European Integration: Current Problems--Funding Social Welfare


Figure 1.--Europeans began contructing the welfare state in the late-19th century. It was not until after World War II that socialist politicans began constructing the modern welfare system with generous entitlements that Europeans now enjoy. This is a scene in West Germany during 1952. The problem is that the socialist politicans in many countries made promisies to win elections that the countruies can not afford to pay. As a result, most of the countries involved hasve had to borrow money to pay out the benefits. They are are now beginning to go bankrupt (Greece, Ireland, and Portugal) and simply do not have the money to pay the benefits promised. And many other EU countries have similar heavy unfunded debt loads, including major countries like Britain, France, nd Italy. Mrs. Thatcher explained the dilema, 'Socialism is fine until they run out of other people's money to give away.'

The EU countries all have generous social welfare programs. Socialist parties have created vast intitlements as part of the European welfare system. The specifics vary from country to country. They all include national health care, old age insurance (often very generous benefits with many workers retiring in their 50s), annual vacations, limits on dismisals, unemployment insurance, disability, and many other benefits amd worker protections. In most EU countries, Socialist politicans have made commitments and promises without any real consideration of the financial ability of the state to afford these commitments. Many workers have benefited from the generous benefits, although some economists maintain that the sysytem has created an inflexible employment situation which has caused high rates of unemployment with young people having problems finding jobs. Americans talking with European here terms such as 'free' health care as if the Europeans were not paying for their health care. The Europeans are all committed to national health care system and there are strong arguments for these systems, but they are certainly not free. National health care systems require major expenditures of public funds. And in addition to the massive expenditures, as far as we can tell, most Europeans are unaware of the impact of national health care on retarding research on innovation in new drugs and medical equipment and procedures. Likewise there are arguments for and against every individual element in the social welfare system such as the age of retirement. Overhanging the cost benefit analysis of each of the items is the iron laws of economics. Europeans may feel that their benefits are free, but in fact someone has to pay for them. Any every EU country to pay for those benefits have been borrowing and quite a few have been borrowing very heavily. Not only have they accumulte huge debts, but the acturarial commitments of the EU government to future benefits as a result of aging populatuions are even more enormous. International lenders have as a result begun to demand much higher interest rates fearing defaults. Some EU countries are now paying more than twice the interest of the bench-mark German bund and this disparity in growing. Sociaslist politicans can win elections by promising 'free' bebefits, but what they can not do is to defy the iron laws of economics. These higher interest rates are unsustaninable for the countries involved. The European Union has created a stability facility funded by Germany and the stronger countries which have more prudent fiscal and social welfare policies. These countries have demanded austerity from the bankrupt countries. The EU has already steped in to bail out Greece and Ireland and will soon have to do so for Portugal. It is unclear, however, the level of austerity the governments will be able to institute in the bankrupt countries. Greece, Ireland, and Portugal are small countries which can be assisted with manageble amounts. The problem for the EU is that Spain will also need aid and will require much larger amounts. It is unclear just to what degree German voters will tolerate outlays to rescue their more profligarte neighbors. And if this was not bad enough the problem does not stop here. Even major countries like Britain, France, and Italy have the same massive and growing debts. Many EU citizens seem unaware of the consequences of the growing debt. An Italian reader tells us, "We have had oour social welfare system for 60 years now, I see no reason why it can not continue." The British at this tiome are the only country to make major cuts in bernefits to avoid bankruptsy. A British reader writes, "The EU will have to revamp its social security systems. A European writes. "We are a lazy and pampered lot. Spoilt by decades of either communism or social democracy we think we are entitled to every kind of luxury - without having to work too much for it. The State is being perceived as the provider of a dream come true, including long holidays, early retirement, low housing cost, free health care and whatever. We have to realize anew that we must fend for ourselves and create riches before we consume them."

European Welfare System

The EU countries all have generous social welfare programs. Socialist parties have created vast intitlements as part of the European welfare system. The specifics vary from country to country. They all include national health care, old age insurance (often very generous benefits with many workers retiring in their 50s), annual vacations, limits on dismisals, unemployment insurance, disability, and many other benefits amd worker protections. In most EU countries, Socialist politicans have made commitments and promises without any real consideration of the financial ability of the state to afford these commitments.

Unintended Consequences

Many workers have benefited from the generous benefits, although some economists maintain that the sysytem has created an inflexible employment situation which has caused high rates of unemployment with young people having problems finding jobs. As far as we can tell, most Europeans are unaware of the impact of national health care on retarding research on innovation in new drugs and medical equipment and procedures. Likewise there are arguments for and against every individual element in the social welfare system such as the age of retirement.

Financial Underpinings

Americans talking with European here terms such as 'free' health care as if the Europeans were not paying for their health care. The Europeans are all committed to national health care system and there are strong arguments for these systems, but they are certainly not free. National health care systems require major expenditures of public funds. Overhanging the cost benefit analysis of each of the items is the iron laws of economics. Europeans may feel that their benefits are free, but in fact someone has to pay for them.

Massive Borrowing

And every EU country to pay for those benefits have been borrowing and quite a few have been borrowing very heavily. Not only have they accumulte huge debts, but the acturarial commitments of the EU government to future benefits as a result of aging populatuions are even more enormous. International lenders have as a result begun to demand much higher interest rates fearing defaults. Some EU countries are now paying more than twice the interest of the bench-mark German bund and this disparity in growing. Socialist politicans can win elections by promising 'free' bebefits, but what they can not do is to defy the iron laws of economics. These higher interest rates are unsustaninable for the countries involved.

Ruropean Stability Fund

The European Union has created a stability facility funded by Germany and the stronger countries which have more prudent fiscal and social welfare policies. These countries have demanded austerity from the bankrupt countries. The EU has already steped in to bail out Greece and Ireland and will soon have to do so for Portugal. It is unclear, however, the level of austerity the governments will be able to institute in the bankrupt countries. Greece, Ireland, and Portugal are small countries which can be assisted with manageble amounts. The problem for the EU is that Spain will also need aid and will require much larger amounts.

Political Reaction in Finncially Sound Countries

It is unclear just to what degree German voters will tolerate outlays to rescue their more profligarte neighbors.

Country Situations

Currently the financial crisis has affected small countries on the European perifery (Greece, Ireland, and Portugal). These countries are requiring large sums to bail out. It seems likely that Spain will eventually follow and this will require even larger expenditures. The financial media has termed the acrinym--PIGS (Portugal, Irelsnd, Greece, and Soain). And if this was not bad enough the problem does not stop here. Even major countries like Britain, France, and Italy have the same massive and growing debts. Many EU citizens seem unaware of the consequences of the growing debt. An Italian reader tells us, "We have had oour social welfare system for 60 years now, I see no reason why it can not continue." The British at this tiome are the only country to make major cuts in bernefits to avoid bankruptsy. A British reader writes, "The EU will have to revamp its social security systems. A European writes. "We are a lazy and pampered lot. Spoilt by decades of either communism or social democracy we think we are entitled to every kind of luxury - without having to work too much for it. The State is being perceived as the provider of a dream come true, including long holidays, early retirement, low housing cost, free health care and whatever. We have to realize anew that we must fend for ourselves and create riches before we consume them."

Britain

Britain is a little different because whike it is in the EU, it is not in the Euro Zone. Decades of heavy social spending and borrowing, however, has undermined the Government's fiscal soundness and the Cobservative-Liberal Democrat coalition has initiated a major retrenchment cutting spending in mabny areas of the country's social welfare syste, . A British reader writes, "Our Socialist Government after World War II introduced the Welfare State which would 'care for everyone from the cradle to the grave'. That promise got them a lot of votes, but from the start there was gross deception. Taxes were high just after the war, because of the need to restore the economy and repay the enormous loans incurred in fighting the war. In addition to Income Tax which was 97.5 percent for top earners, there was National Insurance, which every worker had to pay. This was levied at 6 percent from each wage above a certain amount, with the employer being taxed adding another 9 percent. The impression given was that this 'Insurance' paid for the National Health Service. This is still the belief of many people today. In fact only 5% of National Insurance went to the Health Service. The rest of the tax went towards, funding Old Age Pensions, Unemployment Benefit, Sickenss Benefit, Housing Benefit etc. etc. 'Free' Prescription medicines were too expensive, so a charge had to be made for each item prescribed. This is currently 7.40 per item. This is still a subsidy for many items, but expensive for those who have no exemptions. (Old age pensioners, Pregnant women and those on various hardship benefits get free medicines.) From the start the politicians knew that the bulk of the cost of the National Health Service (NHS) had to come from General Taxation. Long before this, the same deceit came with the introduction of the Road Fund Licience. Car owners had to pay a yearly tax for their car tax disc. Initially this was for the up-keep of the roads. Now it is just another Tax. The roads are in a dreadful state because there are more pressing needs for other Government Services. Nothing is ring fenced. The belief that care was from the' cradle to the grave' meant that many made no provision for their old age. This has resulted in most people having to pay for Care Home provision, if they can longer care for themselves and if they have assets of more than 20,000. As the average price of a house is 168,000, many home owners will have to sell their houses to pay for care. (This is only for single people. Their spouses can continue to stay in the house). However hardship can arise if two spinster sisters have lived in the house all their lives, but the ownership of the house is registered in the name of the sick one. The fit sister will be evicted and the house sold to pay for the care of the ill one. The same applies to co-habiting couples, who are neither married or have a Registered Civil Partnership. Nursing Home care is still free. Nursing Homes are for those with a medical condition not deemed to be age related, e.g.cancer, dementia. (Although that can be a tricky one.) Which side of the fine line depends on whether the care is for personal needs (washing, dressing and other personal care) or whether actual nursing is required e.g. administering drugs, or special nursing skills. With an ever increasing ageing population, the cost of Care for the Elderly cannot be sustained by the state (Taxation). People have not been educated to make provision for Old Age. They don't seem to realise that the Government has no money of its own, only our money. Socalism doesn't work. The poor love it because they pay little, but moan a lot when they better themselves and have to pay taxes themselves." We would add here that vthe poor are not always helped by social welfare systems. To the extent that the social spebding overburdens the economy, job creation and economic growth is affected and thus the poor find it more difficult to obtain jobs that will pay more than state benefits.

France


Germany

Germany is a very different story to many of the other EU countries. The Germans like the other EU countries, also have a generous social welfare syste. Spending is, however, not wildly beyond the country's ability to finance the social welfare system. Exports are booming and nemployment in 2011 was only about 7.5 percent. The question is why is Germany different. Here we are not entirely sure, but have some ideas. Not only are they different, but they are picking up the tab for the irresponsible countries. I am not sure how long that will last. Mrs. Merckle was badly defeated in Baden-Wurtenberg--a CDU stronghold (March 2011). I am sure all the bailouts was part of the reason, if not the major reason. As to why Germany is different, we I don't pretend to have the definitive answer. But we have pulled some ideas together. One factor is the work ethic, although there are differencies between West Germany and the old DDR (East Germany). We also think the German economic system is not as adversarial as the American or the rest of Europe. The Germans have a sort of social compact. Issues like wages are reached more on a consenual basis. Excessive pay demands like the ones made by the UAW in America have been avoided in Germany. In addition, their social spending has been more responsible. There is still a great fear of inflation for historical reasons. There is none of this retiring at age 50 years like the Greeks. There is also an excedllent education system, although socialist policies over the years have watered down the system. A reader adds, "I believe that the strength of the German economy for a large part derives from the "Gewerbeschulen", the excellent trade schools where students really learn a trade. It has been recognized that not all German children are able to go to college and need to read Nietzsche. That's where the trade schools come in. The result is that German products are of good quality."

Greece


Finland

Finland has a string social wlfare system, but like the Germans the Finns have been fiscally resoinsible. They have joined the Germans in asking for austerity from the more proflgerate countries needing EU bailouts.

Ireland


Italy


Portugal


Spain


Socialist Ponzi Schemes

A Ponzi scheme is an investment scheme that is perpetrated by fraudsters. The scheme involves offering investors attractgive returns higher than honest money managers can offer. The scheme is named for Charles Ponzi, an Italian immigrant who perpetrated a large fraud after arriving in America. A Ponzi scheme pays off early investors from the funds contributed by new investors which helps to estanlish his reputartion and attract large numbers of victims. The Ponzi scheme can continue for some time as long as the fraudster attracts a sufficent number of new victims. The greatest Ponzi schemne of all time was perpetrated by the respected financer Bernie Manoff. He os believed to have embelzed $50 billion. This is essentially what socialist politicans in Europe and now America are doing. Socialists win eklections by promising all kinds of benefits. This includes old age pensions (called social security in America). Workers contribute to these government run pension funds. Several countries have increased the benefits significantly beyond what the workers contribute. And by excessive spending and borrowing for other social welfare programs, several European countries will not be able to pay the benefits promissed. This is the very definition of a Ponzi scheme, only it is even more invidious than a fraudsters svhene, it is the worker's own government that is perpetrating the fraud. And the people who will be most effected are low-income workers who the socialists claim they are committed tio championing. These are the workers who are least likely to have other investments and are relying the most on the commitmednts made by btheir giovernments.









HBC






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Created: 6:29 AM 4/1/2011
Last updated: 2:58 PM 4/1/2011