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POLITICAL ECONOMY
Walker's World: The broken contract

disclaimer: image is for illustration purposes only
by Martin Walker
Vienna (UPI) Sep 27, 2010
Despite Britain's stubborn posture as the most euroskeptic member of the European Union, the election and the political prospects of Ed Miliband as the new leader of Britain's Labor Party are firmly rooted within the context of a broader European crisis.

In France, labor unions are repeatedly bringing the country close to a halt with strikes against the government's plans to raise the retirement age from 60 to 62. In Germany, Chancellor Angela Merkel's coalition government is reduced to near-impotence because of the stand-off with the minority Free Democrats over tax cuts. The opposition is in little better shape because the center-left Social Democrats have weakened to the point where they are no at level pegging in the polls with the resurgent Greens.

In Belgium and Holland there is no government because the parties cannot forge effective coalitions from the chaotic array of people elected to parliament. Sweden is in similar difficulty after its election. In all three cases, the root cause is the same; the rise of new anti-immigration parties has sundered traditional party loyalties and challenged political orthodoxy.

It is both facile and glib to say that these are the political consequences of the financial crisis or of high unemployment or of mass immigration. All three play a role but the underlying problem is more profound.

The real problem is that European social democracy, and the social contract on which it has been based since 1945, has become unsustainable in its present form. The welfare state costs too much and the European economies are no longer producing the economic growth necessary to sustain it.

This problem has been coming for years. Europeans are living so much longer that the pension system is broken. Demand for healthcare, similarly driven by the dramatic improvements in life expectancy and the higher health costs of the elderly, has risen to critical levels. Education has also been expanded but now jostles with pensions and health to maintain its share of national budgets.

But these budgets have been under such strain for years that budget deficits have become the norm across Europe. This was never sustainable but the economic crisis has produced fiscal disaster. The traditional Keynesian response of borrowing more money so that countries might spend their way out of recession has reached its limit. The costs of unemployment pay and of bailing out the banks has bust budgets across Europe and triggered fears of default in Greece, Ireland, Portugal and Spain.

Britain's Institute for Fiscal Studies has compiled figures that show how Europe's social democracies got into this mess. In Britain, for example, they demonstrate that spending on the three key components of social democracy -- health, education and social security -- has increased tenfold since 1950. That is tenfold after allowing for inflation. Spending on the national health budget has increased elevenfold (and back in the 1950s it was assumed that the costs of healthcare would decline as people became healthier).

By contrast, national income after inflation has increased fourfold. In terms of national budgeting, the social democracy budget has risen from 11 percent of gross domestic product to 28 percent. Conservative politicians have been unable to prevent this growth. Even under Margaret Thatcher and her conservative successor John Major it grew from 20 percent to 23 percent of GDP.

With minor adjustments, these figures have their parallel across Europe and North America. The United States spends almost 18 percent of its GDP on healthcare alone, and even though the United States has a higher birth rate and a younger demographic profile that the Europeans, it faces a very similar crisis of public spending. The political chaos and policy stagnation that we see across Europe has its parallels in the Tea Party movement and the anti-immigration clamor in the United States.

So this is a crisis of social democracy, of the post-war social contract, and of Western democracy as a whole.

It is a crisis of success. Our post-war societies have been so good at improving our health and extending our life spans and at raising our expectations that the social contract must be rewritten. Either we pay more, much more, in taxes, or we start spending very much less.

There is no choice, because the underlying causes of this crisis are getting worse. By 2030, 32 percent of Germans will be over the age of 60. Demographic realities across Europe show fewer and fewer young people entering the labor force to sustain the health and pension costs of the retiring baby boomers. And with fewer people of working age, it is no longer realistic to assume that economic growth will solve the problem.

Indeed, the levels of extra debt that European and North American governments have taken on during the past three years of the Great Recession means that a greater share of taxes will be going to interest payments.

In this context, the already anguished politics of immigration can turn very ugly, very fast. And European solidarity has already been strained to breaking point by the extraordinary efforts being made by the richer northern countries to bail out the bankrupt southern members of the eurozone.

The new generation of politicians like Ed Miliband and U.S. President Barack Obama and their contemporaries will be defined by the courage and imagination they bring to this challenge. The last generation of politicians have already been defined, and condemned, by that emblematic European politician, veteran Luxembourg Prime Minister Jean-Claude Juncker.

He delivered the epitaph on a broken system when he observed of his fellow leaders, "We all know what to do but we don't know how to get re-elected once we have done it."

Ironically, Juncker said it in March 2007, three months before the financial crisis erupted.



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