Welfare State: Europe's Economic Armageddon

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PARIS -- In the streets of Europe, it's been open warfare over welfare as striking workers fight with police over slashed benefits.

With wealthy European nations edging closer to the brink of insolvency, governments have been forced to cut lavish welfare benefits Europeans still believe to be a birthright.  

Some say the welfare state is dying. Perhaps this is evident nowhere more so than in France.

A Nation on the Edge
 
For decades, France has been running a welfare state it can't afford. And now, aging demographics have doomed it. Economists say it's only a matter of "when" and not "if" the system collapses. 

French economist Bertrand Lemmincier, at the Universite Pantheon-Assas-Paris, predicted the collapse of the French pension system 20 years ago. If the system is not reformed enough, he believes insolvency could happen suddenly and would stun the world.

"Nobody will expect that France will collapse in one month," he said. "But we are at the edge of that. We don't know the date. My point is it will be more like overnight, like in Greece."

France hasn't had a balanced budget in 36 years. And each year, fewer and fewer workers are paying into a system with more and more retirees. When French President Nicholas Sarkozy sparked riots by adding two years to the retirement age, it only shrank the deficit spending - it didn't stop it.

Death of the Entrepreneur

The welfare state hasn't just brought European governments to the brink of financial ruin. It has all but killed the entrepreneurial spirit by making citizens dependent on the state and by making it expensive and risky to start a small business.  

In a 2005 poll, 75 percent of French young people said they want to work for the government because a government job all but guarantees lifetime employment with a secure retirement.

"The welfare state has created many vicious circles because it pushes people to rely on the government to receive money," French academic and writer Guy Milliere explained.

"People think that it's the government that creates jobs, that it's from government that they can receive an income," he continued. "They think capitalism is bad, that free enterprise is bad."

"That's the big problem with the French," French Economist Emmanuel Martin, with the Atlas Economic Research Foundation, said. "They've been brainwashed by politicians that the welfare state is like Santa Claus when in fact its not."

But the state feels like Santa Claus when so many of the French don't pay into the system.

"Half the population in France does not pay the income tax," Martin said. "They don't pay any income tax because of the progressive system."

The French did elect Nicholas Sarkozy to reform the welfare system. But when the cutting began, a majority said they backed the strikers.

Toxic Business Climate

France's business climate is so toxic that it makes a job a very precious commodity. Small businesses avoid hiring because employees are almost impossible to fire. It also cost companies double the employee's actual salary because of the huge payments companies must make into the government welfare system.

"And this produces what?" Martin asked. "This produces unemployment."

Since the end of the 1970s, France has been stuck in double-digit unemployment. The major economic sector has become the state.

The situation is similar all across the European Union. Today, the public sector now accounts for more than half - 50.4 percent - of the GDP in the European Union.

Following Europe off a Cliff?

So why is America copying Europe? The U.S. Bureau of Labor statistics show that in the last 10 years, America's private sector lost 3 million jobs while the public sector gained almost 2 million jobs.

America also has dangerous levels of debt, high unemployment, and signs of economic stagnation.

The French economists CBN News talked to think it's foolish for America to be exploding the size of its welfare state at the very moment Europe's is falling apart.

"You in the U.S. are doing exactly the wrong thing in copying our system," Economist Cecile Phillipe, at the Institut Economique Molinari, said.

"The welfare state as it has been built is dead," Milliere said."The government doesn't want to say it's dead because if the government said it, there would be much more strikes, much more riots."

"The people believe the government can print money and send it from the sky," he said. "People don't understand how the economy works. They don't understand why the welfare state is dying."

So while Europe has long prided itself on its generous welfare system, the failure of the welfare state is giving Europeans and the world a painful lesson in economics.

*Originally broadcast on Nov. 16, 2010.

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