The European Model Is Also Doomed   (February 7, 2009)

Given the abject collapse of "American-style Capitalism" based on "financial innovation," many now tout the superiority of the European version of Capitalism (i.e. one with a stronger social welfare safety net). But the unpleasant demographic and structural truth is that model is equally incapable of paying promised retirement and healthcare.

New correspondent Philip B. recently offered this report on the status if small business taxes and pension prospects in The Netherlands. The questions his report raises can be applied to all of Western Europe and indeed the entire European model of Capitalism: high tax rates supporting a generous welfare/retirement/healthcare system.

Iīll tell you a little story of mine, as it parallels the American situation at the moment in terms of working and realising the only institution working against you is the government.

I had a successful business in Amsterdam for about 8 years and I knew when I started it that it would be to build it up, work towards itīs success and get out while the getting is good. Well I was very lucky, so far, thatīs whatīs happened.

Government interference in terms of income tax, sales tax (19%), property tax, municipal tax, regulations, compulsory government health & disability insurance is on a scale which is unthinkable compared to America or Canada (where I'm originally from). In the Netherlands for instance, once you start hiring employees you've basically signed away your right to any kind of entrepeneural independence. It's practically impossible to fire them and you're weighted down by hefty social security payments (roughly double the net loan the employee receives).

Plus all the semi-governmental institutions come out of the closet: you're compelled to pay for playing recorded music in your business, pension payments into employee pension plans, fees for having a copier and so on and so forth. The only way to do it, make a good living and still have a relaxed social life is to do everything yourself and with your partner and hire on a very minimal part-time and temporary basis.

We sold everything (house and business) (just in time: spring 2007) and have relocated to Crete, Greece. The only real obstacle to leaving was saying farewell to dear friends and family and the only real obstacle here is learning Greek. The current crisis will probably make my savings in euros worthless within 5 years and I'm being optimistic. It'll then be back to helping your neighbors, living from the garden and physical work.

Life as it's been normally lived for thousands of years. The village lifestyle is still very much alive here and even though there has been an added layer of modern conveniences, as they unravel people will realise that life goes on here as it always has. The only concern may be a rise in xenophobia, but the Cretans are famous for their warmth and hospitality to the stranger and I've experienced nothing other than that since being here.

I'm a gen-xer by the way.

Good luck to you in the Great Unravelling.

Just a little about the pension racket in the Netherlands. In practically every sector of the economy there is a collective bargaining agreement which every business in that sector is compelled to participate in, including the compulsory payments into sector pension funds. The largest pension fund in the world (correct me if I'm wrong) the ABP has lost 44 billion euros in the last 6 months.

A few months ago the head of this fund said in an interview "that pension payments are not guaranteed". I expected an uproar in the Dutch media. But not a whimper. This is a fund that participants (in this case all civil servants) are compelled to pay into, there is no opting out. So what this CEO is saying is give me your money but whether I'll invest it prudently and return it with interest at the expiry date is all up in the air.

Can you imagine going to a bank to invest a sizable sum over a long period of time and the manager saying, well we'll do our best but we can't assure you that you'll get any return on this investment. Bad example, but you get the picture.

In any case the Dutch public is absolutely clueless. They've been lulled into a false sense of security by the media and by the efficiency (a dirty word here in Greece, thank god) and success of the dutch economy.

There is going to be political hell to pay when these pension funds start defaulting on their payments not to mention the coming collapse of the state pension system. This time bomb is of course ticking under all the western european countries, yesterday's mild French demonstrations are just a whisper of what is coming down the road.

Thank you, Philip, for this eye-opening report. Peculiar as it may seem to some, the demographics of two workers supporting generous pension and healthcare benefits for one retiree are unsustainable in every economy, not just an "American model" one.

As always, we must consider two factors:

1. What are the incentives and disincentives for small enterprises?

2. What's different now from 1929-1941?

Starting with point 2: What's very different is the overhead/social welfare costs expected of small business, not just in the EU nations but in the U.S.

In France (for example), my brother pays 85 euros in direct social and other taxes on every 100 euros he pays his sole employee. The listing of all the various taxes accompanying each paystub runs over half a standard page in length. Then there are income taxes and a host of other business taxes.

Could a small business owner who squeaked through the Great Depression survive this one? No, for the simple reason that the social welfare and tax burdens are implicitly designed for endless prosperity.

Even more difficult for small business, it is essentially impossible to shed workers in the EU in any other way other than simply closing the doors of the enterprise. Yes, you can quibble about the details, but that is the practical reality.

If we examine the incentives and disincentives of such an "only prosperity" system, we are not surprised to find the informal or "black" economy thriving in the EU--"legitimate" small enterprise is simply too burdened to function except in very high-profit, high-productivity niches of any economy.

We should also not be surprised by the shuttering of tens of thousands of small businesses in both the EU and U.S. economies. The incentives and disincentives currently in place make it almost impossible to start or continue a small business while making informal work while drawing some social welfare benefits extremely attractive--not just financially, but psychologically. Why toss and turn all night wondering how you can meet next month's payroll? Close your business and either pursue it informally, paying no social welfare costs, or do so as a sole proprietor/partnership with zero employees.

As unemployment continues to rise, we might profitably look beneath the numbers at the pernicious set of incentives and disincentives and the unfavorable deomographics which doom high-overhead/fixed cost economies to insolvency and structurally high unemployment.

NOTE: I will be hard-pressed to respond to email for the next week or so--my apologies to all correspondents.

New Readers Comments 2/5/09.

New readers forum up and running! Thank you, reader D.K. for putting this together. Please note I am NOT a moderator and will only be able to drop in sporadically. Other readers have volunteered to moderate, so please be as respectful and cogent as when you write me directly.

Of Two Minds reader forum (hosted offsite, reader moderated)

What's for dinner at your house? has been updated with two new recipes: Quick Easy Vegetable Soup and Pork Butt Stew.

New Operation SERF Installment:

Operation SERF, Part 9

Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

NOTE: contributions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, John K. ($100) for your outrageously generous contribution to this site. I am greatly honored by your support and readership.   Thank you, Chad W. ($25) for your most generous donation to this site. I am greatly honored by your support and readership.

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Your readership is greatly appreciated with or without a donation.

For more on this subject and a wide array of other topics, please visit my weblog.


All content, HTML coding, format design, design elements and images copyright © 2009 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I would be honored if you linked this wEssay to your site, or printed a copy for your own use.


consulting   blog  fiction/novels   articles  my hidden history   books/films   what's for dinner   home   email me