Juxtaposing Merkel's (righteous and principally correct) insistence on debt brakes and fiscal discipline with the socialist tendencies of her European (let us print) comrades is at the heart of the crisis in Europe. Nowhere is that more apparent than in these three charts, from the World Bank [5], which highlight just how large in absolute and relative terms Europe's social protection based government spending has become. This situation will only get more demanding as by 2060 almost a third of Europeans will be over 65 years old. While there was a belief that Europeans were willing to accept less growth for better growth (cleaner, smarter, kinder?), in order to meet the needs of an increasingly heavy 'social' burden, government debt brakes will clearly have to be unhitched further, no matter what Merkel demands (increasing tensions), or the 'new growth model' that is heralded but not yet substantive will have to be a miracle.
World Bank [6]: THE PRECIPITATE PROMISE OF SOCIAL PROTECTION
Europe will have to make big changes in how it organizes labor and government. The reasons are becoming ever more obvious: the labor force is shrinking, societies are aging, social security is already a large part of government spending, and fiscal deficits and public debt are often already onerous.
In dealing with government spending, deficits, and debt, it is sensible to start by asking whether European governments are too big; that is, whether they spend too much. They are obviously bigger than their peers. In the EU15, governments spent 50 percent of GDP in 2009; in much of the rest of Europe, this share was about 45 percent—versus less than 40 percent in the United States and Japan, 33 percent in Latin America, and about 25 percent in emerging East Asia. A map of the world resized to reflect government spending instead of land area shows how Europe might look to outsiders (figure 16 below).
[7]
Governments in Europe spend between 7 and 10 percent of GDP more than their peers elsewhere—viz., countries at similar levels of per capita income. The difference is mostly the spending on social protection. For example, Western European governments spend about 10 percent of GDP more than the United States, Canada, Australia, and Japan. The difference in social protection spending is 9 percent of GDP (chart below).
[8]
A staggering 58% of world government spending on social protection is European.
[9]