Introduction: Europe's Crisis and the Welfare State

By Tanner, Michael | The Cato Journal, Spring-Summer 2013 | Go to article overview

Introduction: Europe's Crisis and the Welfare State


Tanner, Michael, The Cato Journal


Margaret Thatcher once quipped about the problem facing modern social welfare states: "They always run out of other people's money." Today, in country after country, we are seeing that prophetic remark coming true. The headlines have been dominated by the problems of the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain), which face the most immediate economic crisis and have required economic support from the International Monetary Fund and other European countries. However, even countries with relatively robust economies, such as France and Germany, are facing unprecedented levels of debt.

Unless the countries of Europe reform their welfare states, they will face some combination of huge tax increases or default on their obligations, both explicit and implicit. The result will be social upheaval and continued economic stagnation. The tough choices facing those countries are playing out today in parliaments and on the streets. The future remains highly uncertain.

But how much better off is the United States? Our national debt exceeds $16.4 trillion and is increasing at a rate of more than $3 million per minute. And that only represents the debt that is actually "on the books." If the unfunded liabilities of Medicare and Social Security are included, then U.S. total indebtedness could top 800 percent of GDP.

The Fall of the Welfare State

The reason for this dire fiscal situation is the massive expansion of the welfare state that has taken place in the years following World War II, first in Europe but more recently in the United States. As government has taken responsibility for more and more areas of our lives--from retirement and health care to protecting us from unemployment or guaranteeing a minimum level of income--it has grown ever bigger, more costly, and more intrusive. At the most basic level, it has become unaffordable.

Despite an ever growing tax burden, it has become impossible to pay for all the demands of the modern welfare state. At the same time, simply attempting to pay for those demands has slowed economic growth and left citizens poorer. A vicious circle was created, leaving countries unprepared to react to the onset of financial crisis and the worldwide recession that followed. The result has been a painfully slow and anemic recovery.

The future of the welfare state is now open to question. Some argue that the financial insecurity illustrated by the banking collapse and recession demonstrate the need for a social safety net. Others tout the stimulative effect of government spending and warn that whatever long-term debt burdens countries may face, austerity in the short term would undermine recovery. Still others warn that only a fundamental restructuring and downsizing of the welfare state can restore a foundation for economic growth and prosperity.

With federal spending, debt, and deficits all at or near record levels, and entitlement programs such as Medicare, Medicaid, and Social Security facing enormous future shortfalls, this debate is particularly crucial to the United States. The lessons that America learns from Europe's crisis will go a long way toward determining future U.S. economic growth and prosperity.

Fundamental Questions

This special issue of the Cato Journal features articles from academics, economists, and politicians representing both Europe and the United States examining the crisis in Europe and the lessons that the United States can and should learn from Europe's problems. The authors attempt to answer such fundamental questions as:

* What brought about the economic crisis confronting Europe?

* What is the best way to analyze the underlying problems confronting European economies?

* Has the modern welfare state become unaffordable?

* How can countries adapt to changing demographics and aging societies?

* What does austerity really mean and should countries pursue it? …

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