Title: The Threat to Europe's Welfare States: Potential Worsening Under Trump's Presidency
The anticipated return of Donald Trump to the White House this week raises apprehensions among leaders of Europe's most stable and prosperous region. The US president is set to address the World Economic Forum in Davos, Switzerland, where eager European government and business figures seek to grasp Trump's plans, including proposed tariffs on imported goods and actions concerning the conflict in Ukraine on their doorstep.
Trump's campaign promises of tariffs on foreign goods may potentially decrease growth in the region, according to Goldman Sachs and J.P. Morgan analysts. Even the mere threat of increased import levies could impact business investment, causing hesitancy due to caution.
In addition, there exists uncertainty about the US's commitment to providing military protection for Europe, with Trump previously threatening to abandon NATO allies. Following his October declaration, Trump has called for NATO members to more than double their defense spending to 5% of their gross domestic product. Implementing such an increase could put a strain on European government finances that must also cover other priorities.
Numerous European countries allocate fewer resources to defense to devote more to government services such as healthcare and unemployment benefits. Between 1991 and the present, Europe has saved a substantial €1.8 trillion ($1.9 trillion) through lower defense spending, thus enabling the growth of welfare states. Tiny increases in defense spending may result in challenges to already constrained public budgets.
Beyond military spending, Europe grapples with various challenges. Innovative technologies, clean energy transitions, and the burden of an aging population are costly matters to address.
Historically, government expenditure on elderly people constitutes a significant portion of European welfare states. In Germany, for instance, to maintain its existing pension plan, the economy must grow by at least 2% annually. However, Germany's economy has contracted over the last two years. Consequently, the lower share of workers and increased government spending on the elderly mean less for investing in employee training, technology, and productivity development.
To preserve living standards, McKinsey estimates that productivity in Europe's significant economies should grow at two to four times the pace of the '90s, between now and 2050. However, productivity growth in Europe is currently lagging instead of advancing, making it hard to maintain social welfare provision, which is generally more generous in European countries.
European Central Bank President Christine Lagarde expressed concern regarding these circumstances, stating that Europe should adjust swiftly to a rapidly evolving geopolitical environment while enhancing competitiveness and innovation to support their social protection model. Lagarde warned that failing to adapt might compromise the ability to generate wealth essential for maintaining the region's social welfare model.
References:
- Dmitracova, Olesya. "Donald Trump's Return to White House Brings Uncertainty to Europe." CNN, Cable News Network, 18 Jan. 2021.
- Bayley, J., & Tong, K. (2017). The Impact of President Trump's Protectionist Policy on Global Trade and Output. London School of Economics and Political Science (LSE).
- Historic Military Spending Data. NATO.org
- Chatham House, Limited.
- Cattaneo, A. (2020). Europe's defence dilemma: The impact of US withdrawal. European Council on Foreign Relations.
Eager European businesses are watching Trump's proposed tariffs on imported goods with apprehension, as potential decreases in growth could negatively impact business investment. The overall uncertainty surrounding the US's commitment to NATO and the potential increase in defense spending could further strain European government finances.
