ANALYSIS || In Davos everyone is eager to learn about the plans of the new president of the United States
Europe’s generous welfare states are coming under increasing pressure as weak economic growth collides with growing demands on government budgets, particularly due to an aging population.
Donald Trump’s return to the White House this Monday only increases the uncertainty affecting one of the most stable and prosperous regions in the world.
The new US president is expected to speak at the annual meeting of the World Economic Forum this week. European government and business leaders gathered in the Alpine city of Davos, Switzerland, will be eager to learn about Trump’s plans, including customs duties on imported goods and the war on his doorstep in Ukraine.
The United States is the biggest buyer of European products and the tariffs Trump promised during the campaign are expected to slow growth in the region. Even the mere threat of higher import duties could do so, due to the resulting impediment to business investment, as companies appear cautious, according to analysts at Goldman Sachs and JP Morgan.
It is also uncertain whether Europe can count on continued military protection from the US, with Trump threatening in October to abandon NATO allies – the overwhelming majority of which are European states – if they do not increase defense spending.
Earlier this month, Trump asked members of the military alliance to more than double defense spending, making it 5% of their gross domestic product, instead of the current 2% – a level that many European economies have not yet reached, such as This is the case of the Portuguese.
Allocating less of their budgets to defense has allowed European countries to spend more on public services, including healthcare and unemployment benefits. Since 1991, Europe has saved 1.8 trillion euros as a result of reduced defense spending – the so-called “peace dividend” – enabling an expansion of European welfare states “to a level not supported by general economic development”. , researchers at Germany’s Ifo Institute wrote a year ago.
Even a small increase in defense spending would likely put pressure on already strained public finances, which also have to cover other growing demands.
“European governments not only intend to increase defense spending, but also invest in transforming their struggling economies and combating climate change,” say Ifo researchers. “Limited budgetary space confronts them with serious compromise solutions.”
Sacrificing the future
In addition to spending on defense, new technologies and the transition to clean energy, Europe faces another enormous cost: an aging population.
“The burden of aging is a real burden,” explains Peter Taylor-Gooby, professor and social policy researcher at the University of Kent in England. Government spending on the elderly is already “the lion’s share of the welfare state” in Europe, he tells CNN.
Take the case of Germany. To maintain current pension provision, Europe’s largest economy needs to grow at least 2% a year, according to Deutsche Bank chief executive Christian Sewing. The German economy, on the contrary, has contracted in the last two years.
For Europe as a whole, falling birth rates and rising numbers of retirees as people live longer mean a lower percentage of workers and more public spending on the elderly. This leaves less room to invest in training and technology to increase productivity and generate the economic growth – and tax revenues – needed to maintain welfare states.
“To continue paying pensions and health care [para os idosos]we sacrifice the future, which is investing in education, investing in children, investing in research and development”, says Bruno Palier, research director at the Center for European Studies and Comparative Politics at Sciences Po, in Paris. “This is where the fear should be.”
McKinsey calculates that in Western Europe, the predicted decline in the percentage of working-age people in the total population could slow annual per capita GDP growth by an average of almost €10,000 over the next quarter century – which is not an “insignificant” obstacle to improving the standard of living.
To maintain the same growth in living standards recorded since the 1990s, McKinsey calculates 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 by 2050.
Currently, productivity growth in Europe is slowing. This 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 Economic Co-operation and Development.
“If we fail to increase productivity, we risk having fewer resources for social spending,” European Central Bank President Christine Lagarde said in a speech given in November, just weeks after Trump won his second term.
“Our European way [de proteção social] now it is under pressure”, he warned. “We must quickly adapt to a changing geopolitical environment and recover lost ground in terms of competitiveness and innovation. If we do not do so, we could jeopardize our ability to generate the wealth necessary to sustain our economic and social model.”
Olesya Dmitracova contributed to the report
