London
cnn
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Europe’s generous welfare states are under increasing pressure as weak economic growth collides with growing demands on government budgets, particularly from aging populations.
Donald Trump’s return to the White House this Monday only increases the uncertainty facing one of the most stable and prosperous regions in the world.
The incoming president of the United States is scheduled to address the annual meeting of the World Economic Forum this week. European business and government leaders gathering in the Alpine city of Davos, Switzerland, will be eager to hear about Trump’s plans, including tariffs on imported goods and the war being fought in Ukraine.
The United States is the largest buyer of European goods and the tariffs Trump promised during the campaign are expected to reduce growth in the region. Even the mere threat of higher import levies could do so, given the resulting drag on business investment as companies must proceed cautiously, according to analysts at Goldman Sachs and JP Morgan.
It is also uncertain whether Europe can count on continued US military protection, as Trump threatened in October to abandon NATO allies (mostly European states) if they do not increase defense spending.
Earlier this month, he called on members of the military alliance to double defense spending to 5% of their gross domestic product, from the current guideline of 2%, a level many European economies have yet to reach.
By allocating a smaller proportion of their budgets to defense, European countries have been able to spend more on government services, including healthcare and unemployment benefits. Since 1991, Europe has saved US$1.9 trillion as a result of lower defense spending—the so-called “peace dividend”—allowing an expansion of European welfare states “to a degree that is not supported by overall economic development,” researchers from Germany’s Ifo Institute wrote a year ago.
Even a small increase in defense spending would likely put pressure on the government’s already strained finances, which must also meet other growing demands.
“European governments not only aspire to greater defense spending, but also have to invest in the transformation of their economies in crisis and in the fight against climate change,” Ifo researchers stated. “The limited fiscal space poses serious dilemmas for them.”
In addition to defense spending, new technologies and the transition to clean energy, Europe faces another enormous cost: an aging population.
“The burden of aging is a real burden,” said Peter Taylor-Gooby, a research professor of social policy at the University of Kent in England. Government spending on older people already represents “the majority of the welfare state” in Europe, he told CNN.
Take Germany as an example. To maintain the current pension system, Europe’s largest economy needs to grow at least 2% annually, according to Deutsche Bank CEO Christian Sewing. The German economy, on the other hand, has contracted in the last two years.
In Europe as a whole, falling birth rates and rising numbers of retirees as people live longer mean a lower share of workers and greater public spending on the elderly, leaving less to invest in training and technology to improve productivity and generate the economic growth (and tax revenue) necessary to maintain welfare states.
“To continue paying pensions and health care (for older people), we sacrifice the future, which is investing in education, investing in children, investing in research and development,” says Bruno Palier, research director of the Center for Studies Europeans and Comparative Politics at Sciences Po in Paris. “That’s where the fear should be.”
McKinsey estimates that in Western Europe, the projected decline in the share of working-age people in the general population could slow annual GDP per capita growth by an average of US$10,000 over the next quarter century, which would not be an “insignificant” burden on the improvement of living standards.
To maintain the same growth in living standards seen since the 1990s, McKinsey estimates that productivity, defined as GDP per hour worked, in Europe’s largest economies would have to increase between two and four times the pace of the last decade. between now and 2050.
Productivity growth in Europe is currently slowing, which will make it more difficult to maintain social protection, which in many European countries is more generous than in other advanced economies, according to data from the Organization for Cooperation and Development. Economical.
“If we cannot increase productivity, we risk having fewer resources for social spending,” European Central Bank President Christine Lagarde said in a speech in November just weeks after Trump won his second term.
“Our European form of social protection is now under pressure,” he warned. “We need to quickly adapt to a changing geopolitical environment and regain lost ground in competitiveness and innovation. Failure to do so could jeopardize our ability to generate the wealth necessary to sustain our economic and social model.”
Olesya Dmitracova contributed to this report.
