The Future of the European Welfare States

Abstract

The financial meltdown of 2008 and the subsequent recession caused all European welfare states to experience similar problems, including rising unemployment, reduced credibility of the banking sector, falling exports and rising budget deficits. The immediate response was to massively support the financial sector and to protect and then stimulate demand by continuing existing social policies and introducing temporary measures. Bailing out banks, recapitalising them and a host of other measures to save the financial sector came at a high price. Then came rising social expenditures and decreasing taxes and contributions, which put public budgets under extreme financial pressure. The financial crisis and the Great Recession that followed initially celebrated the welfare state for how it cushioned the harmful effects of the crisis as its automatic stabilisers did exactly what they were meant to do: automatically stabilise demand and protect people from hardship. But then something happened, which Mark Blyth has labelled ‘the greatest bait and switch in modern history’: although the fiscal crisis in European welfare states (except Greece) was a consequence of the financial crisis, it became progressively portrayed as its cause. The European welfare states took responsibility for the banks’ massive private debt by socialising it as public debt, the banking crisis was turned into a sovereign debt crisis. The problem became reformulated as one of excessive (welfare) state spending and public debt, which had to be battled by a severe politics of austerity in order to solve the financial crisis and stimulate the economy. The political conviction seems the costly initial response to the crisis and the recession was not sustainable in the long run because it was causing deficit spending to rise dramatically. This ushered in a period of austerity with a view to restore balanced budgets and contain public debt. Governments realised that deficit spending had reached its limits. The politics of reform came to revolve around the question of who was to pay for what, when and how.The outcome of these political struggles will determine who will carry the heavy burden of financial and economic recovery. The crucial political choice virtually everywhere seems to be that a swift return to a balanced budget is the only sensible route to economic recovery and that drastic retrenchment is the only means to achieve that goal. Governments have already agreed on significant public spending cuts, which add up to drastic reforms that induce new distributional conflicts, although more so in some European countries than in others. The European welfare states have been remarkably flexible and capable in their adjustment to their permanently changing environments. Their core social arrangements remain highly popular so that any attempt at a radical overhaul continues to meet public resistance. However, under increasing stress, especially in the wake of large budget deficits and pressures from financial markets, it is not evident that core social programs can still be protected through reform; they may become victims of the pending distributional battles or of policy drift. Severe budgetary problems, the unpredictable but threatening responses of financial markets and the real economic consequences of the financial crisis not only pressure for further reform, but possibly undermine the political capacity to implement those reforms needed to guarantee the continued protection of people against social risks that the welfare state has so far offered. The future of the European welfare states looks gloomy. Or does it?