Sunday Scribblings

2025: The Year of Tough Choices

In 2025 Europe will be faced with tough choices about its future. The need to make these choices has been there for some time now but as is the way with politicians, as with the rest of us, when faced with the need to make tough choices, they have kicked the can well down the road more than once. But there comes a time when you reach the end of the road with little can kicking room left.

The imminent arrival of Donald Trump back in the White House with, for now, Elon Musk playing consiglieri to his Godfather, will force Europe to confront some harsh realities.

What are Trump’s plans for NATO, European defence, and the Russian invasion of Ukraine? Whatever they are, it seems inevitable that the countries of the European Union will no longer be able to have their defence subsidized by the Americans. A greater proportion of national budgets in going to have to go to defending ourselves. That will mean less money for other things. But it is not a choice that can be dodged with Putin and a revanchist Russia looking to rebuild an empire.

This “guns or butter” decision comes at a very difficult moment. Because across Europe, major economies are stuttering badly. As I see it, these are not short-term “stutters” that we can soon put behind us, but long-term structural stutters. There are no quick or easy answers.

The foundations of the social market economy that Europeans built after WWII are crumbling. The circumstances which allowed European countries to build that model are fast disappearing.

But the expectations of European voters that their politicians can continue to deliver rising living standards have not diminished and they are punishing them when they don’t. It has been framed as the “curse of incumbency”. It might be better framed as the “revolt of unreal expectations”. We are demanding of our political class things they just can’t deliver. Except that neither we nor they know that yet, and if we do, and if they do, we both deny it.

As I see it, the fundamental problem is that Europe is running out of people. Not today or tomorrow, but that is the direction in which we are travelling. And even the journey will be difficult.

In nearly European country we see declining populations. Have a look at these numbers from a recent article in the Financial Times.

Official statistics show Germany’s birth rate fell to 1.35 children per woman in 2023, below the UN’s “ultra-low” threshold of 1.4 — characterising a scenario where falling birth rates become tough to reverse. Estonia and Austria also passed under the 1.4 threshold, joining the nine EU countries — including Spain, Greece and Italy — that in 2022 had fertility rates below 1.4 children per woman.

Not only that, our populations are ageing fast. Declining populations means slowing economies, fewer workers, fewer taxpayers, less government revenue. Aging populations means more demands for healthcare and social care, both are services that are people intensive, just when we have fewer and fewer people to deliver that care.

Europe is not alone in having this problem. Nicholas Eberstadt in Foreign Affairs has dubbed it the “age of depopulation”. For the first time in 700 years:

... since the Black Death in the 1300s, the planetary population will decline. But whereas the last implosion was caused by a deadly disease borne by fleas, the coming one will be entirely due to choices made by people.

People just do not want to have children, or enough children to keep our populations growing, or at least stable.

Allowing people from elsewhere to move to your country to fill labour market gaps is the economically rational thing to do when faced with a falling and ageing population. But in many European countries, and in the US (here), immigration is politically toxic because the available immigrants are not white and are probably not Christians. See also this from the Economist.

In 2011, the French author, Renaud Camus, wrote about what he called the great replacement theory which posits that “political elites” are conspiring to replace white, Christian Europeans with non-white immigrants mostly from Muslim countries. This notion has been a stable of right-wing populists ever since.

Burt if your population is falling and aging at the same time, and you close off immigration then you have got yourself a problem. There will be nobody to do the work that needs doing. There is only so long that you can persist with “demographic denial”.

We European need to confront three other issues. The first two is that we are technological laggards and we are overfond of regulations. This, I think, is the essence of the recent Draghi report. Now, there are probably more pages in the Draghi than the number of people who will read it. Nonetheless, it makes important points.

Whatever about encouraging innovation, we can quickly put a stop to overregulation. Maybe if we do not overregulate we can provide a more enabling framework for innovation. We Europeans lean to “don’t do it in case it goes wrong” rather than “let’s do it and sort our problems afterwards”.

I call it “lawdust”, the belief that if we sprinkle enough law on an economic problem it will make the problem go away. The European Parliament is beloved of this idea. What else are its 800 lawmakers going to do if not make new laws? There must be some rule of politics that the quality of laws decreases in proportion to the quantity of lawmakers involved in making the laws.

Regulations are necessary. We could not drive safely if we did not have rules of the road. I am not a “deregulationist”. But I do think we need more robust procedures to examine the rules we propose and to ask if they are really necessary. I often wonder if we are really all that much better off because of the General Data Protection Regulation (GDPR) or has it just created multiple jobs for regulators and fatter bank accounts for lawyers? Can anyone say with any degree of accuracy if the GDPR has added value to the European economy or the well-being of its people? I am open to answers that are evidence based and not just assertions about “fundamental rights”.

The third? The rest of the world does not owe us a living and competitors in other countries will gladly take our markets from us if they can. They can, and they are.

The problems at Volkswagen neatly summaries some of these issues. A month or two back, VW management announced that because of declining car sales it planned to shutter three plants, dismiss up to 10,000 workers, and cut wages for the rest. Technically, VW had got its EV car strategy wrong and its models were not selling and it was also facing rising costs because of EU regulations designed to push the net zero agenda.

For the past twenty or so years, VW has made substantial profits in the Chinese market, but its market share in China has shrunken dramatically as indigenous Chinese manufacturers have come up with cheaper and technically better models than VW.

Further, the Chinese are now pushing into the European market, with plans to build manufacturing plants in low-cost European locations to avoid tariffs on imports. See this from the Financial Times.

As a piece in the Economist puts it:

The main appeal of a Chinese electric vehicle (ev) to foreign buyers is obvious: high quality at prices Western carmakers cannot match (even allowing for import tariffs on Chinese vehicles). But Chinese EVs do not just offer lower prices. They also have more impressive features. The styling and technology in their 2025 models show where cars, as a whole, may be heading.

Not that China is without problems. See here from Paul Krugman.

After weeks of negotiations between VW management and IG Metall and its works council, an agreement was reached which will see the company scrap plans to close plants and cut wages, but 35,000 jobs will go between now and 2030.

Problem solved or problem postponed? Can VW come up with technically smart EV models it can sell in its declining European home marker in the years ahead? Can it fend off Chinese competition? Can it sell into overseas markets in the face of competition from China and elsewhere? Is it overburdened with over-idealistic European regulations?

Are not VW’s problem Europe’s problem in microcosm? That we can keep doing all the things we have been doing for many years even though the world in which we learnt to do these things no longer exists. That we can forever dodge tough choices.

As readers of these Scribblings know, I live in France which is the middle of a period of political instability. The easy answer to the question: Why is France politically unstable is to blame President Macron for calling a snap general election in the wake of Le Pen’s showing in the Europeans.

But look deeper. It seems to me that the French electorate wants a continuing rising standard of living that no political configuration is capable of delivering. The flagship reform of Macron’s presidency has been to raise the retirement age from 62 to 64. It was, and is, deeply contested. Anytime I listen into France Info I hear another 20-something from Mélenchon’s far-left La France insoumise demanding that Macron resign and that the pension reform be scrapped. They speak without a scintilla of doubt about the correctness of their position.

Le Pen from the far-right demands the same. Some want to take the retirement age back to 60.

This year, French debt as a percentage of GDP will be about 6%. Attempts by the Barnier government to bring it down a modest 1% through cuts and tax rises saw him voted out of office after just three months. I doubt if his replacement, Bayrou, will survive much longer. Why? Because the fundamentals have not changed and there is no political magic spell that can make tough choices go away.

The UK Labour government similarly struggles. Its mantra is economic growth. But there is scarcely a sign of such growth. Now leave aside what rejoining the EU, or even the Single Market or the Customs Union, might do for growth because none of these things are going to happen anytime soon. Even if the UK decided tomorrow that it wants to again join the EU then, as I have pointed out before, it would take some years, at a minimum, for it to happen. There is no quick and easy “rejoining” mechanism for lapsed members.

A recent article in the Guardian notes:

The UK economy flatlined between July and September and is on track to have stagnated over the entire second half of 2024 ... In an unexpected downgrade, figures from the Office for National Statistics (ONS) showed growth in the third quarter was revised down to zero, below an initial estimate of 0.1% made last month.

How much of even this meagre growth is down to immigration rather than “GDP per head” growth? Even “GDP per head” growth can be misleading as it does not necessarily guarantee any extra “pounds in the pocket”, to borrow from Harold Wilson.

So, where is economic growth in the UK going to come from? Where are the businesses that will turbo-charge the economy? The engine that will pull the train?

So, a year of tough choices lies ahead.

As you finish reading this remember that these are “Scribblings”, not some deeply researched and learned academic article or a report from a thinktank. Just thoughts that occur to me as I read newspapers and other stuff that comes my way.

No doubt, we shall return to some of these issues in 2025. For now, a Happy New Year to you all.