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Europe is drowning in their welfare state. The problem with a welfare state is that with each increment you give to the people, that is another sum of money you cannot take back at a later date. While it is easy to raise benefits for the population, it is really hard to take it away from them in time of need.

The first main problem of backing out from a welfare state is the large political obstacle: you simply can’t take something away people are already expecting. Its simply the economics of loss: people would rather lose x amount than gain x amount. So telling people they will lose x for the good of the nation simply is too difficult to do. The long-term welfare infrastructure set-up by past European politicians is simply too hard to breach. Mariano Rajoy is throwing around the word “spending cuts”, but can cut away little because there is little discretionary spending left in his government. Mario Monti has his hands tied because his predecessors have left him with a country that simple austerity measures can’t fix. And France furthermore will likely have a President (Sarkozy and Hollande) who only has strategies to prolong their stagnation. And in Greece, Papademos has a bunch of politicians around him gunning for reelection, and unwilling to make the changes necessary. The problem being, when 90% of the things on your ledger are things that will sink your political career, there is not much you can do. There are many advantages to a democracy, but there are many problems as well.

The other being a purely economic reason. People make purchases depending on their expected income. Once you take away from that, they are going to not only decrease their consumption today, but in the future as well. And sometimes people overreact to small cuts in their, say, healthcare benefits. This creates a negative spiral as people decrease consumption in an overreaction to cuts in benefits, prompting more government cuts to save the stagnating economy. Unfortunately, as Monti, Papademos and Rajoy have pointed out, austerity measures by themselves are not enough. Combine that with the decrease in confidence because consumers are faced with nothing but the destruction of their welfare state, and we have a death spiral that will do nothing but bring the European Union to their demise. And despite all the monetary easing giving banks balance sheets full of cash, there probably won’t be any investment flowing into these countries because of the combination of instability and uncertainty. The state of the government simply allows paranoia locally and abroad to take control.

And simply shaving away the components of the government do nothing to solve the actual problem: the problem that Greece is not Germany. This problem of the rich nations having to save the poor means this problem won’t disappear unless you equalize everyone’s industrial capabilities. Whilst Germany has high worker efficiency and strong export, other nations struggle to keep theirs sustainable. This can only be overcome if the EU homogenizes all the economies within, or finds a way of reform to push the laggers more up to the golden standard of Germany.

Given the difficulty of both solutions, I predict the EU won’t embrace either of these, and will just slowly fall apart. So what can the European Union do? Rather, what should everyone else do? With austerity measures out the window as a possibility both politically and economically, and members of the union failing to think of an alternative, we should definitely hope that European debt won’t drag the world down with it. Don’t play with high risk European debt and equity, and embrace the better Germany when it gets rid of its baggage.

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