Twilight of the Euro Welfare State?

Well, as I was saying a little while ago.

From Holman Jenkins, at the Wall Street Journal, "Twilight of the Euro Welfare State?":

Journalists have strained to apply their good guy-bad guy conventions to the Greek crisis. But are the bad guys the greedy, wastrel Greeks? Or are the bad guys the imperious, demanding Germans?

In fact, this narrative is a poor construction. What we’re seeing is less a story of good guy-bad guy than a terminal falling out among Europe’s club of welfare states over the inevitable problem that eventually other people’s money (in Margaret Thatcher’s phrase) runs out.

The Greek combination of welfarism-plus-cronyism, with a large helping of outright corruption, has long relied on other people’s money from abroad to make ends meet. But if the terms imposed by fellow Europeans for fresh loans-cum-aid have lately seemed intolerable to Greek voters, they still took the availability of fresh loans for granted. This week they are learning their right to their neighbors’ money is not automatic after all—and yet, for reasons we’ll get to, don’t be surprised if there’s an 11th-hour bailout.

Let us not kid ourselves, the way many Europeans are kidding themselves, that Greece is entirely unique. Portugal, Italy and Spain—“core” European welfare states—already have made the same transition to dependence on external “other people’s money” to uphold their welfare systems.

Their version of other people’s money is Mario Draghi’s implicit promise to tax all Europeans with future inflation (a promise that remains implicit at this point) to keep their welfare states afloat. If not for the European Central Bank’s promise, these governments likely would already be in the same position as Greece—unable to finance their deficits.

As long as Mario Draghi is on the job, there should have been no dramatic, visible “contagion” from the Greek crisis. And there hasn’t been, for the same reason there was none from the Cyprus crisis two years earlier. There is no “surprise” involved: The markets had already fully internalized that Greece and Cyprus were outside the circle of Mario’s magic guarantee, so there is no reason their default need be seen as heralding other defaults.

But the fundamental long-term problem still remains: How will France and Italy especially (the key too-big-to-fail economies) find their way back to reliance on internal taxation plus voluntary, market-based lending to keep their welfare states up and running? Is this even possible in a democratic political system with large, calcified interest groups? Then again, if European states are already maximizing their option to avoid reform, might not the feared triumph of populist parties in future elections actually be a good thing, producing a crisis that forces action?

Well, Germany has a robust, export-led industrial economy that generates enough wealth to support its welfare state (for now, at least). France, not so much.

But keep reading, in any case.