If crises are the test of a nation, Western Europe is failing
The financial crisis and the pandemic have shown how Western Europe deals with crises. And it’s not pretty, writes Paul Ormerod
Karl Marx certainly had the ability to encapsulate a complex phenomenon in a pithy and memorable paragraph.
In a pamphlet on the Crimean War of the 1850s he wrote: “The redeeming feature of war is that it puts a nation to the test. As exposure to the atmosphere reduces all mummies to instant dissolution, so war passes supreme judgement upon social systems that have outlived their vitality”.
In modern jargon, he is describing the effect of a major shock on a socio-economic system which lacks resilience. An economy may continue to function in benign external conditions and even appear healthy. But a large shock rapidly exposes any weaknesses in the ability of the economy to adapt and evolve.
The nations of Western Europe have now experienced two such shocks in less than 20 years. In the late 2000s we had the financial crisis. In the early 2020s lockdown and the pandemic.
And now there is the third, namely the distinct possibility that America will no longer defend Europe.
Recovery after the 2008 financial crisis
The recovery from the financial crisis in Western Europe varied across countries but overall it was poor. Even by 2015, six years after the end of the crisis, several countries had still not regained their 2007 levels of GDP, the year immediately before the crisis. For the most part, however, growth resumed in 2010 and the drops in output in 2008/09 were recovered. In the UK, for example, GDP was some seven per cent higher in 2015 than it was in 2007.
But taking the 2007-15 period as a whole, annual average growth rates were distinctly anaemic. The low growth rates have continued to the present day. The final country to regain its pre-financial crisis output level, Italy, only did so in 2023.
In the UK, growth since 2007 has averaged just one per cent a year. This contrasts very sharply with the 2.7 per cent achieved from the mid-1950s to the mid-2000s. Given the rise in the population, the per capita increase post-pandemic is in fact only just above zero.
Recovery after the 2020 pandemic
The dramatic, adverse consequences of the second shock – lockdowns during the pandemic – have become more and more apparent.
Just to give one example, in the calendar years 2017-19, immediately before the pandemic, the UK government borrowed around £50bn each year. This soared to £273bn in 2020, followed by a further £166bn in 2021. This massive increase in indebtedness continues to hold the public finances in a vice-like grip.
It is plain for all to see that Western Europe as a whole has performed very poorly in response to the major shocks of the financial crisis and the Covid-19 pandemic. For decades after the Second World War, these countries followed what we might usefully describe as the social democratic welfare model.
Regardless of which political parties were in power, the role of the state in the economy and society was very much larger than it was before the 1940s and taxation was necessarily much higher in order to finance the activities of the state.
This model worked well for many years and delivered prosperity on an unprecedented scale. But, in retrospect, it was already beginning to falter by the time of the financial crisis.
The whole thrust of policy was towards less and less risk taking, and to more and more regulation, introduced with the aim of preventing failure. Of course, intentions are not the same as outcomes, and the financial crisis exposed the problems with this approach.
It is hard to escape the conclusion that Marx’s words, originally directed at Tsarist Russia, apply to Western Europe today. We need to embrace innovation and risk much more positively, just as the Americans have done. And they have ridden the crises much more effectively.
Paul Ormerod is an honorary professor at the Alliance Business School at the University of Manchester and an economist at Volterra Partners LLP