Europe: Democracy, Welfare and Refugees -- An Existential Crisis

Singapore: September 9, 2015

European democracy faces an existential challenge. Demographics, economic structure, and complacency instigate a coalition among voters outside productive life powerful enough to determine economic policy constraining those inside productive life who generate wealth. The result is a growing dichotomy between 'welfare citizens' and 'competitive citizens' undermining nationwide solidarity. Even the friendliest observer cannot eschew the observation that politics is about promising more to non-productive voters. Better welfare, better health care, and lower pension age - you name it. Rarely information about how to pay for it is added. Rarely steps are taken to make life easier for those who actually work.

Welfare economics teaches that a policy step enhances welfare if those who gain can compensate those who lose and still be better off. Forgotten! Those who lose - and there will always be losers - try to get media coverage knowing that if successful politicians swing into gear to placate them. By doing so, political intervention prevents lower respectively higher remuneration from stimulating workers to move from declining to expanding sectors. Politicians rally around 'no one to be left behind'. In the past changing jobs normally meant moving from lower productivity to higher productivity jobs (Churn). This is not really happening anymore explaining a good deal of falling growth in productivity. Too many people are kept in unprofitable business sectors, paid a too high salary to produce too little. Paradoxically the result of political intervention is not higher, but lower wages and a reduction of wage share of Gross Domestic Product because the incentive to move into jobs with higher wages is neutralized. Furthermore the labor market becomes skills driven with those having skills in demand getting a premium, while remuneration for those not so lucky is under pressure from a pool of labor with 'wrong' or no skills.

The combined result is higher unemployment and especially higher long term unemployment, lower productivity growth keeping economies below capacity, almost frightening inequality rewarding those with skills in demand, rising tax burdens, and higher social welfare expenditures.

The decline of manufacturing explains the turn around. Well into the 1960s and the 1970s the majority of voters took part in economic life - earned the money that society spent. Trade unions, farmers association and other groups agreed to limit benefits to those outside economic life. They formed a majority coalition to maintain competitive societies. With the decline of manufacturing the public sector plus those out of the labor market has encroached on the turf of the productive sector.

Even more threatening is the international perspective: Formation of coalitions of countries hijacked by those supported by the public sector fighting to preserve their privileges. People benefiting from the welfare society without any intention of joining the competitive economy sense the threat to their privileges from migrants looking for a better life and ready to join the labor force. Therefore they adopt a closed door policy as we now see in some European countries and detect in the campaign underway for the US presidential election November 2016.

Europe is in the forefront of this quandary. A large number of Europeans fear for their own future if immigrants arrive putting a strain on welfare benefits already under pressure. There is no common cultural heritage between immigrants from Syria, Libya or Africa and Europe adding an uneasiness of welcoming people who are strangers and may disrupt daily life in local communities. These fears and anxieties are legitimate and cannot be brushed away. Unless solutions can be found, Europe and the refugees face an uncertain -- maybe even an agonizing -- future. Solidarity looks fine on paper and in declarations, but is much tougher to deal with in practice.

Can the circle be squared? Maybe. Two policies should be implemented. A better mix of welfare and competitive economies ensuring that welfare does not impede flexibility plus adjustment and welcoming immigrants under the explicit condition that they adapt to host nations and contribute to their economies. Add to this stronger commitment to economic growth in Europe's adjacent geographical areas and a glimmer of hope beckons in the horizon.