Regional Outlook : The Welfare Costs That Are Dragging Down...EUROPE : The Continent’s ‘good life’ is getting too expensive, touching off protests and strikes.

Life is good for Myriam Gerard, Alain Dubois and their little family.

With two incomes, they net $3,500 every month, own their own home in the city that calls itself the capital of Europe and enjoy the benefits of Belgium’s liberal welfare democracy--the 13th-month salary (an extra month’s pay each year), the 14th-month salary (a second extra month’s salary each year minus 15%), automatic inflation-indexed pay increases, a company car, free gasoline, a gift from the state of $850 for the birth of each child, subsequent child benefits, food stamps and, of course, six weeks annual vacation, heavily subsidized medical care and the security of a generous state pension.

Fifty miles west of the Gerard-Dubois home, in the small Flemish town of Lembeke, Karel Boone finds the going tougher. He struggles to keep his family-owned cookie business from sinking under wage costs that he says have gone out of control. “If this doesn’t change, there’s going to be a catastrophe in our country,” he said.

Back in Brussels, Jan Smets, who heads the Belgian government’s Cabinet office, sits in a room a few doors down from Prime Minister Jean-Luc Dehaene and mulls the problem of how to rein in a national debt that in relative terms is already more than twice that of the United States and growing fast.

The Gerard-Dubois benefits, Boone’s struggle and Smets’ dilemma are all part of a painful reality that has spread far beyond the borders of this tidy little nation to afflict virtually all the democracies of Western Europe: The tax-supported welfare states that have anchored the region since World War II can no longer be sustained. That realization is making political waves that have washed into the streets.

While the deepest recession in decades has played its part, the crisis that grips Western Europe’s social democracies goes far deeper than any economic downturn.

Instead, the difficulties lie in the worrisome structure of the welfare state and intractable problems such as rapidly aging populations, a large and growing army of long-term, hard-core unemployed and spiraling health care costs. All have increasingly sucked up resources, driving the welfare bill to untenable levels. Traditional sources of funding such as payroll taxes can no longer bear the load. Wage costs in the region have gone so high that they are beginning to price Western Europeans out of competitive world markets.

The fall of the Iron Curtain just over four years ago was the final straw, unleashing a new flow of immigration that has swamped already strained Western welfare systems and placing an array of cheap industrial goods at Western Europe’s doorstep.

“We’ve reached the top of the flagpole,” former Economics Minister Otto Graf Lambsdorff of Germany warned his country’s Parliament in a speech last year. He called Germany’s network of social benefits “too expensive, too inflexible, too static, insufficiently entrepreneurial and dynamic.”

Although his comment was directed at Germany, it was valid for the entire region.

“We’ve hit the peak; we’re looking at the downhill side,” Tony Vandeputte, chief executive officer of the Federation of Belgian Enterprises, said in an interview. “Even within the trade unions and elsewhere on the political left, people are aware that dramatic changes are needed.”

For Western Europe, the idea of questioning the welfare state is an emotional process that represents far more than a discussion on how to resolve an economic crisis. The debate touches the very foundation on which the Western Europeans have built their post-World War II social order.

The region’s generous welfare systems have not only erased poverty as a social blight, they have provided the glue of social cohesion and stability. And during the postwar decades, these social safety nets have become a part of a collective identity, one that Western Europeans believe sets them apart from industrial societies in America and Asia. (Belgian official Smets, for example, in trying to explain his country’s basic commitment to the welfare state, spoke of “the very European idea of solidarity.”)

Western Europeans have carved out a level of affluence that matches that of most Americans, and they have provided for everyone along the way. That ideal is now cracking under the weight of economic imperatives. The budget cutting has already begun, and the only certainty about the future is that deeper cuts will follow.

Some of the most radical rollbacks so far have come in Sweden--the nation whose mixture of affluence, welfare and social justice dates from far earlier in the century. Since taking office in late 1991, conservative Prime Minister Carl Bildt has pushed $20 billion in government spending cuts through the Swedish Parliament, reducing maternity and sick leave benefits, introducing small fees for medical services and making citizens contribute to their own pensions.

More fundamentally, the very value of complete, comprehensive welfare as a social good--once an unquestioned given--is undergoing a rethink. A report published last year by the Swedish Ministry of Finance drew a troubling conclusion:

“What was considered as a central achievement of the Swedish welfare state only a couple of decades ago is now being evaluated differently. Costs have skyrocketed, while effects on economic growth . . . have been increasingly detrimental.”

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A reduced work ethic characterized by alarmingly high absenteeism, an unemployment rate that has increased sixfold in five years and the industrialized world’s highest per capita budget deficit all helped contribute to this conclusion, as did the country’s sharply reduced growth over the last two decades.

The re-evaluation in Sweden has been an important signal for Europe psychologically, because it served as a model to many of the war-torn nations of Western Europe in the late 1940s and early 1950s as they searched for new vision in a post-fascist era. It was from Sweden, for example, that influential leaders such as Germany’s Willy Brandt and Austria’s Bruno Kreisky carried home new political ideas gathered during their wartime exile there.

Today, governments throughout the region are following Sweden again--this time in the politically unpleasant task of taking away what they once gave so generously.

Predictably, the reaction has been intense. Late last year in Germany, steelworkers demonstrated against the abolition of guaranteed lifetime liberal unemployment benefits. (A four-year limit was placed on them instead.) Later, more than 100,000 angry construction workers descended on Bonn to protest a government decision to abolish “bad weather money”--a government subsidy established during the late 1950s that effectively pays workers even when weather conditions shut down a building site.

Faced with growing budgetary strains, Chancellor Helmut Kohl’s government has cut education support, begun to shift health care costs onto the consumer and reduced unemployment insurance. It has yet to confront the implications of an aging population on the country’s welfare system. One in every four Germans will be over 65 by the third decade of the next century, decreasing the economically productive percentage of society.

Meanwhile, employers, straining under the costs of benefits they help finance, are telling trade unions the era of big wage hikes has passed. “The idyllic life is over; turbulent years are ahead,” the leading German news weekly, Der Spiegel, predicted in its 1993 year-end issue.

The picture is similar elsewhere:

* In France, since his election last May, Prime Minister Eduard Balladur has frozen public service wages, extended the number of working years required to draw a full state pension from 37.5 to 40 years and said he hopes to trim more than $500 million from health care spending this year.

* In Italy, over the next decade, the minimum legal retirement age will be increased by five years to 65 for men and 60 for women as a way of cutting pension costs. But fraud remains rampant, and the government has yet to crack down on a system that is estimated to dole out some form of pension to more than one-third of the population.

* In Spain, which embraced the welfare state wholeheartedly only with the Socialist election victory in the early 1980s, reductions in health care and jobless benefits triggered a national general strike last month.

Many experts believe that the cuts so far represent the beginning, not the end, of a painful, socially sensitive process.

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The struggle in Belgium is an example with parallels throughout the region. Despite the fact that 47% of the country’s national income flows into government coffers, it is no longer enough to finance what over the years has become one of Europe’s most comprehensive welfare systems.

For Belgium, the price for this luxury has become the highest national debt (in relative terms) in the industrialized world and a system of financing benefits that many argue has become counterproductive. For example, private-sector employers such as Boone, the man with the cookie business, claim that the costs of welfare benefits are now so high they have become a disincentive to employ new people.

“If I had a new product with a guaranteed market but that product was labor-intensive to make, I would be a fool to launch it here,” Boone said.

Even Prime Minister Dehaene’s coalition government, which includes a number of Socialist ministers, agrees that wage costs must come down. Last year, Dehaene launched an austerity program that included a wage freeze in real terms, a cut in child benefits, a cap on health care spending and a retroactive tax surcharge.

In an attempt to shift some of the burden of benefits financing away from industry, the government has also agreed to cut business contributions to welfare in half for low-wage employees. It hopes to make up the difference by increasing indirect taxes.

What industrial leader Vandeputte called “a very cautious beginning”--and the Paris-based Organization for Economic Cooperation and Development dismissed as wholly inadequate--was nonetheless viewed as a disaster by trade unions. They called Belgium’s first general strike in 58 years last November to protest and have vowed to continue the fight.

Little wonder that other politically sensitive areas, such as the extremely high civil service pensions (90% of working salary for the lower-paid employees and 80% for others), remained untouched. “We are going to live through more and more social unrest,” predicted Robert Voorham, national secretary of the large FGTB trade union. “The (economic) pressures from Central and Eastern Europe have only just begun.”

Voorham agreed that wage costs must drop but insisted that the existing welfare net can--and must--be preserved by a combination of new indirect taxes and serious government attempts to cut down on tax fraud. He argued that trimming the welfare state at a time of record unemployment would risk new tensions that could rupture the fragile social peace that exists between Belgium’s 5.5 million Dutch-speaking Flemings and its 4.5 million French-speaking Walloons.

“You just can’t do that here,” he said. “There’s too much cultural, nationalistic conflict.”

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Xavier Mabille, director of the Center for Socio-Political Research and Information here, went further, claiming that repeated government calls for more sacrifice run the danger of discrediting the entire political mainstream and driving voters to the extremist right.

“Europe is becoming a powder keg,” he said. “The fires have already started in some places.”

But not all are so pessimistic.

Indeed, in Denmark, the government has found a new source for financing its expensive welfare system: exporting its expertise. So far, revenues are admittedly modest, but the Danish Social Affairs Ministry has formed a company called Exsos (Export of Social Systems) and landed contracts in eastern Germany for setting up retirement homes for the elderly and in Estonia to assist in building that country’s first social security program.

“We’re not exporting the level of our welfare--we’re selling our know-how,” stressed Leif Lytken, the ministry’s chief consultant on the venture. “There’s a lot of good opportunities out there.”

Tallying Up the Welfare State The Employer

Gross salary is just part of an employer’s cost in Western Europe. Karel Boone, DEO of Corona-Lotus, a medium-sized producer of cakes and cookies in Belgium, provided this braeakdown for an average employee, using the salary as an index equal to q100:

Gross salary: 100

Annual bonus: 11

Social security: 50

Vacation pay: 12

Sick pay: 9

Insurance: 3

Misc.:6

Total cost to employer: 191

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The Employees

Educator Myriam Gerard a research manager Alain Dubois, a two-income Belgian family, pay a hefty portion of their income to the government, but they get quite a few benefits, too, from both the government and their employers. Here’s a monthly rundown:

INCOME

Combined joint net monthly income: $3,508.82.

TAXES

Combined monthly income tax and social security contributions: $2,438.00

BENEFITS

* Additional, year-end, so-called 13th month salary, valued per month: $241.67

* Additional vacation bonus, so-called 14th month salary, valued per month: $233.92

* Subsidized car and gasoline: $588.00

* Child benefits paid by employer: $88.23

* State child benefits: $147.05

* Employer-paid pension contributions: $164.71

TOTAL BENEFITS: $1,463.58

Europe’s Economic Malaise Burdensome Debt

Most of Western Europe’s social democracies are rolling up huge public debts, in large part caused by costly welfare programs. The United States and Japan also have substantial public debt. * Accumulated public debt as a percentage of gross national product. Belgium: 1995 (forecast): 145% 1980: 69% * Italy: 1995 (forecast): 118% 1980: 62% * Sweden: 1995 (forecast): 91% 1980: 35% * Netherlands: 1995 (forecast): 83% 1980: 40% * Denmark: 1995 (forecast): 72% 1980: 22% * Spain: 1995 (forecast): 66% 1980: 18% * France: 1995 (forecast): 66% 1980: 37% * Germany: 1995 (forecast): 60% 1980: 33% * Britain: 1995 (forecast): 56% 1980: 54% * UNITED STATES: 1995 (forecast): 64% 1980: 38% * Japan: 1995 (forecast): 72% 1980: 52% *

Source: Organization for Economic Cooperation and Development *

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Generous Benefits Workers’ benefits are more extensive in Western Europe than in America or, in most cases, Japan. * Benefits as percentage of total compensation (1992). Belgium: 47% Italy: 52 Sweden: 44 Netherlands: 46 Denmark: 21 Spain: 39 France: 49 Germany: 46 Britain: 32 UNITED STATES: 25 Japan: 25 *

Note: To account for exchange rates, the figures have been rounded off. Source: Assn. of German Industry, Cologne. *

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Long-Term Unemployment The region’s unemployment is structural in nature, and jobless benefits constitute a permanent drag on its economy compared to that in the United States and Japan. *

* Long-term jobless (one year or more) as percentage of total unemployed (1991). Belgium: 62% Italy: 67 Sweden: Not Available Netherlands: 43 Denmark: 31 Spain: 51 France: 37 Germany: 46 Britain: 28 UNITED STATES: 6 Japan: 18 Source: Organization for Economic Cooperation and Development