Europe Must Break The Welfare Habit

`Let us be bold. The French people expect it." So Prime Minister Alain Juppe exhorted the National Assembly when he opened debate on his plan to right his country's badly listing social security system. Savvy politician that he is, Juppe knows that the battle over welfare will be fought on the terrain of people's expectations. And that only boldness from himself and other political leaders--none of whom have been exactly brimming with it lately--will keep Europe's integration agenda on track and keep the region from falling further behind in the global economy.

Capitalism's triumph over communism may stand as the overarching economic event of this half-century. But few in Europe expected what they now face: an end to their social-democratic welfare way of life. There is no way to stop the downsizing of programs that reach from the essentials--such as cradle-to-grave health care and generous early retirement--to the extravagant--such as subsidized ski lessons.

Such programs thrived in an economy marked by steady growth, brief recessions, and easy employment. The welfare state even embodied a virtuous circle of social protection and economic growth. This salve of benefits soothed the wounds of war, kept communism at bay, and provided the basis of a postwar ideal: a collective European approach to shielding citizens from fear and want.

But mobile capital and global production now give wing to companies whose output once fueled the local welfare state. As governments piled on taxes to fund social-spending shortfalls, they generated disincentives to producing and working in Europe. Manufacturing is fast escaping to cheaper sites in Eastern and Southern Europe, the U.S., and Asia. Astounding waste is draining Europe of its wealth and threatening its place in the global race for capital, jobs, and markets.

Europe clearly isn't ready for Newt Gingrich and the slash-and-burn school of reform. But it must make a brutal break with some well-entrenched expectations: that individuals can rely on state-run pensions for a suitable retirement, that young workers need not demean themselves by gaining experience in low-paying service jobs, that employers can shoulder enormous contributions for social programs without hollowing out the national economy, and that merely paying taxes entitles users to consume as much health-care service as they like--even as providers pay no attention to incentives for more efficient delivery of social services.

Tough habits to break. And so far, Europeans haven't quite swallowed the notion that tough spending cuts--not just higher taxes--are required. Yet there's no question that the welfare state will change. The challenge for Europe is to muster the political boldness to change expectations, overhaul the welfare state, and retrofit itself to a hypercompetitive global economy. The alternative is financial crisis, economic decline, and social turmoil. These, too, would change European expectations, but at a much higher price.

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