Did Pope Benedict XVI Praise Socialism?



No. The quotation some people have in mind when they think that he did is the following. 
But in Europe, in the nineteenth century, the two models were joined by a third, socialism, which quickly split into two different branches, one totalitarian and the other democratic. Democratic socialism managed to fit within the two existing models as a welcome counterweight to the radical liberal positions, which it developed and corrected. It also managed to appeal to various denominations. In England it became the political party of the Catholics, who had never felt at home among either the Protestant conservatives or the liberals. In Wilhelmine Germany, too, Catholic groups felt closer to democratic socialism than to the rigidly Prussian and Protestant conservative forces. In many respects, democratic socialism was and is close to Catholic social doctrine and has in any case made a remarkable contribution to the formation of a social consciousness.
The quotation from B16 is taken out of context, and clues within the quoted passage should indicate that something is amiss in the way it is used. We can find the whole work here. 

So the first question we should ask is, what are the models that democratic socialism finds itself in between? B16 tells us.
Since the French Revolution, two new European models have developed. In the Latin nations the lay model has prevailed. They sharply distinguish the state from religious bodies, deeming them to fall under the private sphere. The state denies that it has a religious foundation and affirms that it is based on reason and rational knowledge. Since reason is inherently fragile, however, these lay systems have proved to be weak, becoming easy prey for dictatorships. They survive only because elements of the old moral conscience have persevered, even without the earlier foundations, making it possible for a basic moral consensus to exist.
In the Germanic world, the liberal Protestant model of church and state has prevailed. According to this model, an enlightened Christian religion—conceived of as essentially moral and involving state-supported forms of worship—guarantees a moral consensus and a broad religious foundation to which the single non-state religions must conform. This model has long guaranteed state and social cohesion in Great Britain, the Scandinavian states, and once upon a time also in Prussian-dominated Germany. In Germany, however, the collapse of Prussian state Christianity left a vacuum that would later provide fertile terrain for the dictatorship. Today state churches throughout the world are marked by fatigue. Moral force—the foundation on which to build—does not emanate from the religious bodies dependent on the state or from the state itself. 
So the models are about the relationship between the state and religion. The Lay model says there has to be a sharp distinction between the two, while the Liberal Protestant model says the state sponsors religion. So, with this context, B16 says there is a 3rd alternative, which is Socialism. He then distinguishes between the totalitarian version, and the democratic version. He quickly condemns the totalitarian version (though he will return to this, more on this in a bit), but then says the democratic version is welcome. It is in this respect that it is good, that it neither abolishes nor mandates religion from the public sphere. So we see that B16 praise for Democratic Socialism had absolutely nothing whatsoever to do with the economic aspect of it, but only the legal aspect of it concerning religion and state.

This is further demonstrated by the more immediate context in which B16 considered another 3rd alternative between the two models. Between the Lay Model and the Liberal Protestant Model is the American Model. Here, B16 has some good, though qualified, things to say.
Situated between the two models is the model of the United States of America. Formed on the basis of free churches, it adopts a separation between church and state. Above and beyond the single denominations, it is characterized by a Protestant Christian consensus that is not defined in denominational terms but rather in association with its sense of a special religious mission toward the rest of the world. The religious sphere thus acquires a significant weight in public affairs and emerges as a pre-political and supra-political force with the potential to have a decisive impact on political life. One can of course not hide the fact that in the United States, too, the Christian heritage is decaying at an incessant pace, while at the same time the rapid increase in the Hispanic population and the presence of religious traditions from all over the world have changed the picture.
To complicate the picture, we have to acknowledge that the Catholic Church today represents the largest single religious community in the United States, while American Catholics have absorbed the free-church traditions on the relation between the Church and politics, believing that a Church that is separate from the state better guarantees the moral foundation as a whole. Hence the promotion of the democratic ideal is seen as a moral duty that is in profound compliance with the faith. In this position we can rightly see a continuation, adapted to the times, of the model of Pope Gelasius described earlier. 
Do you see anything there whatsoever mentioning economic systems? No, again, the topic, the strain of thought of which B16's comments concerning Democratic Socialism are to be found, is about the relationship between religion and the state.

Economics are briefly discussed towards the end of the section of his analysis of these models, however. He picks up the totalitarian model and says it failed for two reasons. The most important failing is the spiritual failing. But the second failing is that, 
The Communist systems collapsed under the weight of their own fallacious economic dogmatism....The essential problem of our times, for Europe and for the world, is that although the fallacy of the Communist economy has been recognized, its moral and religious fallacy has not been addressed.
Socialism collapses not because it was totalitarian and starved souls, but it failed and collapsed because of the economics. But this is what it has in common with Democratic Socialism. So, the critique would extend as well to Democratic Socialism: their economics fail.

So, contrary to popular belief, B16 has put forth an argument AGAINST socialism, not for it.

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