Europe is changing its ways – very, very slowly

They will fight hard to preserve their economic and social model: high tax and extensive welfare provision
Click to follow
The Independent Online

So the centre-left stages a come-back in Sweden and maybe next week in Germany too. European voters, who had been resolutely throwing out the left across the continent, seem to be pausing for breath. Of course all European electorates are different, and national circumstances differ. Nevertheless, just as throwing a leftish government out sends a strong signal to their peers in nearby countries, voting one back in sends out a signal too.

So the centre-left stages a come-back in Sweden and maybe next week in Germany too. European voters, who had been resolutely throwing out the left across the continent, seem to be pausing for breath. Of course all European electorates are different, and national circumstances differ. Nevertheless, just as throwing a leftish government out sends a strong signal to their peers in nearby countries, voting one back in sends out a signal too.

That signal, at its simplest, is that Europeans will fight long and hard to preserve their economic and social model – the high-tax, extensive welfare provision one – if it is at all possible to sustain it. Sweden has the most extreme version of the model, with public spending reaching 67 per cent of GDP in the early 1990s. If Swedish voters are happy to underwrite that, maybe the rest of Europe will be able to carry on with their more modest variations on the theme.

The German election campaign seems to support this view. Whoever wins, the really interesting thing is surely the reluctance of Edmund Stoiber, the challenger, to promise radical reform. His reading of the German electorate is evidently that they would only accept limited changes to the tax and benefits system, even if it has helped create more than four million unemployed. Maybe that wave of rejection of the left that swept across Europe was more to do with resentment of immigration (the key issue in Austria, Denmark, the Netherlands and France) than wider economic concerns about taxation, growth and unemployment.

Maybe. Actually I suspect that what we have seen in Europe over the past two years is a micro version of the great debate that will define European politics for the next generation. And that debate is not about whether Europe will reform its economic model. Rather it is about the pace of change, and in particular the extent to which the young – who have to pay to sustain the model – are prepared to support the old – who in general benefit most from it.

Sweden is hugely interesting because it demonstrates both the ways in which the system is being reformed and the tensions that arise from the slow pace of change. It is wrong to see the social democrats there as old-school "won't budge a millimetre" ideologues, refusing to roll back the frontiers of the state. The public sector is being shrunk quite swiftly. That 67 per cent figure for state spending is now down to about 53 per cent.

Taxes have come down, with the top rate of income tax (including local taxes, which vary depending on where you live) at around 60 per cent. Indeed, for many middle-income workers Swedish taxation is lower that Danish, with the odd effect that now the bridge between Copenhagen and Malmo is complete, quite a lot of people live in Sweden and work in Denmark. You might not think of Sweden as a tax haven, but if you are a Dane...

Public services in Sweden are also being squeezed, or charged for. So there is a fee for a visit to the doctor, and many Swedes are worried that their much-vaunted education system is being neglected. There is certainly some evidence that it is not as good as it used to be. In an OECD survey in 1995, Swedish adults came top of the league as the most literate and numerate. But in another OECD survey two years ago, of the literacy and numeracy of 15-year-olds, though Sweden did all right, it was pretty much middle of the pack, particularly on scientific literacy – and, incidentally, well below the UK.

Worse, even at this reduced level of taxation, Sweden is suffering a brain-drain without a compensating "brain-gain". Very few foreign professionals go to work in Sweden as the country cannot pay competitive post-tax salaries – nor, actually, can Denmark. Swedish firms such as Ericsson base many of the functions that need international talent outside Sweden. And while I have not seen any estimates of the numbers of Swedes who have emigrated specifically for tax purposes, there are large Swedish communities in London and New York.

Of course there are great compensations: Stockholm regularly ranks towards the top of the cities in terms of lifestyle. And if the country's schools are slipping down the performance league, its healthcare system remains towards the top. Unemployment has come down, though it remains high among the immigrant community. And while living standards, once the highest in Europe, are now only in the middle of the pack, it is a perfectly rational choice for Swedish people to make: "Look, we don't mind not getting any richer – we would rather preserve our welfare system and our lifestyle."

Or rather it is, if indeed that is the choice. That, surely, is the issue for Germany and indeed most of continental Europe. If preserving the present level of welfare benefits were compatible with stable or slowly rising consumption, then many people in Europe might well choose that option. In the case of Germany, one could envisage the country scrabbling by with continued modest changes to its pension system, some increase in the retirement age, other gradual structural reforms to the labour market – and not much change in tax levels.

The trouble is that given the increasing adverse demographic shift that is taking place throughout Europe, this may not be enough. Sweden is lucky in that the total fertility rate (the average number of children born to each woman) is around 1.7, about the same as the UK. With some immigration, the population is not likely to shrink much and the ratio of people of working age relative to retirees falls only gradually.

Not so in Germany. Its population is predicted to shrink by more than 10 per cent over the next half century, while the falls in Spain and Italy are even more dramatic. Living standards in West Germany have risen only very slowly since reunification, a testimony to the generosity of its people in helping rebuild the infrastructure of the East. Suppose they don't rise much during the next 10 years, and then start to fall? The likely outcome, surely, is for the young and vigorous to leave, thereby cutting the tax base and increasing the burden still further on those who stay.

The one developed country already facing stagnation in living standards as a result of demographic shift is Japan, but for various reasons, including language and culture, Japan has not yet faced an exodus of talent. The paradox for the European Union is that it needs more labour mobility to compete against the US, but the more people move for higher-paid jobs, the less sustainable is its tax-and-spend economic model.

Western democracies do not have much experience of coping with falling living standards, at least in peacetime. But we do have a bit here. During the 1970s a combination of runaway inflation and pay controls lead to a sharp cut in the living standards of Britain's managerial and professional cadres. It is quite hard now to recall the £6-a-week pay ceiling – either that there was the social cohesion to make such a policy stick, even for a while, or that it would be thought appropriate.

As it turned out, we had a revolution – a revolution that eventually helped to change policy throughout the world, including in Sweden and Germany. Maybe the gradualist approach to reform still being followed in those two countries can be sustained. There is a tremendous political desire in Europe to avoid radical change. Given the costs of any revolution, it is easy to see why many European voters should want to preserve the present system. But will the young pay for it? The young, after all, are the ones who can vote with their feet.

Comments