The criticism of EuroZone government for the last few years has focused on Greece, a small country with huge public debt and deficits when the Global financial crisis struck in Y 2008.
But, when it comes to overspending on social welfare it is all of Europe, not just Greece.
I was watching a travel show in PBS recently and it spoke about the Scandinavians and what good places they were for their citizens, by good the commentator meant that the State takes good care of its citizens and the taxes are very high.
Those governments that looked to be in sound fiscal shape in Y 2008, were then scrambles by unsustainable private-sector debts, they were spending too much and have to restructure. The only question that analysts and economist ask is; gradual, or shock treatment.
Scandinavia aside, lets have a look at the 4 countries at the center of the EuroZone crisis: Ireland, Greece, Portugal and Spain. No matter what you have heard, Italy is in pretty good shape. The Key 4 have 3 Key issues in common.
1. the total debt in these countries expanded rapidly throughout the past decade, either because of increased government borrowing, ie Greece and Portugal, or through a rapid buildup of private debt, ie Ireland and Spain.
2. they ran substantial current-account deficits in the years before the Y 2008 crisis.
3. government spending grew quickly.
In Greece and Spain, nominal spending by the state increased 50 to 55% in the 5 yrs before the crisis began.
In Portugal, public expenditure rose 35%t; in Ireland, almost 75%. No other country in the EU equaled or came close to those numbers.
The welfare-state expansion in Greece, and Portugal was part of the reason these 2 countries required ECB o bailouts.
Ireland and Spain had problems with the rapid expansion of the state, as well.
A part of rising affluence during the boom years was generated by escalating real-estate values, that is what caused private debt to rise, this also occurred in the US.
Ireland and Spain boosted their construction sectors and, drove domestic consumption to the point where Spain had to borrow as much as 8% of GDP every year to finance its current account deficit.
Like other Bubbles, they spearheaded economic growth, which allowed governments to expand the state entitlements rapidly and they did do that.
When the growth came to a grinding halt with the credit freeze all the glittered was fool's Gold and inflation fueled and credit driven prosperity was not sustainable anywhere and the Bubble burst.
Solid fiscal surpluses were quickly turned into high structural deficits.
Spain entered Y 2008 with a budget surplus of slightly more than 2%, and ended Y 2009 with a structural deficit of 9% according to the data.
This has been the story during the crisis. But, very few people in Europe (and the US pols and citizens) have cared to understand the role that the welfare state played in creating the Global financial mess
The European debate took on 2 our of phase positions, both bordering on caricatures as the Keynesians vs. the Germans.
The Keynesian school likes a cradle-to-grave welfare state and sees Europe's main problem to be a insufficient fiscal expansion once disaster struck.
The German school blames the entire EuroArea crisis on over blown budget deficits and a lack of fiscal discipline.
The Keynesian side see thrift Evil, the Germans sees deficits as Sinful.
Each has its solution: Keynesians call for a government-spending spree, Germans for purification by sacrifice.
Both sides do not understand that a rapid expansion of state spending is the Key component in most economic crises, and that the composition of expenditure growth causes particular problems for post Bubble economies.
A Spain's social-security systems expanded, (it has roots in Franco Fascism) in size and benefit levels, at the same speed as general economic growth. Thus, driving up government spending, as rising revenue kept deficits narrow. Ok we are making more, so we have to spend more, and since there is no end in site to this cycle, and money is looking for safe havens in sovereign debt, let borrow some too.
Example: the average Spanish pensioner, until recently received a state pension that was more than 80% of the average salary of current earners. So when the economy was strong, salaries and pensions grew too. That might not be a problem if wages and pensions were to fall again when the economy shrank, but that does not usually happen. What does happen is that the pension bill tends to remain at the same elevated levels even as economic growth and government revenue decline, creating an unaffordable debt level with no support in effect.
The result now is that the EU's crisis economies have to radically reduce their welfare states.
State spending in Spain will have to shrink by at 25% at the minimum; Greece will be lucky if the cut is less than a 50% of pre-crisis expenditure levels.
The bad news for these countries is that this is just Round 1 of welfare-state corrections.
Over the next 10 yrs Europe enters the Age of Aging, when the cost of pensions will rise and providing health care for the elderly will hold a even bigger cost.
This demographic shift will be felt all over Europe including Scandavia that was spared the worst effects of the sovereign-debt crisis.
Germany still has an under-funded pension system.
One study I read projected that on current population and spending growth trends, health-care expenditures alone will account for 15% of Germany's GDP by Y 2025 and almost 26% by Y 2050, and that last figure will be 33% for the US.
The presumption was that the Universal welfare state with its generous entitlements would not be able to survive because the pols would see to it one way or the other, as they like their jobs and there are thousands of them imbedded in the systems.
Europe's social systems will look very different 20 yrs from now, they will be around, but benefit programs will be very much less generous, and a greater part of social security will be managed privately.
Welfare services, like health care, will be competitive, and, to a much greater degree, paid for out of pocket or by private insurance not the governments
The big divide in Europe will not be between North and South or Core and Peripheral of Left and Right.
It will be between countries that efficiently manage the transition away from the Universal welfare state that has come to define the European social model, and countries that will be forced by events to change the hard way and live in austerity for decades.
Obama supporters please take notice.
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.