What Sweden's Riots Say About Europe's Rising Social and Political Risks

05/28/2013 08:00 am ET | Updated Jul 28, 2013

The riots in Sweden last week are a manifestation of the socioeconomic disequilibrium pervading much of Europe, and the level of frustration that is beginning to boil over among European immigrants and youth. While income inequality has been falling globally since the 1980s, it has been rising in most of Europe. The Gini Coefficient, a widely used measure of income inequality, has risen since that time not only in Eastern Europe, but among Europe's wealthiest societies. Austria, Finland, Germany, Luxembourg, Norway and Sweden are among the Western European countries where inequality has consistently risen over the past several decades. The fact that this has been occurring for so long points to a deep malaise in European societies that the euro crisis has only served to exacerbate, and has raised a host of serious issues European law makers must address beyond short-term economic and fiscal concerns.

According to Eurostat, in much of Eastern Europe, the percentage of the population categorized as 'at risk' of poverty after receipt of social transfer payments was above 20 percent in 2010. In Italy and the UK, that percentage was 17 percent and 18 percent respectively, with the European average being above 16 percent. There has been little improvement since 2010. Unemployment rates have risen consistently in Europe since 2008 (apart from a brief leveling off period in 2010), and reached a new high of 11.8 percent in December 2012. Youth unemployment is approaching 60 percent in Greece and Spain while approaching 40 percent in Italy and Portugal.

Among the long-term impacts of this unbelievably high unemployment is a brain drain among the young, corresponding with an older population over time. In societies where governments have made a social compact to provide a broad range of long-term entitlements, this spells looming disaster. Eurostat notes that since 1960, the percentage of citizens over 65 years of age has tripled, from 10 percent to 30 percent. Elderly benefits account for nearly 40 percent of average social spending among the EU27 governments, with health care taking nearly 30 percent of the pie. The traditional tax base of these countries is declining while the number of individuals dependent on entitlements is rising.

In 2009, expenditure on social protection accounted for 30 percent of GDP among the EU 27 governments, compared with approximately 18 percent in the U.S. and 7 percent in China. Total expenditures have outpaced total revenue among the EU27 since 2000, with the gap having increased significantly, beginning in 2008.

Also according to Eurostat, between 1995 and 2010, total taxes among all European governments dropped an average of 2 percent, with some countries losing as much as 5-6 percent of their tax base during that time. Overall European tax rates on corporations declined more than 8 percent, and labor taxes were down more than 3 percent, between 2000 and 2010. European governments have responded by raising VAT rates, environment and other forms of taxes in an effort to counter the revenue decline.

The corresponding gradual erosion of standards of living in Europe has manifested itself in a number of other ways, including increasing crime rates, tougher immigration laws, and a backlash against minorities and immigrants. The popularity of radical right parties has risen dramatically across Europe since the 1980s, even in countries which have not been the worst affected by the economic crisis. For example, according to the Friedrich-Ebert-Stiftung Forum, in Belgium far right parties took 1 percent of the popular vote between 1980 and 1984, versus 14 percent between 2005 and 2009. During the same period, in Norway the figures were 4.5 percent versus 22.5 percent, and in Switzerland 3.8 percent versus 30 percent.

A greater percentage of the population throughout Europe is becoming increasingly disillusioned with what the post-war social, financial, and political compact has produced, and are seeking more radical alternatives. Previously 'fringe' political movements have benefited while the political center is increasingly being eroded by candidates and parties catering to people's worst fears and darkest visions. Europe's middle class is slowly eroding. People are losing hope. Their sense of security is disappearing. The notion that a better future can be achieved through a painful present is increasingly being challenged.

In Europe, new political divisions are emerging. It is no longer simply a question of left versus right or nationalism versus xenophobia. Today, the choice in increasingly between old world versus new world, and a future which envisions participation in the EU versus one that does not. Voters are likely to support candidates who can demonstrate political sobriety, realism, common sense, and a break from the past. As the crisis endures and the solutions pursued continue to fail to produce lasting and meaningful change, there is a rising risk of civil disobedience, street demonstrations, and political violence.

Many analysts continue to focus on the economic and fiscal manifestations of the euro crisis, while the social and political implications -- which are every bit as important -- seem to garner less attention, yet are having a profound impact on when, if, and how the crisis gets resolved. The crisis is multifaceted and more than likely has another five to 10 years to play out. Europe must address its long-term political, economic and social demons in a realistic and common sense fashion. It will do Europe little good in the long term to forcefully address its fiscal and economic challenges without simultaneously addressing its daunting social and political problems. The risks of not doing so are rising.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk advisory firm, and author of the book "Managing Country Risk".