What we’re seeing in Greece is the death spiral of the welfare state. This isn’t Greece’s problem alone, and that’s why its crisis has rattled global stock markets and threatens economic recovery.
Virtually every advanced nation, including Canada and the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven’t fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.
North Americans dislike the term “welfare state” and substitute the bland word “entitlements.”
Vocabulary doesn’t alter the reality. Countries cannot overspend and overborrow forever. By delaying hard decisions about spending and taxes, governments maneuver themselves into a cul-de-sac.
To be sure, Greece’s plight is usually described as a European crisis – especially for the euro, the common money used by 16 countries -- and this is true. But only to a point.
Euro coins and notes were introduced in 2002. The currency clearly hasn’t lived up to its promises. It was supposed to lubricate faster economic growth by eliminating the cost and confusion of constantly converting between national currencies. More important, it would promote political unity. With a common currency, people would feel “European.” Their identities as Germans, Italians and Spaniards would gradually blend into a continental identity.
None of this has happened. Economic growth in the countries using the currency averaged 2.1 per cent annually from 1992 to 2001 and 1.7 per cent from 2002 to 2008.
Multiple currencies were never a big obstacle to growth; high taxes, pervasive regulations and generous subsidies were. As for political unity, the euro is now dividing Europeans. The Greeks are rioting. The countries making $145 billion in loans to Greece – particularly Germany – resent the costs of the rescue. A single currency could no more subsume national identities than drinking Coke could make people American. If other euro countries (Portugal, Spain, Italy) suffer Greece’s fate – lose market confidence and can’t borrow at plausible rates – there would be a wider crisis.
But the central cause is not the euro, even if it has meant Greece can’t depreciate its own currency to ease the economic pain. Budget deficits and debt are the real problems; they stem from all the welfare benefits (unemployment insurance, old-age assistance, health insurance) provided by modern governments.
The welfare state’s death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day – no one knows when – doubt governments’ ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy.
Perversely, that would make paying the remaining benefits harder.
Greece illustrates the bind. To gain loans from other European countries and the International Monetary Fund, it embraced budget austerity. Average pension benefits will be cut 11 per cent; wages for government workers will be cut 14 per cent; the basic rate for the value-added tax will rise from 21 per cent to 23 per cent. These measures will plunge Greece into a deep recession. In 2009, unemployment was about nine per cent; some economists expect it to peak near 19 per cent.
If only a few countries faced these problems, the solution would be easy.
Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states.
Robert Samuelson writes for The Washington Post.