Oliver Hartwich tracks the rise of the European welfare state driving spending and taxes to unprecendented levels - 'bread and circuses' to mask its structural flaws

Oliver Hartwich tracks the rise of the European welfare state driving spending and taxes to unprecendented levels - 'bread and circuses' to mask its structural flaws

This is the fifth chapter of Oliver Hartwich essay "Why Europe Failed", an analysis of an ageing Europe, burdened by the size of its welfare state. He draws cautionary lessons for New Zealand's policy makers. You can read the full version here.

This fifth section is titled "Panen et Circenses: The rise of the European welfare state". Part I is here. Part II is here. Part III is here. Part IV is here.

By Oliver Hartwich*

The anti-democratic political structures of European integration should have made the European project unpopular. Similarly, the declining relative importance of Europe should have been a concern for Europe’s citizens. And if none of that bothered the Europeans, then maybe the slowing economic dynamism should have.

Yet despite such shortcomings, there have not been uprisings against (Western) Europe’s status quo since World War II. European citizens witnessed falling average growth rates decade after decade. They saw mass unemployment become a persistent feature of their society. They also realised how their economies lost entire industries to newly developing countries. Despite this, there has been remarkable political stability for decades across the EU.

This is of course not to say that there have never been any changes of government, which sometimes even brought about some policy changes. However, the basic direction has remained the same. At least Western Europe countries were typically governed by parties that subscribed to a mixed economy model and continued with European integration through the EU and its predecessors. Whether governments were led by centre-left or centre-right parties or coalitions became a matter of aesthetic preference. It rarely ever mattered much beyond that.

Government spending as a percentage of GDP increased dramatically across Europe all through the 20th century (Table 1).

The pattern of government growth is also similar across Europe. Both world wars increased government spending (except in Spain, which remained neutral in World War I and thus did not have to increase its expenditure). Since the immediate post-World War II and reconstruction era, government spending has increased to unprecedented levels. The most extreme case is France where the state now accounts for well over half of the economy.

These spending rises have not been driven by the core areas of government spending of law and order, defence and certain public goods. Instead, all the increases in government spending have been in education, health and welfare.

In a 2014 paper for the Centre for Policy Studies, economist Brian Sturgess analysed data for 19 European OECD countries for 15 years from 1996 to 2011. He found that on average, European governments now direct only 19% of their total spending to core responsibilities, while 10% is spent on subsidies and infrastructure, 12% on education, 15% on health, and 38% on social security.14

On average, these European countries spent almost 30% of GDP on welfare alone, which is more than the total of government spending before World War II.

There are many possible explanations for this growth of government. American economist Robert Higgs describes a ratchet effect in his book Crisis and Leviathan. In times of real or imagined national emergencies, mainly wars and recessions, government takes over previously private rights and activities. When the crisis passes, government retreats somewhat, but never to the same level as before.15 This ratchet effect could indeed explain why European governments increased in size during the two world wars. However, it is less well suited to explain the additional (and substantial) government growth since 1945.

Another explanation is the rise of Keynesian economics after World War II. Keynesian demand-side management had given governments a licence to increase spending to ‘stimulate’ the economy. This probably contributed somewhat to the growth of government. However, not every European country subscribed to Keynesian policies. Germany, for example, only briefly flirted with Keynesianism in the late 1960s and 1970s, and yet its spending record was similar to that of countries where Keynesianism was stronger.

The theory of public choice explains this growth in government spending as a consequence of lobby activities and rent seeking. Public choice undoubtedly has strong explanatory power – but it still does not explain why European governments grew much faster than their counterparts in other developed economies such as the US, Australia or New Zealand.

Perhaps the burgeoning size of government in Europe has something to do with the specific political structure of the EU. Though this argument might be hard to prove empirically, there is some value to it. In building the unpopular political superstructure of the EU, the European elites had to ensure the electorate would not desert them. They achieved this by establishing a welfare state that went far beyond a mere safety net. Instead, European welfare states became an all-encompassing insurance and entertainment scheme.

Seen this way, the European welfare state was a means of buying the public’s silence and acquiescence. It was the same method of securing power Juvenal described in his Satires two millennia ago:

Already long ago, from when we sold our vote to no man, the People have abdicated our duties; for the People who once upon a time handed out military command, high civil office, legions — everything, now restrains itself and anxiously hopes for just two things: bread and circuses.

Bread and circuses – or panem et circenses in the Latin original – were the means of bribing the masses in ancient Rome. Modern Europe is witnessing a similar phenomenon. To their subservient citizens, the European elites provide free or heavily subsidised education, health care, TV and radio programmes, roads, income support and pensions, public transport, libraries, opera houses, and theatres.

Unfortunately, it is often overlooked that government can only bribe the people with their own money. In the words of the great French economist Frédéric Bastiat: “Government is the great fiction through which everybody endeavours to live at the expense of everybody else.”

As a result, the very people benefiting from the welfare state are also footing the bill – at an astonishing cost. Last year, the German Federation of Taxpayers calculated the difference between gross wages and net take-home pay based on OECD data. To do this, they also included the effect of value added taxes, which are often hidden from view.16

For a single income earner on the national average income, Belgium topped the list of predatory governments with a tax burden of 59.1%, followed by Hungary (54%) and Germany (53.1%). In most large European economies, the burden was well above 40%.

The respective tax burdens for families with two income earners and two children are somewhat lower, but tax burdens in Europe still range from 47% in Greece to 29.4% in the UK. By comparison, the figures for Australia and New Zealand 23.2% and 15.5%, respectively.

Buying European citizens’ loyalty for their mixed economy welfare states has effectively enslaved them. Is that the price of peace the EU claims it has brought to the continent? Has Europe lost its economic liberty as the price of national safety?

The welfare state (broadly defined as all government spending outside the state’s core functions) was the means by which Europe bought itself political stability. Little wonder, then, that the moment governments could no longer afford to pay for it, the previous political consensus started falling apart. This also explains the rise of radical parties such as SYRIZA in Greece, the National Front in France, and Podemos in Spain.

The rise of the European welfare state, the reduction of economic dynamism, and the increasingly questionable legitimacy of the European project go hand in hand. Panem et circenses could have been the motto of Europe’s post-World War II mixed economy model. It remains to be seen whether the EU will also share the Roman Empire’s fate.


13. Vito Tanzi, “The Economic Role of the State in the 21st Century,” Cato Journal 25:3 (Fall 2005), pp. 617–638. 2013 data sourced from http://www.tradingeconomics.com/germany/government-spending-to-gdp.
14. Brian Sturgess, Not Paved With Gold: Government ‘Investment’ Does Not Equal Growth (London: Centre for Policy Studies, 2014).
15. Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987).
16. Volker Stern, Rundschreiben 8/2014: Zum Steuerzahlergedenktag 2013 und 2014 (Berlin: Deutsches Steuerzahlerinstitut des Bundes der Steuerzahler, 2014), http://www.steuerzahler.de/files/61647/RS_08-2014_-_Stern_-_Zum_Steuerzahlergedenktag_2013_und_2014.pdf.


Oliver Hartwich is the Executive Director of The New Zealand Initiative. Before joining the Initiative he was a Research Fellow at the Centre for Independent Studies in Sydney, the Chief Economist at Policy Exchange in London, and an advisor in the UK House of Lords. Oliver holds a Master’s degree in Economics and Business Administration and a Ph.D. in Law from Bochum University in Germany.

This is part V of a serialisation of his essay "Why Europe Failed". Part I is here. Part II is here. Part III is here. Part IV is here. Part VI tomorrow is titled: "Europe's demographic time bomb".  You can read the full version here.

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A great article, Oliver - well done. Table 1 illustrates the problem in very simple terms. Socialism has been running rampant in Europe (as well as most other Western countries) since the 1930s and we are witnessing the collapse of modern socialism. When people start realising that government bonds/debt will never be repaid, the ensuing chaos will unfortunately entangle all of us. However, there seems to be no other way out...change can only come once it is forced upon governments. The concerning part is what desperate measures they will resort to so that they can hold on to power.

OK, the writer may not like Keynesian -ism, or the long tradition of communities paying taxes for redistributive government transfers . NZ welfare has plenty of critics too. But to say Europe's high government spend is some kind of sinister bribe to 'buy the public’s silence and acquiescence'' is just absurd. Ironically, the same argument is used about unfettered capitalism-as long as the wealthier majority are kept happy by light taxes, the poor can be ignored (or wait for crumbs from the elusive Mr 'trickle down'.) Income disparity has a corrosive effect on individuals and society, with plenty of evidence of negative affects from growing wealth disparities. Many countries recognise this and a welfare state gives a 'social contract' to protect the disadvantaged. Look at Germany's (and much of Europe's) remarkable generosity with a tidal wave of refugees. It's only possible when built off the tradition of a strong, secure and interconnected European social welfare infrastructure . With it comes an acceptance that higher taxes are not 'predatory', as long as money is spent transparently. Most Europeans are glad it's in place, as are thousands of truly desperate refugees at present.

These spending rises have not been driven by the core areas of government spending of law and order, defence and certain public goods. Instead, all the increases in government spending have been in education, health and welfare.

I think that this paragraph that lays waste to the authors arguments. Core areas of government are what the people want them to be. That is what democracy is all about. People power it is what the word means. The idea that government is simply Law and Order , defence and some un named bits and pieces is simply not right.

Exactly - and this is why the people end up getting what they deserve, sadly. The majority are like sheep and simply follow whoever is in power. They delude themselves into thinking that the unsustainable can somehow be sustainable, that they can get a free lunch and that they are "entitled" as they have "rights" no matter what. And, when it all collapses around them, then invariably it is someone else's fault. Truth is indeed stranger than fiction.

Another thought provoking essay on Europe out today from Raúl Ilargi Meijer :
"when I see the likes of Monti, Draghi and Rajoy present their grandiose plans to save the union, and their place in it, far more costly than any can afford, as it’s sinking ever deeper into its overwhelming debt morass."
http://www.theautomaticearth.com/2015/09/eurodystopia-a-future-divided-2/

Political movements that pander to ethnic based nationalistic sentiments are a recipe for a bloodbath, especially when carried out in a period of social and economic turmoil. Obviously people haven't learnt from the horrific history of the 20th Century. Has everyone forgotten the lessons of the Nazis, the Balkan wars, the Rwanda genocide etc.

"Similarly, the declining relative importance of Europe should have been a concern for Europe’s citizens."

It's not declining in Europe. If anything the newspapers, Euro, Greece, Swiss-unpegging, local issues, far out weight any outside "decline". A bit like asking US folks about stuff in their media or geography outside the US.

Folsk who say government infrastructure spending grows economy:

" The most extreme case is France where the state now accounts for well over half of the economy."
" Instead, all the increases in government spending have been in education, health and welfare."

Explain how the economy will grow from government or personal activity.
get more skills or training in a sector - most of your country's spending is in education, health, welfare - so if you're not increasing your revenue in one of those sectors you have a thin and hard market with little disposable income to profit from.
If you train -in- one of those areas, then nearly the only place you can get a job is working via the government (wage slave until death). And your output will be primarily into education, health, or welfare.

Where does the value add come from:
education? Producing more people who will work for the government just like yourself
health? Keeping government people healthy and they pay for it, their wages from the government; except they can do more hours providing education, health or welfare.
welfare? There is no "profit" in welfare, only staving off imminent disaster, until people can be otherwise employed...into ? health? education?

HTF, is that supposed to grow an economy, let alone for the whole scope of the population??

Ultimately I see the big question here is; is the socialist component of ensuring the common people are fed and housed to achieve stability worth the total price? Defining that cost could be difficult but would include an increasing wealth gap, loss of democratic control to elites/wealthy. Also today we see a declining living standards/spending power so how does that factor in? What are the outcomes/ what does failure look like? And what are the possible solutions or how do we avoid failure?

Yes, but one must consider that Oliver is the product of a rather sterile intellectual climate in terms of economic instruction. He admits himself, that economic instruction in Germany is confined almost purely to a form of political economy, which in Germany is called Ordoliberalism. It represents an intellectual effort by German intellectuals after the War to develop a marriage between a strong interventionist government and the capitalist market economy, so that the people can enjoy the "benefits" of the market system without its destabilizing qualities jeopardizing the social order. In Germany the domain of political economy is considered a prerogative of the legal profession. In Germany it is a matter of order and clearly defined rules and there is no space for discretionary, contingent political intervention in the economic realm.

http://bruegel.org/2014/08/blogs-review-ordoliberalism-and-germanys-appr...

"Europe’s experience of fascism and communism encouraged postwar Germans to limit discretionary government action. As such, ordo-liberals are akin to free-market economists in the US and elsewhere. But they kept markets within tight rules – hence the country’s image as over regulated. The concept of Ordnungspolitik – the practical application of ordo-liberalism – was combined with the idea of a Soziale Marktwirtschaft, an economy requiring income redistribution and generous welfare safety nets. "
http://www.fergusmurraysculpture.com/cyprus/the-bailout-and-beyond-20-pa...

"Order policy’ would be the literal translation of the conception that has shaped German economic policy since the end of World War II. Surprisingly, it has nothing to do with giving orders. ‘Order’ in this sense refers to the order of things within which economic activities take place. It does not have to do much with ‘policy’ either since Ordnungspolitik is sceptical about any discretionary interventions into market processes.

Ordnungspolitik therefore refers to a framework of economic policy settings that guide economic activity. This includes secure property rights, competition law, and clearly defined rules for liability and the law of contract.

If all of this sounds more like a legal philosophy than an economic theory, it is because it was developed by German lawyers and economists, mainly during the interwar and immediate post-war period. They emphasised the need for a stable legal and political framework in order for the economy to thrive."
http://nzinitiative.org.nz/About+Us/Staff/Oliver_Hartwich/Opinion+and+co...

Which is, btw, exactly what the EU through its variety of very useful crises has just abolished. There is now ONLY discretionary, not to say arbitrary, decision making in the EU with no transparent legal framework to talk about. Merkel, Draghi, Juncker pretty much do what the like.

Look at the outcomes. Illegal migration anarchy, perennial Euro crisis etc.

Yes, the Greek public would agree with you, when the Eurogroup imposes structural reforms on their government which the public in their own countries' would never accede, following a programme that the Troika's own officials admit, has no basis in European law.

https://www.youtube.com/watch?v=pL1wqbYxoEw

True. If they simply had stuck to the law which prescribes no bail-out, then this situation would have never arisen.

It is this way when you start operating outside the laws. Once breach makes another ten breaches necessary to cover up. An avalanche of illegality.

Draghi is also operating well outside his legal mandate, and e.g. Merkel simply declaring the EU Dublin-III-treaty invalid this week acts also clearly illegally.

The old slippery slope. Once you start lying and breaking the law there is no easy way back. 400 million Europeans will pay the price for the illegal operations of a few "power brokers".

IMHO the main EU institutions, be it European Commission or ECB are just subtle systems of organized criminality.

The socialist component needs to be directed at a long term self-sustaining (ie business) result.

Aiming to feed and house people in minimal and constantly unsustainable arrangement is going to get worse with every bump in the road, and because there's no "upswing" to the plan there's never any improvement in the situation.

No point having an ambulance at the bottom of a cliff if it's just going to stack the patients in a pile and does nothing.

".. In building the unpopular political superstructure of the EU, the European elites had to ensure the electorate would not desert them. ..."

I doubt that govts used hand-outs to paper over the creation of an anti-democratic EU. Most people in the EU do not even know what the EU does and how it works plus they are lied to about it by most media. Hand-outs are a national phenomenon and NZ has a dismal record on it, too, without any EU or other institution to justify with it.

What I miss here is an analysis of who the recipients of welfare spending are. If Hartwich presented the numbers, it would become amply clear that there is a strong correlation between welfare spending and migration, see also today's interest.co.nz piece on NZ's de facto low skill migration policy.

The next question would be why our societies are willingly importing problems. Look at the UK where the photo of one drowned child has been enough to morally blackmail a government into an irrational policy backflip on illegal migration. In my view there is a strong undercurrent of divide-and-conquer, "Divide et impera" behind the atomization of our societies. Where there is no strong sense of community, some groups have it very easy to push through their selfish, money centered agendas.

What I miss here is an analysis of who the recipients of welfare spending are.

Including of course, corporate welfare as a percentage of GDP.

Really, Oliver points to the key weakness of his own analysis when stating, "Perhaps the burgeoning size of government in Europe has something to do with the specific political structure of the EU. Though this argument might be hard to prove empirically, there is some value to it."

How/why should it be hard to prove empirically? The political structure is a known - the laws that it passed which members had to comply with are known - the cost of these can be quantified. For all we know, implementing EU environmental policy might have contributed significantly to government expenditure as a % of GDP. The aging population (demographics) may have contributed significantly to government expenditure as a % of GDP. The list goes on.

And when he does refer to empirical data, he points out, "all the increases in government spending have been in education, health and welfare". So, welfare is only part of the increase he refers to. Perhaps it is the smallest part - or for that matter, expenditure in welfare may well have decreased, but when one adds in education and health expenditure there is an overall increase.

Just not a robust enough analysis, but then I think it is largely meant to be an opinion piece - positing a theory and putting it out there for general consumption.

There is no academic rigour to that book, and it certainly - as you say yourself - also was not meant to appeal to academic audiences.

I still would have expected a bit more depth e.g re the fundamental failure of the European parliament to honour the one-man-one-vote principle, or what is behind the rise in welfare, health, education spending.

Never mind, any bit of intellectual discussion is good for all of us :-)

Agree. Also interesting wee fact every time oil price spikes european consumption flat lines or declines, it happened last time in 2004/5 and guess what we have been stagnant and tottering on a depression for a decade since.

What this artical is, is nothing more than yet more neo-liberal clap trap. Kind of getting concerned that we keep seeing such rubbish on Interest.co.nz as it is not good finance and economics at all and in fact is giving extremists a platform they would not otherwise have.

The Q is why?

"education and health expenditure there is an overall increase" and the private system in the USA was growing at 7% per year and was absorbing 18%+ of GDP and missing 25%? of Americans. I fail to see how such a system that sucks huge amounts of money out of an economy lining the pockets of a few and has a worse outcome for many can be justified in any shape or form economically let alone socially.

Oliver,
The article is simply pure opinion and provides no basis in fact or evidence for showing large government welfare spending is bad per se. European countries have some of the lower Gini co-efficients when compared to other countries. Yes there clearly is a case that welfare spending can be too high if the government can not afford it but then the same can be said for government spending as a whole.

do your own look-ups there is plenty of evidence. you want academic rigour, be prepared to pay full price for the research and write up.

After the GFC, Governments around the world flooded the world with cheap money. This was meant to be spent on productive enterprises which in turn created jobs.
Unfortunately, most of this money was borrowed from banks to invest in existing real estate and inflate prices.
We now face a problem with individuals carrying huge debt. If the markets turn, thousands of these people will owe banks more than their properties are worth and will be destitute.
Governments will then have to dole out millions in welfare and the above social problems will escalate.