Europe's Unsustainable Welfare State
Angela Merkel used to say that “the European Union is about 5% of the world’s population, about 25% of its GDP, and about 50% of global welfare spending”:
The real data is more concerning.
The European Union is:
7.2% of the World Population.
23.8% of the World’s GDP.
58% of the World’s Welfare Spending.
Something has to give.
The EU average tax burden on workers is 44.9%. The average worker in the EU spends half a year working for the tax man.
Taxation accounts for 41% of the euro area GDP.
Ease of doing business remains below the leading economies of the world.
Bureaucracy is asphyxiating. The EU approves on average 80 directives, 1,200 regulations and 700 decisions per year.
The main EU economies remain significantly below the leaders in economic freedom.
At the same time, despite massive tax burden and constant confiscation of wealth, the EU’s average debt to GDP is 90%. Continuously making science fiction estimates of tax evasion and calling to tax the rich as a mirage, has led to unsustainable levels of government burden on the real economy and hinders investment and capital investment as policies are increasingly aimed at taxing the productive to subsidize the unproductive.
Using unrealistic estimates of tax revenues made by politicians — that are always missed — for very real expenditures — which are consistently above budget — has made the EU miss its debt reduction expectations.
The cost of hyper-regulation and excessive taxes to job creation, investment, and innovation are evident. The EU has an unemployment rate that almost doubles the leading economic peers, and taxation hinders the growth of SMEs (small and medium enterprises), which shows a ratio of development to large companies that is half the same ratio in the US.
The EU has many positive things, as I explained here. But we cannot let bureaucracy and confiscatory taxation take over a worthy project. Because ignoring those risks, we would make the EU implode.
Unless the EU politicians change their mindset of a model built on massive taxation and bureaucracy and start putting at the forefront of policy cutting taxes, slashing red tape, more open business, more economic freedom, focusing on job creation and attraction of capital, the welfare state will implode.
The EU’s welfare state can only be protected defending growth, investment, and job creation. However, it will likely be destroyed by the same ones that say they defend “the public sector.” By making it unsustainable.
Reprinted with permission of the author. Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets, and The Energy World Is Flat (Wiley).