Does the Welfare State Keep a “High and Stable”Level of Demand in Europe?

The debate on the Welfare State is mainly focused on a supposed trade-off between growthand equity, more precisely, on the sustainability of social programmes and their effects on individualincentives to work and save. In this paper we focus on the relation between Welfare State andaggregate demand. The starting point is the claim that consumption levels in US are responsible forthe high rate of growth of the economy during the period 1995-2000, and that the slowing down ofconsumption in Europe (both in absolute levels and comparatively to the US) is a major factor inexplaining the poor performance of the EU countries.We distinguish three effects through which the welfare state may affect demand for consumption:a “macroeconomic” effect, related to the stabilisation function of the public policy; a“crowding out” effect, induced by the “substitution” of private consumption with public expend iture;and an “income” effect caused by the fiscal austerity (both implemented and announced) imposedby the stability pact.° Dipartimento di Contabilità Nazionale e APS, Università di Roma “La Sapienza”. Riccardo.massari@uniroma1.it.* Dipartimento di Economia Pubblica, Università di Roma “La Sapienza”. Annamaria.simonazzi@uniroma1.it.