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The Northern Model

Watching the north of Europe, some countries experience pangs of jealousy. The so-called Northern Model has asserted itself in spite of a crisis and has become a model for success. Jochen Hille airs the secret of this success.

Those who have been pronounced dead live longer. At the beginning of the 90's, the Northern Model was considered to be a discontinued model. Finland, Denmark and Sweden suffered under economic crises with high unemployment rates and national debt. Only Norway, preserved by riches coming from oil, remained untouched by the crisis in the welfare economy.

The Nordish model: an option for entire Europe?
Photo: Photocase

Today, the economic data for the northern European countries is exemplary - large growth, low unemployment and high employment rates, good state finances and very little poverty. The northern European countries are regularly at the top in international comparative statistics. According to these, those in the north live more healthily and longer; are better educated, less corrupt, and satisfaction with the political system is high.

Is this wondrously fast recovery for the northern states just luck, or is there a system behind it? The northern states of Finland, Norway, Sweden, Denmark and Iceland are characterised by a certain construction method of welfare economy. In Social Sciences, this construction method is called the Northern or Scandinavian Model. As Finland is not a Scandinavian country, the term "Northern Model” is more precise. This welfare model is known to be generous. The high national rates (Sweden 53.7%; in comparison Germany 46.6 % and USA 33.8%[1]) and the high income taxes with strong tax progression – the peak tax rate in 2006 in Sweden was 56.6%[2] - as well as high VAT (approx. 25%) are also typical. In recent years, however, there were clear reforms. In a similar manner to the present German tax reform, company tax burdens were reduced, but the tax base was broadened. It should be mentioned that, due to public tax registers and low corruption in northern Europe, it is very difficult to evade taxes. Tax evasion and illegal employment are also not seen as peccadillos.

The central difference between the Northern Model and the German one lies in the way that in-payments and out-payments are organised in the social security system. In Germany, the insurance principle is predominant. It is based on the assumption – which is becoming increasingly fictive - that the normal employee pursues a permanent and well-paid full-time job during his entire earning biography. The social protection of the traditional male employee and his family is dependent on this system. And the husband and wife-splitting leads to part-time work being most lucrative for the wife. Whoever loses a job in Germany is thrown back onto the low basic social protection (generally Hartz IV). This is only guaranteed if all other income sources and capital is used to support subsistence (principle of subsidiarity). In contrast, the social protection in northern Europe is financed directly from the high tax incomes. The state takes a lot and gives a lot. In this way, the demand on social benefits is primarily based on civilian status. In the same manner, social benefits in northern Europe are conceived as civilian's rights – for all the state children, so to speak.

This has major advantages: it is simple and cheap, as no complicated requirement and assets inspections are necessary. This ensures that all citizens can enjoy social benefits, and not only those who understand the complicated applications. As all civilians have a right to benefits and also are obliged to pay taxes, the system is relatively transparent and is therefore accepted. In contrast e.g. to Germany, less differentiation is made according to job and family status. There is no husband and wife-splitting, but rather an individual taxation. The extremely high earning rates stand in connection with this (Sweden 77.3% Germany 72%)[3], in particular for women. Individual taxation, high living costs, relatively low per capita income and high tax rates for individual employees do, however, make a household in which two people earn necessary. The Northern Model is based – far more so than the German – on the principle that as many people as possible work and pay taxes, and as few people as possible place demands on the expensive social benefits. The simultaneous target and prerequisite of the Northern Model is that everyone works.

A basic pragmatism also belongs to the Northern Model, as well as the tendency to consensual solutions. In northern European political systems, there are no strong veto powers such as e.g. the federal states or the Federal Constitutional Court in Germany. If the state, employers and the powerful trade unions agree on something, it will then be implemented. The high level of national social protection and the trust in the political system lead to changes being accepted politically. The de facto abolishment of protection against dismissal in Denmark would hardly have been possible politically if a massive, also financial, support for those seeking jobs had not taken place simultaneously (Flexicurity).

The democratic national and welfare economy is seen by citizens in northern Europe as a legitimate representative of citizens' interests. The good state is allowed to have a lot of influence on the community; but it is expected that it provides and cares for citizen's fates. There are only two relevant political and legal categories: the good national democratic state and the individual citizen. Here the question is raised as to the transferability of the Northern Model. The Northern Model is based on citizen trust in its democratic, peaceful, fully functional state which is capable of action. Compared to the centralistic political systems of northern Europe with its ethnic and religious (Lutheran) homogeneous populations, Germany and still more Europe is a "sack full of fleas” which is far more difficult to tend. Think of the many veto possibilities in Germany, not to speak of the dynamic multi-level EU systems.

Conversely, the citizens' trust in the political system and the welfare economy in northern Europe is not only a prerequisite, but also the result of transparent and simple rules which consider social protection to be an entitlement for all citizens. The level of social aid money cannot be applied to Germany, nor to Europe against the background of high unemployment. Simple, cost-efficient, understandable and (at first) low social aid money – based on the European citizen's status - would, however, create a collective European self-conception and a responsible community. European citizen's incomes should form the basis for trust and social security in Europe. The northern states show that social security and economic success are not contradictions in terms, but rather that the feeling of security gives the readiness to change.

Further articles on the subject » Tax Policy, » Domestic Policy, » Sweden, » Denmark, » Finland
More from the press review on the subject » Tax Policy, » Domestic Policy, » Sweden, » Denmark, » Finland