On Europe. Margaret Thatcher
rather, the effect had been to increase social security taxes to support the retired – so burdening business. Finally, Mr Marsden noted:
There is a clear correlation between higher government expenditure and lower employment. In the US, the government share of GDP was twenty-two percentage points below that of France but its employment ratio was fifteen points higher. Britain’s public spending level was eight points below Germany’s, yet its employment ratio was seven points higher.10
Another study of Europe’s social model by Bill Jamieson and Patrick Minford has highlighted the main economically harmful features of the European model: higher state spending, higher overall taxes, higher social security contributions – noting particularly the damaging burden this places on business – higher corporate taxes and higher levels of regulation, especially of labour markets. The results have been eminently predictable, but as an example of wilful self-damage no less shocking all the same: ‘The contrast with the United States is stark. Since 1970 the US economy has created almost fifty million new jobs, while the EU has created just five million.’11
EUROPE’S PENSIONS CRISIS
Another way of describing the difference between the European and the American models is to borrow a rather profound observation of Friedrich von Hayek. In The Road to Serfdom, first published in 1944, Hayek wrote:
[T]he policies which are now followed everywhere [in Europe], which hand out the privilege of security, now to this group and now to that, are nevertheless rapidly creating conditions in which the striving for security tends to become stronger than the love of freedom. The reason for this is that with every grant of complete security to one group the insecurity of the rest necessarily increases.12 [Emphasis added]
The European model epitomises precisely this: it places security above everything else, and in its persistence in eliminating risk it inevitably discourages enterprise. That is the basis of Europe’s pensions crisis, whose full implications are still not widely grasped.
Of course, in one sense the cause of the crisis is demography, the failure of much of Western society to reproduce. One can speculate about the causes for this and what it may tell us of contemporary values, attitudes and institutions. One can also debate whether and how policies might be changed to reverse long-term demographic decline. But such discussions, fascinating as they are, are irrelevant to the crisis much of Europe is facing now.
No less a person than the EU Commissioner in charge of the Internal Market and Taxation, Frits Bolkestein, has admitted that Europe faces a ‘pensions time-bomb’. He has noted that the ratio of workers to pensioners will decline from four to one to less than two to one by 2040. And he observes that if unfunded pension liabilities were shown up in the national accounts of some member states this would represent a debt of over 200 per cent of GDP.13 Italy is the EU country which is facing the worst crisis. It has a fertility rate of just 1.2, the lowest in the world, and also the world’s most costly pensions system, amounting to over 15 per cent of GDP – 33 per cent of worker payrolls, expected to rise to 50 per cent by 2030.14
Continental European countries have walked into a trap from which there appears no painless exit. Of course, they could not know just where demography would lead. But they have known well enough for some years that the promises implicitly made to pensioners could not be afforded. It was precisely because we realised the implications for Britain’s public finances that in 1980 we ended the connection between the retirement pension and incomes (it now rises in line with prices). And in 1986 we cut back state funding of the State Earnings-Related Pension Scheme (SERPS) and provided incentives to opt for private-sector Personal Pension Plans (PPPs). As a result, future state obligations have been curtailed to manageable levels. Britain also now has more money invested in pension funds than the rest of Europe put together. Although other EU countries have made repeated attempts to scale back their social liabilities, none has taken similar substantial steps. As a result, just three countries – the United States, Britain and Japan – possess three-quarters of the entire world’s funded pension assets.15
Quite how the countries of mainland Europe are going to cope with their problems is unclear. But someone is going to be disappointed – either pensioners or workers. And it seems that the official figures actually understate the scale of that disappointment. This is because it is not enough to express the problem in terms of national finances: it can only be understood in terms of equity between the generations. There is nothing theoretical about this. If one generation is expected to carry an excessive burden on behalf of another it will seek by every means to avoid it. It will either demand that past promises are broken, or it will not work, or it will not pay its taxes, or the most talented people will leave. Socialist governments which have tried to tax ‘till the pips squeak’ have ample experience of that. It is the main reason why even left-wing governments today try to keep marginal tax rates down. In the present case, and employing the concept of ‘generational accounts’ – which ‘represent the sum of all future net taxes (taxes paid minus transfer payments received) that citizens born in any given year will pay over their lifetimes, given current policy’ – Niall Ferguson and Laurence J. Kotlikoff have made various projections of the changes required to achieve ‘generational balance’. The scale of what is implied is illustrated by the conclusion that, for example, nine EU countries would need to cut government spending by more than 20 per cent if they wanted to rely on this means to achieve balance.16
THE COMMON AGRICULTURAL POLICY AND PROTECTION
Europe’s pensions problem is relatively recent. By contrast, its agriculture problem is of long standing. Although the European Common Market had its origins in a project to create a common policy towards coal and steel, it was the Common Agricultural Policy (CAP) which from the time of the Treaty of Rome was the central pillar of the structure.17 Political leaders and their policies come and go. Reform programmes rise and fall. But the CAP goes on for ever. No one seriously seeks to justify it. The days when we were told that without it Europe might be short of food have long since passed. Despite successive attempts at reform, not least those initiated by Britain, the CAP is wasteful, environmentally damaging and extremely costly. It still absorbs some £30 billion – about half of the EU’s total budget.18 But it continues because it constitutes the most important reason why the less industrially developed European countries put up with other European programmes that diminish their competitiveness, and it is the unspoken reason why so many new countries want to become members.
The CAP puts up the cost of food for EU consumers, thus increasing our costs and reducing our growth. It also depresses food prices worldwide, as subsidised European food exports deprive farmers in poorer countries of their livelihoods. This is precisely the wrong way round. Industrialised countries need low-cost workforces; agricultural countries need to provide their peasants with incomes. Both lose from the CAP.
The CAP is also a force for global protectionism. It has been estimated that the CAP is responsible for 85 per cent of the world’s agricultural subsidies.19 Not surprisingly, this prompts widespread resentment. Other countries, aware of this scandalous situation, are thus less willing to make compromises and resolve disputes.
The EU is not the only body which subsidises agriculture and it is not the only trade grouping which is inclined to protectionism. But on both counts it is certainly the most serious global offender. It has been estimated that the total annual cost of the CAP to the world economy is about $75 billion, of which two-thirds is borne by the Europeans in the form of higher prices, inefficient production and economic distortions. The rest falls on non-EU countries