Europe's economic woes have reached a critical point, threatening to unravel the continent's political stability. President Trump's recent remarks, branding Europe as 'decaying', and his administration's National Security Strategy, questioning Europe's reliability as allies, have sparked justified concern. The numbers paint a stark picture: European real incomes have stagnated since the global financial crisis, with the U.S. pulling ahead by a significant margin. This economic malaise has taken its toll on Europe's political landscape, with mainstream parties suffering and insurgent groups gaining traction. Take Britain as a prime example: the ruling Labour Party's popularity has plummeted, while the left-wing Green Party has seen a remarkable rise, almost catching up with Labour's polling share.
The Greens offer a radical solution, advocating for a break from the economic consensus of the past two decades. They blame austerity measures and fiscal rules for Britain's stagnant living standards. However, this diagnosis is flawed. The state's share of Britain's economy has actually grown since the late 1990s, reaching over 19% in 2010. Austerity merely brought it back to pre-2008 levels. The real culprit behind the UK's stagnation is the dramatic slowdown in productivity growth.
Low productivity is a supply-side issue, and it requires a different approach. Boosting productivity involves making the factors of production more accessible and affordable, allowing the private sector to innovate and invest. In the UK's case, this involves addressing issues in the markets for land, labor, energy, and capital.
Britain's regulatory obstacles to land use are legendary, with major infrastructure projects facing immense red tape. The planning process for the Lower Thames Crossing tunnel, a national priority, resulted in a 360,000-page application and costs exceeding those of the world's longest road tunnel. Meanwhile, housing stock additions are falling short of government targets.
Labor is another critical resource facing challenges. The end of free movement with the EU and the flawed points-based immigration system have disrupted employers' access to overseas workers. Additionally, the number of economically inactive working-age UK residents has increased significantly, and employment taxes have been raised.
The UK's enthusiasm for transitioning to renewable energy has come at a cost. Industrial electricity prices are now almost twice as high as in other major European economies and nearly four times those in the U.S., largely due to green subsidies and network costs.
Finance is another area where the UK and the euro zone have lagged behind the U.S. after the financial crisis. While all three jurisdictions tightened lending and rebuilt capital buffers, the U.S. maintained positive real credit growth, while credit outstanding in the euro zone and UK fell significantly.
The UK's Labour government is addressing some of these supply-side issues. They've published a Planning and Infrastructure Bill to streamline development, accepted recommendations to reduce regulatory barriers for nuclear reactors, and ordered reviews on youth inactivity and mental health-related incapacity. They've also rolled back provisions of the Employment Rights Bill and relaxed capital requirements for banks.
However, the energy sector remains a challenge. An independent analysis shows that a less aggressive transition to renewable energy would be more cost-effective in the long run.
If Labour wants to prove that supply-side reforms, rather than demand-side stimulus, are the key to reviving European economies, they must take action on energy. The solution lies in attracting private investment through supply-side reforms, not in an ever-expanding state.
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Editing and production by Peter Thal Larsen and Oliver Taslic.
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