Europe’s Generous Welfare States Face Strain as Economic Growth Stalls and Populations Age
The stability of Europe’s welfare states is facing a significant challenge as weak economic growth and an aging population put pressure on government budgets. The return of Donald Trump to the White House heightens the uncertainty, as his plans, including tariffs on imported goods and potential changes to war in Ukraine, may impact European economies.
The United States is Europe’s largest buyer of goods, and the threat of tariffs could decrease growth as companies become cautious. Additionally, Trump’s request for NATO allies to increase their defense spending to 5% of GDP, up from 2%, could further strain European governments, which are already working to balance their books.
Europe’s aging population is also a significant concern, with falling birth rates and rising numbers of pensioners. This leaves less money for governments to invest in training and technology, which is crucial for productivity and economic growth. The burden of aging is already significant, with pension provision being the lion’s share of government spending in many countries.
To maintain the same growth in living standards, productivity in Europe’s largest economies would need to rise at a rate two to four times the pace of the past decade. However, productivity growth is currently slowing, making it more challenging to maintain social welfare provision, which is more generous in many European countries than in other advanced economies.
European Central Bank President Christine Lagarde has warned that the failure to raise productivity could jeopardize the ability to generate the wealth needed to sustain the economic and social model. The European way of social protection is under pressure, and governments must adapt quickly to a changing environment to regain lost ground in competitiveness and innovation.
