Europe's Entitlement Reckoning
From Greece to Italy to France, the welfare state is in crisis.
WSJ Editorial
In the European economic crisis, all roads lead through Rome. The markets
have raised the price of financing Italy's mammoth debt to new highs, and on
Tuesday Silvio Berlusconi became the second euro-zone prime minister, after
Greece's George Papandreou, to resign this week. His departure may keep the
world's eighth largest economy solvent for the time being, but it hardly
addresses the root of the problem.
In Italy, as in Greece, Spain and Portugal and eventually France, the
welfare-entitlement state has hit a wall. Successive governments on the
Continent, right and left, have financed generous entitlements with high taxes
and towering piles of debt. Their economies have failed to grow fast enough to
keep up, and last year the money started to run out. The reckoning has arrived.
If the first step in curing an addiction is to acknowledge it, there is
little sign of that in Europe. The solutions on offer are to spend still more
money, to have the Germans bail out everybody else, or to ditch the euro so
bankrupt countries can again devalue their own currencies. France's latest debt
solution includes raising corporate, capitals gains and sales taxes.
Yet Europe's problem isn't the euro. If it were, Hungary, Iceland and
Latvia—none of which use the euro—would have been spared their painful days of
reckoning. The same applies for Britain. Europe is in a debt spiral brought
about by spendthrift, overweening and inefficient governments.
This is a crisis of the welfare state, and Italy is a model basket case.
Mario Monti, who is tipped to lead a new government of technocrats, once
described the Italian economy as a case of "self-inflicted
strangulation." Government debt is 120% of GDP, making Italy the world's
third largest borrower after the U.S. and Japan. Its economy last grew at more
than 2% a year in 2000.
An aging and shrinking population is a symptom, but not a leading cause, of
the eurosclerosis. A fifth of Italy's 60 million people are 65 or older and
make increasingly expensive claims on state-paid pensions and other benefits.
In fast-growing Turkey, only 6.3% fit that demographic. Italian women have on
average 1.2 children, putting the country's birth rate at 207th out of 221
countries.
But the bulk of the responsibility lies with politicians. Mr. Berlusconi,
Italy's richest man, promised a shake up each time he ran for office (in 1994,
1996, 2001, 2006 and 2008). He was the longest serving premier in post-war
Italy, from 2001 to 2006, controlled parliament and could have pushed through
reforms. He didn't. Promises to lower taxes and hack away at regulations and
protections for Italy's powerful guilds—from taxi drivers to pharmacists to
journalists—were broken.
"It is not difficult to rule Italy," Benito Mussolini once said,
"it is useless." The so-called concertazione, or concert,
of Italian coalition politics that brings together numerous parties in the
Parliament makes for unstable and indecisive governments. So does the fear
prominent in many European countries that any serious reform will provoke
street protests. An unhappy byproduct of a welfare state is that it creates
powerful interests that will fight to the last to preserve their free lunch, no
matter the cost to the country.
But now hard choices can no longer be postponed. And the solution to
Europe's debt crisis must begin with reforming, if not dismantling, the welfare
state. Europe rose from the economic grave in the 1960s, it rode the
Reagan-Thatcher reform wave to more modest growth in the 1980s-'90s, and it can
grow again. A decade ago, Germany was called the "sick man of
Europe," bedeviled by Italian-like economic problems. But a center-left
coalition, supported by trade unions and German society, overhauled labor and
welfare codes and set the stage for the current (if still modest) export-led
revival in Germany.
The road from Rome may now lead to Paris, Madrid and
other debt-ridden European countries. But this is no cause for U.S. chortling,
because that same road also leads to Sacramento, Albany and Washington.
America's federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and
is rising on an Italian trajectory. The lesson of Italy, and most of the rest
of Europe, is never to become a high-tax, slow-growth entitlement state,
because the inevitable reckoning is nasty, brutish and not short.
No comments:
Post a Comment