LONDON, Dec 11 (Reuters Breakingviews) – Europe’s near-two-decade economic malaise is threatening to destabilise its politics. President Donald Trump this week characterised, opens new tab the continent as “decaying” while his administration’s new National Security Strategy, opens new tab openly doubted whether on current form “certain European countries will have economies … strong enough to remain reliable allies.” These undiplomatic broadsides caused justifiable dismay, yet the numbers do not lie. Relative to the United States, European real incomes have stagnated since the global financial crisis. U.S. GDP per capita in 2024 was 24% higher in real terms than in 2007. Incomes in Germany grew by only half as much; in the United Kingdom, by barely a quarter.The political casualties of this lamentable record are Europe’s mainstream political parties. For a prime example, look to Britain, where the ruling Labour Party recently notched up the joint lowest polling ever, opens new tab for a sitting government barely 18 months after winning nearly two-thirds of the seats in the House of Commons. The beneficiaries are insurgent parties like the left-wing Green Party. Its polling share has approximately doubled since the beginning of the year, taking it within a few percentage points, opens new tab of Labour.
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The Greens pitch a clean break with what they style as the failed economic consensus of the past 20 years. In their telling, Britain’s stalled living standards are due to public sector austerity imposed since 2010, and the spending restraint required to meet arbitrary fiscal rules ever since. Their proposed solution is to re-open the fiscal taps and end the shrinking of the state.
That diagnosis does not stand scrutiny. Far from being in retreat over the past two decades, the share of Britain’s economy occupied by the state has been growing since the late 1990s. The public sector share of Gross Value Added reached over 19% in 2010, from a low of 15% in 1998. Austerity only succeeded in scaling it back to its level immediately before 2008. Today it is once again close to a fifth of the economy.
The real reason for the UK’s stagnation since the financial crisis is rather the dramatic deceleration of productivity growth. In the decade leading up to 2007, GDP per hour worked increased by 2.1% per year according to OECD data – the second strongest in the G7 and close to the U.S. at 2.3%. Since the crisis, the UK’s productivity growth has shrivelled to a pitiful 0.6% per year.
Low productivity is a supply-side problem. It is not caused by a shortage of demand and will not be solved by a still-larger role for the state. Boosting productivity requires policies designed to make the factors of production more freely and cheaply available so that the private sector can employ them to innovate and invest. In the UK’s case, the markets for four of the most fundamental inputs – land, labour, energy, and capital – all play a role.
Regulatory obstacles to land use in Britain have become the stuff of legend. Major infrastructure is one problem. The planning application for the Lower Thames Crossing road tunnel east of London – a project designated a national priority 14 years ago, but on which work has yet to begin – ran to nearly 360,000 pages and, at 267 million pounds, cost more than the actual construction of the longest road tunnel in the world, opens new tab. Meanwhile, the Office for Budget Responsibility, opens new tab expects net additions to the housing stock to fall from an average of 260,000 per year in the early 2020s to 215,000 next year – far short of the government’s annual target of 300,000.Labour is another key resource which has been getting steadily more difficult to secure. The end of free movement between the United Kingdom and the European Union, and the botched points-based immigration system which replaced it, scrambled employers’ access to overseas workers. Meanwhile, the number of working-age UK residents classed as economically inactive increased by nearly 850,000, opens new tab between 2019 and 2024 and remains well above its pre-pandemic level, opens new tab today. After raising employment taxes, opens new tab last year, the government is about to enact a new Employment Rights Bill which the Confederation of British Industry has dubbed, opens new tab a “thicket of regulation”.On energy, the United Kingdom has been among the most enthusiastic proponents of the transition to renewable power, committing to fully decarbonise its electricity grid by 2035 and contracting 39 gigawatts, opens new tab of green generating capacity since 2014. Yet Britain’s success at hitting its targets has not come cheap. Average industrial electricity prices are now almost twice as high as the average for other major European economies, and nearly four times those in the United States. Green subsidies and network costs have accounted for a significant part of the rise in costs since 2019, according to calculations by the Economist, opens new tab.
Finally, there is finance. In the decade before the financial crisis, both the United Kingdom and the euro zone significantly outpaced the United States in the rate of growth of credit to businesses and households. After the crash, all three jurisdictions forced their banks to rein in lending and rebuild capital buffers. In the U.S., however, deft policy meant that real credit growth stayed positive over the next decade and a half – whereas credit outstanding in the euro zone and UK fell by 25% and 28%, respectively, in real terms. This stark difference has been a decisive factor in the divergent performance of the American and European economies since 2008.
The UK’s Labour government is already taking three of these supply-side problems seriously. On land, it has published a Planning and Infrastructure Bill, opens new tab which aims to streamline housing and infrastructure development and recently accepted the recommendations of a major review, opens new tab to slash the regulatory barriers to a new generation of nuclear reactors. On labour, it has ordered independent reviews of youth inactivity, opens new tab and the rising demand for mental health-related incapacity, opens new tab, and rolled back key provisions, opens new tab of its Employment Rights Bill. On finance, UK regulators have this year relaxed capital requirements for banks and introduced a raft of rule changes, opens new tab intended to reinvigorate London’s capital markets.That leaves energy. This week, the independent body which plans the UK’s energy networks published an analysis, opens new tab showing that a less headlong transition would be cheaper over the next two decades.
If Labour really wants to demonstrate how it is supply-side reform attracting private investment that will revive European economies, rather than demand-side stimulus and an ever-bigger state, it should take note.
(Corrects paragraph nine to say green subsidies and network costs accounted for a significant part of the rise in energy prices, not two-thirds as previously stated.)
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Editing by Peter Thal Larsen; Production by Oliver Taslic
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