WASHINGTON, DC – Though the Greek crisis has been placed on pause, the economic situation in Europe remains bleak. Eurozone growth is up slightly from its near-recession levels of a few months ago, but projections by the International Monetary Fund for 2015 and 2016 barely exceed 1%. Unemployment remains above 11% – and twice that among the young (and doubled again in countries like Greece and Spain).
Greece's exit from the eurozone would likely be less disruptive now than it would have been a few years ago. The countries most at risk of contagion – Portugal, Spain, and Italy – are less vulnerable now in the eyes of the markets; the European Union has established a bailout fund; and the European Central Bank has launched a large bond-buying program.
The real challenge in Europe is continued stagnation and rising public-sector fiscal pressures in bloated welfare states with rapidly aging populations. Restoring growth, opportunity, prosperity, and financial stability will require bold solutions to five inter-related problems.
The first problem is fiscal. The math is simple. The tax rate necessary to fund social spending must equal the ratio of the number of people receiving benefits to the number of taxpayers (the dependency ratio), multiplied by the average benefit relative to the income being taxed (the replacement rate). It was this math that led Mario Draghi, the president of the European Central Bank, to declare that, “The European social model has already gone." Too many Europeans are collecting too many benefits, but so far governments have mostly ducked the issue, taking on massive debt in order to postpone the reckoning. Reform that targets social spending at true need is long overdue.