Does Europe have its own Katrina-in-waiting?

By Melvyn Krauss

Tuesday, Oct 04, 2005, Page 9

ILLUSTRATION: YU SHA

As Europeans watched US President George W. Bush stumble over the death, destruction, and chaos wrought by Hurricane Katrina in New Orleans, some could not help patting themselves on the back and saying, "Thank God for our social solidarity."

True, no European country worth its salt would ever allow its citizens to fall into such dire poverty that they literally could not escape from their homes in the face of a natural disaster. And all Europeans -- not only those on the left -- were truly shocked and appalled by Katrina's vivid demonstration that there apparently is no bottom for the US' poor.

But this concern and sensibility is a little too self-congratulatory, for it allows Europeans to gloss over the very real problems they now have with their own vaunted social solidarity.

For one thing, while Europe's doctrine of social solidarity preaches fairness and equality, it masks an "insiders' society" that is spectacularly unjust at the upper end of the income spectrum.

`European social solidarity nonetheless is failing lower-income groups by not sufficiently delivering to them the benefits of economic growth.'

Welfare-state typically get the best doctors, the best concert seats, the best flats in the best neighborhoods, and so on, because of Europe's stubborn refusal to use prices and the market mechanism to allocate key goods and services. Outsiders find it difficult to compete when "who gets what" depends on knowing the right people.

Surprisingly, the treatment of elites in Europe may not be all that different from the US. The US favors its elites by giving them tax cuts. Europe favors them by bumping them to the head of waiting lists and giving tax breaks to capital.

Second, while the shame of New Orleans could never happen in Europe, European social solidarity nonetheless is failing lower-income groups by not sufficiently delivering to them the benefits of economic growth. This is perhaps the welfare state's most glaring weakness. Though social solidarity and economic growth are by no means incompatible, Europeans -- quite unwisely -- have opted for an inefficient variety of the welfare state.

"The labor market is the key," says Bundesbank President Axel Weber, a Social Democrat recently appointed to his post by Gerhard Schroeder. "In Europe we need to have more flexible labor markets and more structural reforms."

But European social solidarity too often has pursued its objectives through economically costly direct interventions in labor markets rather than in more market-neutral ways.

For example, in order to protect workers' jobs, Europe's welfare state has made it difficult for firms to fire them. But he who can't be fired won't be hired, and he who won't be hired won't quit. This means that the unemployed can't find jobs (even though there is useful work for them to do), and that workers who have jobs will not move to potentially better ones. The inevitable result is persistent high unemployment and labor immobility.

It doesn't have to be this way. Social redistribution can be effected through fiscal measures rather than by direct intervention in the labor market. That's how it was done in the early days of the welfare state.

But as the "revolution of rising entitlements" took hold in the 1960s and 1970s, trade unions have adopted the position that labor is entitled not only to a job, but to a job in the region and firm of its choice. This version of the welfare state has proved devastating for Europe's employment and economic growth.

Finally, while Europe's left may be boastfully proclaiming in Katrina's wake, "Thank God for our social solidarity," there is considerable doubt even about what "our" actually means.

The homogeneity of Europe's nation states is decreasing, with immigrants posing a growing challenge for social solidarity, while the EU as a whole faces a similar dilemma: Is a Dutchman in Amsterdam supposed to feel as much solidarity with a Greek in Athens as with a fellow Dutchman in Rotterdam?

Which us back to Katrina. A lot has been said and written in the wake of the disaster about how little Americans seem to care for one another. And it certainly can't be denied that it is hard to get people in New York, Maine or Utah to spend enthusiastically on levees in New Orleans -- at least until a horrific crisis occurs.

But is it really so different in Europe? Will the Dutch enthusiastically finance public infrastructure in Greece? Will Greeks fund water control projects in the Netherlands? If one takes the EU as one's term of reference, social solidarity between member states would appear to be not that different from social solidarity between US states.

No the US has very real -- and growing -- problems with the fairness of its income distribution. But Europeans should temper their criticism with the realization that Europe has similar problems of its own.

Melvyn Krauss is a senior fellow at the Hoover Institution, Stanford University.

Copyright: Project Syndicate