not change the need for real economic adjustment.

Current economic problems and prospects differ substantially among European nations. At one extreme is Greece, where promises for pensions and other benefits have made the cost of producing uncompetitive. (An index rates Greece's competitive position at 3.8 on a scale of 10.) Greek workers can retire on full pension after working 37 years, so a worker who starts at 18 can retire with full pension at 55. Most other European countries use 65 as the age for retirement with full pension.

Recently, the Greek Parliament finally agreed to reduce pension costs as part of its preparation for the next round of negotiations. Greece has much experience with agreeing to adjustments that it is unable to achieve in practice. To remain in the European Monetary Union, Greece has been required to adopt “austerity” budgets that would require it to run a large budget surplus and retire outstanding debt. Greece promises but cannot achieve balanced budgets or reduce its enormous debt. France and Italy are not as far along to disaster as Greece, but their welfare systems are also difficult to reduce to regain competitiveness.

Read the full article at the Hoover Intitution: Lessons From The European Welfare State