Europe’s social systems are under serious threat as sluggish economic growth meets increasing demands on government spending, especially due to aging populations. The return of Donald Trump to the U.S. presidency has only heightened the uncertainty in one of the world’s most stable and wealthy regions.
Trump is expected to speak at the annual World Economic Forum this week, where European political and business leaders, gathered in Davos, Switzerland, are eager to hear his plans. Concerns are growing about his proposed tariffs on imported goods and the ongoing conflict in Ukraine, which lies at Europe’s doorstep.
The United States is Europe’s largest buyer of goods, and the tariffs Trump talked about during his campaign are predicted to hurt economic growth in Europe. Even the possibility of higher import taxes could slow growth, as businesses may become more cautious and hold back on investments, according to analysts from Goldman Sachs and J.P. Morgan.
Another major concern is whether Europe can continue to rely on U.S. military protection. Trump has previoously threatened to withdraw support from NATO allies, most of which are European nations if they fail to increase defense spending. In October, he proposed that NATO members should spend 5% of their gross domestic product (GDP) on defense, more than double the current guideline of 2%, a target that many European countries still haven’t reached.
By spending less on defense, European countries have been able to allocate more resources to public services like healthcare and unemployment benefits. Since 1991, this “peace dividend” has saved Europe approximately €1.8 trillion ($1.9 trillion), allowing for the expansion of welfare programs beyond what economic growth alone could support, according to researchers at Germany’s Ifo Institute.
However, even modest increases in defense budgets would strain already stretched public finances. European governments also face other significant financial pressures, such as transforming struggling economies and addressing climate change. Limited financial resources leave leaders grappling with difficult decisions about how to prioritize spending, the Ifo researchers noted.
Europe Faces Productivity Slowdown and Social Welfare Challenges
“To continue funding pensions and healthcare for the elderly, we are sacrificing investments in the future, such as education, childcare, and research,” said Bruno Palier, research director at Sciences Po in Paris. He emphasized that this is where the true concern lies. A study by McKinsey estimates that in Western Europe, the declining share of working-age people in the population could reduce annual GDP growth per capita by $10,000 on average over the next 25 years. This represents a significant blow to improvements in living standards.
To maintain the level of economic growth and living standards seen since the 1990s, McKinsey estimates that productivity in Europe’s largest economies must grow two to four times faster than it has in the past decade. Productivity, measured as GDP per hour worked, is already slowing, making it harder to sustain generous social welfare systems. Data from t4ehe Organisation for Economic Cooperation and Development (OECD) shows that European welfare programs are generally more generous than those in other advanced economies, adding to the challenge.
“If we cannot improve productivity, there will be fewer resources available for social spending,” European Central Bank President Christine Lagarde warned in a speech last November, shortly after Trump’s reelection. “Our European model of social protection is now under pressure,” she said. Lagarde stressed that Europe must quickly adapt to a changing global environment and work to regain competitiveness and innovation. Failing to do so, she warned, could jeopardize the wealth needed to sustain the continent’s economic and social systems
Sacrificing the Future
In addition to defense, technology, and green energy investments, Europe is grappling with another expensive challenge: aging populations. “The burden of aging is a genuine challenge,” said Peter Taylor Gooby, a social policy professor at the University of Kent. He explained that spending on older populations already accounts for the largest portion of welfare budgets in Europe.
For example, Germany, Europe’s largest economy, must grow by at least 2% annually to sustain its current pension system, according to Deutsche Bank CEO Christian Sewing. Yet the German economy has shrunk over the past two years. Across Europe, falling birth rates and longer lifespans mean fewer workers and more retirees, resulting in greater government spending on the elderly. This reduces funds available for other vital investments such as education and technology, which are necessary to boost productivity and generate the economic growth needed to support welfare programs.
Conclusion
The challenges facing Europe’s welfare states are immense and growing. Aging populations, slow productivity growth, climate change, and increased defense spending demands are all putting enormous pressure on public finances. Trump’s policies, particularly on trade and defense, could further complicate the situation, creating more uncertainty for European economies. Without decisive action to improve productivity, foster innovation, and address demographic shifts, the future of Europe’s welfare systems and the stability they provide could be at serious risk.
