European countries are the largest welfare states in the OECD and among the highest in the World. At the same time, Europe’s economic dynamism has faded out and European leaders are getting increasingly worried about it. According to Christine Lagarde, the ECB President, Europe’s generous social model is at risk unless the region fixes a persistent decline in growth. In a recent report, Mario Draghi strongly calls for reforms and investments to reinforce productivity growth, while keeping untouched the continent’s oversized welfare state. For Austrian school economists, this sounds like having your cake and eating it too, because the issues of economic growth and income redistribution are intrinsically linked.
Europe’s problem with anaemic growth
Lagarde acknowledges that Europe trails behind the US in terms of productivity growth. Faced with rapid advance in innovation, the EU remained stuck in the “middle technology trap”, while the US and China are spearheading the digital revolution. Europe is falling behind in emerging technologies such as microchips, AI, and electric vehicles and only four of the world’s top 50 tech companies are European.
The Europeans are trying to have their cake and eat it, too. They cannot have both a strong welfare state and growing economies because production and distribution are not separate processes and the governments are trying to redistribute equitably. The only way the state can do that is to confiscate the goods for redistribution, which destroys the property rights of the owners of the property, thus decreasing production incentives. They are, indeed, between a rock and a hard spot. What do you think is the solution?