For decades, Britain’s left-wing elites have admired Europe’s high-spending social model.

France, Germany and Scandinavia have long been viewed, perhaps through rose-tinted glasses, as examples of what the UK might be like if governments weren’t so tight-fisted.

Under Sir Keir Starmer, Labor Party is determined to give the country a much bigger state. Official forecasts published alongside the Budget last month suggest government spending will stabilize at around 45 per cent of GDP.

Spending has never been sustained at these levels before; it has only briefly reached such high levels during the country’s worst moments, including the pandemic, the financial crisis and the oil shocks of the 1970s.

So, at last, the UK has a chance to become the high-spending social democracy of Labour’s dreams.

It is unfortunate, then, that this is the moment Christine Lagarde has chosen to issue an extraordinarily vivid warning: Europe’s social models are simply unsustainable.

Weak and uncompetitive economies risk running out of money to fund expanding welfare states unless they can reverse decades of relative decline and emulate America’s runaway success in technology, the head of the European Central Bank (ECB) has warned.

“Our productivity growth in Europe is gradually slowing down, which means our ability to generate income is decreasing. “If left unchecked, we will face lower tax revenues and higher debt rates,” he said.

“We are faced with a rising elderly dependency ratio, which will increase public pension expenditures. And it is estimated that governments will need to spend in excess of €1 trillion (£836 billion) a year to meet our targets. Investment needs for climate changeinnovation and defense.

“If we cannot increase productivity, we risk having fewer resources for social spending.”

These pressures will increase further. For example, pensions are becoming more expensive. In Spain, Germany and France, more than a fifth of the population is now over 65 years old. In Italy, almost a quarter reached this age. Twenty years ago, none had more than 20 percent in the cohort.

The United Nations’ forecasts show even sharper increases to come. In Italy, for example, more than a third of the population will be 65 or older by 2040.

In Britain, not only is the share of pensioners increasing despite the increase in the state pension age, but also the generosity of the benefits they receive.

The triple lock means the state pension increases by: Highest level of inflationwages, or 2.5 percent each year, meaning that benefits paid in old age are guaranteed to grow faster over time than the incomes of those who cover the cost in taxes. The health expenses of retirees are also added to this.

As Lagarde put it: “We are and will continue to face a changing security environment, an aging population, and rising expenses resulting from the climate transition.”

As successive British governments have found, it is extremely difficult to cut any of these benefits. It’s no surprise that voters who paid taxes for previous generations of retirees find it frustrating that they’re being asked to tax less.

Similarly, in France, Emmanuel Macron faced widespread protests against plans to raise the retirement age. Marine Le Pen The National Rally made big gains in this year’s general election, partly on the promise of reversing the rise.

Costs are also rising for other age groups, with more people receiving working age benefits as well as more generous childcare subsidies in Britain.

Europe ‘being left behind’

If Europeans want continue to enjoy this generosityLagarde says they need to find a way to pay the bills.

“Europe is under pressure. The rapid pace of technological change triggered by the digital revolution has left us behind,” said the ECB president and former managing director of the International Monetary Fund.

“We need to quickly adapt to the changing geopolitical environment and regain lost ground in competitiveness and innovation. “Failure to do so could jeopardize our ability to create the wealth needed to sustain the economic and social model that the vast majority of Europeans value.”

While the US economy has recovered from Covid, Europe’s recovery has been clearly inadequate. Germany actually cannot grow from 2019 level. But the problem is not just a post-quarantine effect.

Over the past 20 years, productivity has grown twice as fast in the US than in the eurozone. Output per hour worked rose by more than a quarter in America, compared with less than 13 percent in the single currency area.

In Britain the situation is even worse; productivity increased by less than a tenth.

The world’s largest companies exemplify this problem. By market capitalization, the top five, each worth more than $2 trillion, are all American and led by Apple. all of them technology companies – chip manufacturers Nvidia, Microsoft, Alphabet owns Googleand Amazon.

In sixth place is state oil company Saudi Aramco, the first company from outside the United States, with only $1.8 trillion.

Most of the top 20 are Americans. The first European company ranks 25th; Denmark’s Novo Nordisk, famous for its production of Ozempic and Wegovy and worth much of it at half a trillion dollars.

Europe’s largest technology company is SAP, a relatively unknown giant in business technology in Germany and the 37th largest listed company globally.

Industries in which Europe has traditionally been a world leader are under increasing threat.

Germany’s automobile industry Struggling to compete with cheap electric vehicles from China and fashion and luxury groups face tax risk if President-elect Donald Trump implements campaign policy 10 percent or even 20 percent border tax on imported goods.

LVMHThe 34th largest company and star of the French industry, it ranks high on Morgan Stanley’s list of businesses exposed to US tariffs due to the large share of products the luxury consumer group sells across the Atlantic.

At the same time, its exposure to any slowdown in trade with China shows how vulnerable Europe has become to geopolitical tensions.

Lagarde says the Continent is at risk of a “middle-tech trap”.

“We specialize in technologies developed in the last century. “Only four of the world’s 50 largest technology companies are European,” he said.

“Unlike in the past, Europe is no longer at the forefront of progress. “Our productivity growth, the key driver of our long-term prosperity, is moving away from the United States.”

On top of that come the cost of trade wars and military wars with Russia, the most pressing threat for which the continent is unprepared.

As Lagarde points out, it was wealth alone that created the taxes to be paid to Europe’s welfare states.

The sun is setting on European-style welfarism. Sir Keir needs to watch out; growth must come first.

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