Abandoning the Welfare State in Europe?

by Guest Author Dirk Ehnts

Global Economic Intersection Article of the Week

When thinking about current economic problems in Europe, it is clear that we have had a problem with the adjustment in the euro zone. Some countries saw productivity rise faster than wages, other experienced the opposite. So, price levels are now “wrong” in the sense that current account balances are not sustainable. Germany net exports too much, the periphery still net imports too much. It seems now that the Troika is pushing ahead its agenda of abandoning all those ineffective structural rigidities. Here is the Economonitor:

The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Timescites competitiveness gains as a rationale for the minimum wage cut:

The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs.

Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view.

Follow up:

There is good reason to believe that these measures will further depress domestic demand while not leading to an increase in employment. Greece will not be able to export itself out of the slump by relying on minimum wage workers, which are typically not highly qualified. Entering a competition with China is a race that Greeks cannot win.

In the long-run, the determinants of economic growth are something else anyway. So structural reforms are necessary, that’s right, but it seems to me that the current EU leadership mistakenly identifies these with lower wages. I think – and most growth theorists would probably support me on this – that education is the driver of social change, transforming uneducated into highly skilled and knowledgeable (and much more) people. This has huge positive externalities. Garfinkel et al. in their book Wealth and Welfare States make the same point:

It is widely believed that the welfare state undermines productivity and economic growth, that the United States has an unusually small welfare state, and that it is, and always has been, a welfare state laggard. This book shows that all rich nations, including the United States, have large welfare states because the socialized programs that comprise the welfare state-public education and health and social insurance–enhance the productivity of capitalism. In public education, the most productive part of the welfare state, for most of the 19th and 20th centuries, the United States was a leader.

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