Why Europe shouldn’t forsake its social covenant

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News that the International Monetary Fund wants to slash welfare spending is typically about as shocking as the revelation that the Pope is a Catholic. Why – in nomine Patris, et Filii, et Spiritus Sancti – should anyone be surprised?

However, the sheer scale of the Fund’s proposed cuts to Europe’s social expenditure, announced in a policy note this week, was genuinely astonishing: the equivalent of learning not just that the Pope is a Catholic, but that he holds the Guinness World Record for lifetime genuflections and is the original author of the Ave Maria.

The IMF’s basic argument is that Europe’s debt levels – which have soared in recent years as governments have splurged to keep the economy afloat during the pandemic and subsequent energy crisis – are now so high that many countries have no choice but to scrap the welfare system that has underpinned the continent’s society since the Second World War.

“A rethink of the role of government may be unavoidable in some countries,” the IMF proclaimed, with almost ecclesiastical solemnity. “Radical fiscal measures could include reassessing the scope of public services and other government functions, potentially affecting the social contract.”

In other words: Europe, and especially high-debt countries like France, Belgium, and Spain, simply cannot survive – at least as we know them. Strong social protections, decent pensions, free education and healthcare: all must be sacrificed on the altar of fiscal sustainability.

To be sure, the Fund is not the only influential voice calling for Europe’s welfare state to be dismantled – or, at the very least, fundamentally transformed.

German Chancellor Friedrich Merz has declared that persistently sluggish growth means the present level of welfare in the EU’s largest economy “can no longer be financed”. Hungary’s Viktor Orbán, meanwhile, has raged against “Western-type” welfare states for well over a decade.

What is especially notable, however, is the reaction by EU officials – or, rather, the lack of one.

In a panel discussion of the IMF’s report in Brussels earlier this week, Maarten Verwey, head of the European Commission’s department for economic and financial affairs, did not even attempt to rebut the Fund’s argument that Europe’s welfare system is financially unsustainable.

Instead, Verwey showered praise on the report, saying he agreed “very much” with “many” of its proposals, and that “most of them” are already “on the table”.

“I think the real question is not so much that we don’t know what to do,” he said. “It’s more: Can we find the right speed of doing it? I think that is the key challenge.”

Translation: The European Commission agrees that the EU’s social contract needs to be revised, and potentially completely rewritten. But it remains unable to fathom how, at a time of widespread anti-government sentiment, this could be politically feasible.

Verwey’s remarks are, of course, likely to compound labour groups’ fears that Brussels’ drive to “simplify” EU regulations is, in fact, a political pretext to undermine workers’ rights.

They are also rather ironic. During the discussion, Verwey and the Fund’s European Director, Alfred Kammer, repeatedly affirmed their support for Mario Draghi’s proposals for reinvigorating the EU’s stalled economy – whilst conveniently forgetting the former European Central Bank chief’s claim that the bloc’s social protections are “non-negotiable”.

Still, the IMF’s report raises several crucial questions: Isn’t it true that Europe’s debt levels are far too high? And, if so, why aren’t the IMF (and Merz, Orbán, and co.) correct that Europe’s social contract should be shredded?

Funding the fears

One ultimately doomed line of argument would be to claim that Europe faces no debt problem at all. Indeed, a glance at the data provides some superficial support for this conclusion.

In particular, Europe’s debt, while high by historical standards, is still relatively low when compared to the 110% average among advanced economies. Moreover, the eurozone’s current government debt ratio of 88%, while 20 percentage points higher than at the turn of the millennium, has actually fallen by more than 10 percentage points since 2020.

Alas, such considerations are unlikely to convince the IMF; or, for that matter, anyone else. The obvious riposte is that Europe’s debt, although not a major concern now, will become a severe worry in future as its population ages and its climate, digital, and military investment needs inexorably climb.

In fact, this is precisely the Fund’s point. It estimates that, if no action is taken, Europe’s public debt will rise to 130% by 2040: well above the 90% ceiling at which, it predicts, government bondholders risk being spooked, and more than twice the EU’s own 60% official debt threshold.

This, however, points to a second, more plausible line of argument: alternative courses of action are possible.

Maria Demertzis, who heads the Economy, Strategy and Finance Centre at the Conference Board Europe, noted that risks associated with EU countries’ high debt ratios have been exacerbated by low growth – another critical affliction plaguing the bloc’s economy.

“So long as the economy grows and is productive, the urgency to reduce public debt is not imminent,” Demertzis said. “But if you have structural issues with growth and productivity, then the issue becomes much more urgent.”

Her point also underscores a basic mathematical reality: Unless governments are actively paying down what they owe, their debt-to-GDP ratios will only increase if output stagnates or declines.

Demertzis also suggested that Draghi’s proposed growth-boosting reforms – such as removing national barriers to EU financial market integration – would significantly reduce, and potentially obviate, the need to scrap or reform Europe’s welfare state.

“Can we find the political will to accept that national interests are European interests?” she asked. “That’s what you need to do.”

Green, clean, and fiscally mean

Other analysts, however, suggest that the IMF’s push to rewrite Europe’s social contract is misplaced for entirely different reasons.

Sebastian Mang, a senior analyst at the New Economics Foundation, a progressive think-tank, suggested that the Fund places an insufficient emphasis on the risks posed to fiscal sustainability by climate change – which, he said, threatens to “destroy infrastructure, drive up borrowing costs, and slow productivity and growth”.

Mang also argued that, rather than seeking to axe social protections, the EU should prioritise boosting investment in green technologies. These, he said, could be funded in part by wealth taxes as well as special “green interest rates” provided by the ECB, which would allow companies and government firms to borrow more cheaply for climate-related investments.

“The real fiscal risk now comes from climate impacts,” Mang said. “Without decisive action to strengthen resilience and accelerate the shift to cheaper, future-proof technologies like renewables, heat pumps, and clean transport, we will be left with a hefty bill in the future and miss out on economic progress that the transition can bring.”

Such considerations, of course, do not necessarily demonstrate that the IMF is wrong. But they do suggest there is a wealth of alternative – and far less politically toxic – options that should be contemplated before policymakers jettison one of the core pillars of contemporary European society.

Indeed, this point underscores a truth Catholic priests are instinctively aware of: If you’re ready to read someone their last rites, you should be absolutely certain they’re not going to survive.

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