Illustration by Jiro Bevis
Illustration by Jiro Bevis

Europe’s sovereign-debt crisis has forced some countries to pare back welfare programs harshly to meet austerity targets, raising a provocative question: Is the Continent’s famed social model doomed?

That’s what European Central Bank President Mario Draghi seemed to imply during a Wall Street Journal interview earlier this year, when he said that ”the European social model has already gone,” because it could no longer assure jobs for youths.

Draghi’s comments have been overinterpreted, but he would hardly be the first to have wondered about the sustainability of Europe’s extensive welfare systems. The same Wall Street Journal, in an editorial in the mid-1990s, pronounced them dead already. Last fall, Jin Liqun, the chairman of China Investment Corp., a sovereign wealth fund, blamed Europe’s troubles on ”the overburdened welfare system, built up since the Second World War,” and its ”sloth-inducing, indolence-inducing labor laws.”

That’s a sentiment many U.S. Republicans would seem to agree with, judging from recent campaigning by the party’s presidential candidates. But there are few signs that Europeans are ready to abandon their cherished welfare systems.

Europe’s social model defies easy definition. It’s simpler to explain what it isn’t (American or Chinese, for example), than what it is. The details vary considerably from country to country, but what they have in common is this: the public provision of substantial proportions of health care, education, pensions and a range of social services, together with intrusive rules that govern employment relationships.

Asset, Not Burden

Draghi didn’t say in his interview that these systems of social protection and labor-market regulation are now obsolete. They are certainly under pressure, not least because austerity is forcing governments to reduce the generosity of welfare provisions. But in those countries where the social-welfare system works well, many still regard it as an asset rather than a burden.

It’s important here to stress the diversity of experience across the continent. Spain, notoriously, now has half its youth unemployed -- yet it was the country that, in the decade before the crisis, had by far the most impressive record of job creation. Germany, which struggled to create jobs in the 15 years that followed reunification, has come through the crisis with unemployment falling to levels not seen since the 1970s. In the Nordic countries, commitments to so-called active labor-market policies designed to keep people connected to the workforce have imparted resilience in employment that others envy.

What is happening in response to the financial and sovereign-debt crises is an extensive recasting of the various European welfare systems designed to make them more effective, while retaining their core values and features. That’s a process that has been going on for some time.

The Netherlands and the U.K. led the way in the 1980s, with a range of initiatives designed to liberalize labor markets and curb welfare benefits. German Chancellor Gerhard Schroeder sought from 2001 onward to revamp a labor market that had become too rigid, with important changes in institutional support for job seekers. And when the former socialist countries of central and Eastern Europe had to rebuild themselves after the collapse of communism, they put in place welfare systems that shared many key characteristics of those in their Western European peers, but avoided some of the pitfalls.

Shrinking Workforces

Europeans are living longer and reproducing less, so even before the crisis there was a wide-ranging debate about how to accommodate these changes, as shrinking workforces are obliged to pay for ballooning populations of retirees. Many countries raised their retirement ages, and those, such as Greece and Italy, that face acute adjustment problems now have to confront unsustainable pension systems.

To an American or Chinese, it may seem a paradox that countries of Northern Europe that have high social expenditure and correspondingly high tax burdens continue to score well on indices of global competitiveness produced by bodies such as the World Economic Forum. The explanation is that much of the social spending facilitates economic activity (think of Swedish child care) and keeps people employable (Danish training schemes), or healthy (France and Germany spend less than two-thirds as many dollars per capita on health care as the U.S., but achieve better overall health outcomes).

Clearly, governments that were slow to reform now have to accelerate the pace. Spain has not only embarked on a fiscal consolidation, but also begun to dismantle some of its tough employment protection legislation. The list of social reforms that Greece has to undertake grows by the week, but many of its elements illustrate how dysfunctional the system had become. Public-sector workers able to retire at the age of 50, for example, or restrictive practices by pharmacists that push up the cost of drugs would be seen as indefensible in most other European countries that allegedly share the same social model.

In Italy, Prime Minister Mario Monti has launched a wide-ranging program of changes that will target tax evasion and shake up the labor market, while also recalibrating social safety nets. Even in Sweden, the high incidence of disability has prompted the current government to tighten rules that enabled some claimants to obtain higher benefits than if they had been classed as unemployed.

’Flexicurity’ the Goal

It’s impossible to say now what the outcome will be when the current turmoil finally ends. Before the onset of the crisis, Europe’s leaders had been gravitating toward a welfare model known as “flexicurity,” a system first adopted in Denmark and the Netherlands. As the neologism implies, it combines greater flexibility in the labor market with security for workers at risk of unemployment. The core of the approach is to focus on the individual, rather than to seek to preserve specific jobs.

Some dismiss flexicurity as empty rhetoric, but in the countries that have made the necessary changes, there is confidence that reports of the demise of the European social model have been more than a little exaggerated.

(Iain Begg is a professorial research fellow at the European Institute of the London School of Economics & Political Science. The opinions expressed are his own.)

Read more online from Bloomberg View.

Today’s highlights: The View editors on signs Iraq is veering away from democracy and the National Rifle Association’s role in encouraging gun sales and use; William D. Cohan on restoring faith in Wall Street as the key to an economic recovery; Simon Johnson on why long-term budget projections get too much attention; Kellie McElhaney on how Apple should change its behavior; Albert R. Hunt on Mitt Romney’s potential vice presidential choices; and Vali Nasr on positive developments in Pakistan.

To read other op-ed articles in this series about Europe's social contract: Josef Joffe on how all of Europe should learn from Germany's reforms; Ana Palacio on the difficulty of shedding Franco's labor laws; Fredrik Erixon on the last days of Europe's welfare states.

To contact the writer of this article: Iain Begg at IAIN.Begg@lse.ac.uk

To contact the editor responsible for this article: Marc Champion at mchampion7@bloomberg.net