Western governments are running out of other people’s money
FOR decades, the sirens of the Western world have sung a seductive tune: that the state can be all things to all people without ever sending the full bill. Cloaked by the “peace dividend” of the 1990s and cushioned by a long era of basement-level interest rates, politicians from Washington to Berlin indulged in a fantasy of permanent expansion. But the music is stopping. A tightening fiscal vise is closing on the West, and the structural rot it reveals is the result of a long, comfortable nap in the face of demographic and economic reality.
The numbers are as stark as a winter morning in the Ardennes. America’s public debt now scales 120% of GDP; France sits at 110%; even Britain, despite its periodic bouts of “austerity,” hovers around 100%. Budget deficits are no longer cyclical emergencies but permanent fixtures. In 2024 the United States ran a deficit near 6% of GDP—a figure usually reserved for deep recessions or total war, yet occurring during a period of nominal growth. Germany, the self-appointed schoolmarm of European frugality, boasts a debt-to-GDP ratio of 65%, but its surface-level calm hides the same roiling pressures of an ageing society and sclerotic investment.
The core of the malaise is a quiet, steady accumulation of “rights.” Social welfare, health care, and education now devour between 45% and 55% of total public spending across Western Europe. In France, social protection alone siphons off 30% of GDP. These are not merely budget lines; they are secular religions. To suggest reforming them is, for a politician, a form of professional martyrdom—just ask Emmanuel Macron, whose modest attempts to raise the retirement age saw Paris engulfed in the smoke of burning bin-bags.
During the post-Cold War lull, defence spending was the “adjustable margin” that funded this largesse. Military budgets plummeted from 5% of GDP to 2%, and the savings were promptly poured into the maw of entitlement systems rather than productivity-enhancing reforms. It was a classic case of eating the seed corn. Voters were promised more generous welfare and better services, delivered not through efficiency, but through the magic of the printing press and the bond market.
Now, the West faces a demographic pincer movement. The pay-as-you-go model—where today’s workers fund today’s grey-beards—relies on a steady stream of young tax-payers. Yet fertility rates in the EU average 1.5, well below the replacement rate of 2.1. By 2050, Germany’s working-age population will have shrivelled by 10%, while nearly a third of its citizens will be over 65. The fundamental equation of growth is simple:
Economic Growth=Population Growth+Productivity Growth
With population growth in retreat, productivity must do the heavy lifting. Yet since the financial crisis, it has been a laggard, averaging barely 1% a year.
The European model also suffers from a peculiar lack of “capital formation.” In countries like Germany, the state’s dominance in retirement provision has stifled the development of deep, private capital markets. Contrast this with South Africa: despite its myriad dysfunctions, its tax-deductible private pension system creates a pool of investable capital that supports domestic firms. Germany, by contrast, lacks a vibrant ecosystem for domestic equity; its stock market is a shallow pool for an economy of its size.
To break the stasis, Western leaders must rediscover the lost art of honesty. The path forward requires a messy, difficult pivot: moving toward funded pension provision, deepening capital markets, and slashing the thicket of regulation that smothers innovation before it can scale.
The alternative is a slow, brittle decline. Europe and America are not yet insolvent, but they are perilously short of “margin.” Without a vision that moves beyond defensive entitlement-hugging, the fiscal vise will continue to turn. Politics will grow more populist and more fractious as the state fights to distribute a shrinking pie. The arithmetic is unforgiving; the only question is whether the West’s leaders have the stomach to face it.