The numbers — to those who don’t know them — are astonishing. In 1870, all government spending was 7.3 percent of national income in the United States, 9.4 percent in Britain, 10 percent in Germany and 12.6 percent in France. By 2007, the figures were 36.6 percent for the United States, 44.6 percent for Britain, 43.9 percent for Germany and 52.6 percent for France. Military costs once dominated budgets; now, social spending does.
“Survival of the fittest” no longer sufficed. Europeans have never liked markets as much as Americans do. In the 1880s, German Chancellor Bismarck created health, old-age and accident insurance — landmarks regarded as originating the welfare state. The Great Depression discredited capitalism, and after World War II, communists and socialists enjoyed strong support in part because they “had formed the backbone of wartime resistance movements,” writes Barry Eichengreen in “The European Economy Since 1945.”
To flourish, the welfare state requires favorable economics and demographics: rapid economic growth to pay for social benefits and young populations to support the old. Both economics and demographics have moved adversely.
The great expansion of Europe’s welfare states started in the 1950s and 1960s, when annual economic growth for its rich nations averaged 4.5 percent compared with a historical rate since 1820 of 2.1 percent, notes Eichengreen. This sort of growth, it was assumed, would continue indefinitely. Not so. From 1973 to 2000, growth settled back to 2.1 percent. More recently, it’s been lower.
Demographics shifted, too. In 2000, Italy’s 65-and-over population was already 18 percent of the total; in 2010, it was 21 percent, and the projection for 2050 is 34 percent. Figures for the European Union’s 27 countries are 16 percent, 18 percent and 29 percent.
Until the financial crisis, the welfare state existed in a shaky equilibrium with sluggish economic growth. The crisis destroyed that equilibrium. Economic growth slowed. Debt — already high — rose. Government bonds once considered ultra-safe became risky.