The British Treasury building in central London. Many economists see a complex new interplay between markets and the state emerging. (Toby Melville/Reuters )

DAVOS 2009

Is Europe's welfare system a model for the 21st century?

DAVOS, Switzerland: Along with skiing and partying into the night, Europe-bashing has long been a favorite sport when the world's business and political elite gather here for their once-a-year winter schmoozefest.

But this year, many of the critics have fallen conspicuously silent. As top executives, government leaders and a wide range of experts gathered Tuesday for the World Economic Forum to talk about the challenges facing the battered global economy, the question many were asking was this: Could the much-maligned social welfare system in Europe end up being the model for the 21st century?

In the United States, the global stock market rout has wiped out trillions of dollars in retirement savings, and rising unemployment is leaving more people without health insurance. In response, officials in the administration of President Barack Obama have been busy studying the Swedish bank bailout of the 1990s and the Swiss and Dutch health care systems. On the environmental front, the officials have been quietly contemplating whether Europe's high fuel taxes and carbon trading system are the right way to limit the burning of fossil fuels that contributes to global warming.

For China, where the demise of the American market has brought to light the perils of excessive savings at home, the government has not only recently proposed a big Keynesian-style stimulus program but has also just announced a three-year plan to provide universal health care. Though modest by comparison, China's health care plan goes in the direction of what has long been considered a fundamental right in Europe.

"When the world's biggest economy and the world's biggest emerging economy look for lessons in the same place at the same time, you know something is up," said Kenneth Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund, who is one of the 2,500 participants in Davos this year. "We are seeing a paradigm shift towards a more European, a more social state."

Such shifts are rare.

The Great Depression of the 1930s eventually ushered in Keynesian demand-side policies and, after a devastating world war, firmly established the need for some sort of social safety net in every major industrial democracy.

The oil price shocks of the 1970s and a wave of inflation helped turn the governing approach in the other direction, empowering Ronald Reagan and Margaret Thatcher and other advocates of lower taxes, smaller government and deregulation.

At the opening of the 2008 World Economic Forum, a front-page article in the International Herald Tribune suggested that global capitalism was again ripe for such a generational transformation. Amid the worst financial crisis since the Depression, that transformation is now in full swing.

With whole swaths of the banking sector being propped up by trillions of dollars in taxpayer funds and hundreds of billions more being dedicated to deficit-financed public spending programs across the world, the most striking feature so far is the comeback of big government.

In the United States, the world's largest and most emblematic market economy, the surge in the growth of the government is going to be financed by a huge increase in borrowing, projected to grow to as much as 10 percent of gross domestic product this year and into 2010 from 3 percent last year.

"We're moving back towards a mixed economy," said Daniel Yergin, chairman of Cambridge Energy Research Associates in Cambridge, Massachusetts, and the co-author of "The Commanding Heights," a history of the last-such paradigm shift, the one toward wider acceptance of the market-driven economy.

The new shift is likely to go well beyond expensive short-term fixes. The ferment suggests that ultimately the United States may move closer to Europe, altering the trickle-down economic doctrine of the past three decades and establishing a new social contract aimed at narrowing the gap between the rich and the rest of society, officials and economists say.

Obama, who called for a "watchful eye" on the market in his inaugural speech last week, wants to make health insurance available to all Americans. Almost half of the $825 billion pledged to stimulate the economy is earmarked for extending health care and unemployment assistance, and investing in public schools.

Meanwhile, Beijing approved a health reform plan worth 850 billion yuan, or $124 billion, last week that sets out to provide free basic health care to the country's 1.3 billion inhabitants by 2011. Each person covered by the system would receive an annual subsidy of 120 yuan, starting in 2010.

As Pascal Lamy, director general of the World Trade Organization and another Davos regular, put it, "It's a cultural revolution."

It is no coincidence that this revolution is unfolding simultaneously in the United States and China, analysts say.

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