3 April 2024

Is Europe headed for a financial crisis?


Doomsday scenarios are in high demand in Europe these days, which is understandable when there is no dearth of bad news coming down the wire. Forecasts for German economic growth were revised downwards once again this week, with expectations now at a meagre 0.1% GDP growth. France, the second-largest economy in the European Union, has apparently lost all control over its public finances and possesses debt levels exceeding 100% of GDP, a problem also faced by Greece, Italy, Portugal, Spain and Belgium. Put simply, some of Europe’s major economies are on an unsustainable economic trajectory, with a growing gap between government spending and revenues.

There are, however, some reasons for optimism. Poland, for example, has experienced a three-decade-long “economic miracle”, during which GDP more than tripled; if measured per capita, it almost quadrupled. This is a unique success story which does not receive the attention it deserves, largely because Left-leaning Western politicians are afraid that the economic success of a deeply conservative country could strengthen their domestic competition. Nevertheless, it shows that economic growth is possible — even in the often sclerotic EU.

Poland isn’t alone in this success. Sweden has tied state pensions to overall life expectancies, thereby ensuring assets will exceed liabilities in the national pension system. Meanwhile, Denmark enacted a governing reform in 2007 which reduced the number of municipalities from 271 to 98, with no municipalities representing fewer than 20,000 citizens. This allowed the Copenhagen government to make public services more efficient and fiscally sustainable.

The growing worries that Europe is heading for a renewed financial crisis are justified, but there are clearly a number of possible solutions which are already being pursued by smaller EU member states. One key problem is the inability of Paris and Berlin to address the decline of their domestic economies, and the unwillingness of Emmanuel Macron and Olaf Scholz to address the mostly homemade causes.

Bureaucracy and regulations need to be slashed, not expanded, in order to create incentives for capital formation and innovation. Retirement ages need to rise, especially since failed immigration policies which have mainly attracted unskilled labour will not solve the demographic time bomb coming for the pension systems. Finally, people need to be incentivised to work and not rely on government largesse — an issue that has been exacerbated by the current coalition government in Germany.

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