The Welfare State Is Eating Europe Alive

July 10, 2012 by  Filed under: Credit 

Western Europe is being consumed by a crisis that seems to be both insoluble and unending. Its adored welfare state is eating Western Europe alive. The crisis has been a long time coming. Decades of ever-greater social benefits, that were borrowed and not paid for. In country after country, the debt burden has become unsupportable.

Looking back it now seems obvious that the final straw that broke the camel’s back was the creation of the Euro currency in 1999.

The requirements for Euro membership seemed modest at the time and certainly within the historic means of any advanced first world nation.

A national budget deficit of no greater than 3% and a debt to GDP ratio of no greater than 60% of the gross domestic product. At the time, this was regarded as no great challenge unless you were a banana republic. What no one realized at the time was that hitherto responsible western European nations were turning into banana republics.

Historically people supported the state by paying taxes. They paid taxes to build bridges and roads and dams and schools etc. They paid to support the state. Nobody lived off the state. The state did not support them and then everything changed. Economists have a word for this change it is called transfer payments.

Major examples of transfer payments would be social security, unemployment benefits, welfare and disability payments. With the rise of transfer payments, the very nature of the relationship between the people and the state changed. To an ever-increasing degree, taxes were not paid for the traditional purposes like building and maintaining the national infrastructure. The state in its new role was robbing from Peter who worked to pay Paul who did not.

For all practical purposes, the welfare state was born in Europe after World War Two.

Although you can trace its antecedents back to the early 19th century.

The political elites who were crafting the welfare state were smart enough to know that if they directly taxed the workers to support the monstrosity that they were creating they would revolt. So they fudged the issue by borrowing like a banana republic. They calculated that they would be long gone when their debt-ravaged states blew up.

Since most of them had been models of rectitude since the end of the Second World War, investors were slow to realize that they were turning into banana republics.

Much is being made today of the alleged differences between what is often referred to as the Club Med nations of southern Europe and the stern, responsible nations of northern Europe led by their champion, Germany. This works only if you do not look too closely at Germany. The debt/GDP average for both Germany and the 17 Euro nations as of 2011 was almost exactly the same at 85%. This is shockingly high, almost banana republic territory.

Granted this looks good when compared to Greece with a debt/GDP ratio of 140% or Italy with a debt/GDP ratio of 120%.

What the welfare state produces above all else is an ever-growing army of bums and parasites. When you stop to think about it, the smart money move in a welfare state is to become a bum and live off of the state. As time progresses more and more people realize this and elect socialist leaders who make promises that cannot possibly be fulfilled.

A classic example of this is the recent act of France’s new socialist president, Francoise Hollande who proclaimed that in the name of social justice he was dropping the age of retirement in France from 62-60 and raised the minimum wage. Two acts that are guaranteed to make France less competitive. As result of this act France now undoubtedly has the smallest working age population is relation to its total population in its history. This in a country with zero population growth. This working age population must now attempt to support an enormous and ever growing population of retirees and parasites who are bleeding the country white.

Spain has become an example of what the endgame looks like. The Spanish minister of finance has recently submitted the state budget for 2012. Pensions, unemployment benefits and interest on government debt are expected to consume a crushing 56.8% of the total budget. Can you say welfare state?

Fred Carach is the author of Forty Years A Speculator. His blog is

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