The end of the welfare system as we know it?

By Anna McLauchlin

Date: 14/04/05

Ask most economists and they will tell you that the welfare system as we know it in Europe today is doomed.

Unemployment remains high in many member states, most notably Germany where last month figures hit a post-Second World War record of 12% but also in France, where unemployment is currently running at a five-year high.

Ever advancing medical technology has pushed up healthcare costs to a level where they are becoming difficult to sustain, and this is set to worsen with the impending demographic time bomb.

According to the latest figures released on Friday (8 April) by the EU's official statistics office Eurostat, the number of people over 65 years of age will rise to nearly 30% of the EU's population from 16.4% in 2004.

The ageing of our population also has well documented implications for public pension systems. Eurostat estimates that by 2050, four people will be working for three retired people in the 25 member states. In 2004 two people worked for every one inactive person.

Added to this is the fact that EU government spending is constrained by the fiscal rules laid down in the Stability and Growth Pact, although the recent weakening of the rules will allow governments more leeway when they are battling sluggish growth rates.

Faced with these challenges, it is understandable that many economists predict the end of the European welfare state. The figures, they say, simply do not add up.

Proposed solutions lie along various different avenues. At a recent conference, Donald Johnston, the secretary-general of the Organisation for Economic Co-operation and Development, said that there were no cure-alls, but insisted that benefits would have to be reduced.

Some favour the phase-out of public pensions in favour of privately funded systems. Encouraging fertility rates is also possible, but only if governments are prepared to take on the difficult task of enabling families better to marry their work and home lives.

Getting more people into the workforce is a major target, as it will not only reduce benefits but also add to the number of people paying into dwindling public coffers.

Here the EU is trying to do its bit with its initiative for growth and jobs for the Lisbon Agenda, but it relies on the political will of member states. The European Commission's recent Joint Employment Report shows that employment has stabilised at 63% across the EU and that governments would need to create 22 million new jobs to meet the Lisbon target of 70% within the next five years. Rates for women and older workers have stagnated at 55% and 40%.

Migration is another avenue to pursue, but is not without its drawbacks. The high cost of employment in western Europe is already seeing companies relocate their production units where labour is cheaper, which may cancel out any positive migration of skilled workers into the region as a result of EU enlargement. At the same time, high welfare can attract benefit seekers, which will not enhance employment figures.

Whether migration within the EU becomes a help or a hindrance could depend on the welfare model chosen by the new EU member states, which have so far followed the Anglo-Saxon social model, if they begin to see good growth as a result of joining the EU. Henri Lourdelle from the European Trade Union Confederation (ETUC) argues that good social protection is likely to emerge as a result, although this is not borne out by the political leaning of the governments at the moment.

Whatever the outcome, migration cannot be a panacea. A report from global consultants McKinsey this month estimates that in Germany, a 50% increase in net immigration to 100,000 people a year would only raise total financial assets by 0.7% by 2024.

The dilemma is a political one as much as it is an economic one. Right-wing politicians tend to consider the issue on its financial merits alone, and therefore come to the conclusion that the current benefit systems are unsustainable.

Socialists believe that the priority must be to uphold the European social model and solutions found to support it.

Lourdelle argues that it is a question of choice. "If you fix your objective that standards must be maintained, then it becomes a question of where the money will come from," he says.

Article discusses the negative predictions of economists for the European welfare state.