The welfare debt trap is eating the economies of Europe
Britain is not the only country living beyond its means; addiction to welfare is also devastating France and Germany
Simon Heffer
20 September 2025 10:59am BST
On Thursday Friedrich Merz, the chancellor of Germany, announced that his country had been “living beyond its means for years”. He singled out its pensions system, among the most generous in Europe, costing 31 per cent of GDP, which one of his minsters had said had a “profound and urgent need for reform”. To the horror of his welfare-loving people, he promised “painful” austerity to spare young Germans the burden of excessive debt.
His problem was similar, but in fact less grave, than that expressed in France recently by its then prime minister, François Bayrou. He blamed excessive welfarism (and especially the pensions bill) for France’s spiralling debt, and said that around €44bn would have to be cut from annual public spending, by raising the retirement age and abolishing two bank holidays. The public were outraged, and 364 of the 577 members of France’s National Assembly flaunted their populist credentials by agreeing with them, and voting to throw M Bayrou out. The French, too, love welfarism so much that they pretend not to recognise the damage caused by excessive public spending, or the urgent need to curb it.
Britain joined this club earlier in the summer, when the Government’s comparatively modest proposal to cut benefits was abandoned because Sir Keir Starmer (whose administration currently enjoys a Commons majority of 148) feared defeat on it. Labour has decided that, apparently like the people of Germany and France, the people of the United Kingdom will not tolerate cuts in their social security benefits, whatever the consequences of profligacy.
At least Herr Merz and M Bayrou have been honest enough to admit the unsustainability of their spending policies, with the last French administration hinting that the International Monetary Fund might have to be called in unless spending and debt were cut, and Herr Merz indicating that pensions may have to be reined in. Sir Keir dares threaten nothing of the sort, so although the consequences of inaction may be similar, they may come as more of a shock.
Government debt is mainly bought by big institutions, and sometimes foreign states. When a country’s indebtedness indicates not merely reckless economic management, but also that there might be unduly high risk about repaying what is already owed, things turn ugly. We have seen this in Britain lately, with bond yields – the levels of interest demanded before somebody will take the debt on – rising steeply.
France, Germany and Britain have all experienced a long-term upward trend in debt, caused for no reason other than political decisions to appease electorates by allowing them, in Herr Merz’s phrase, to live beyond their means.
Germany’s deficit last year was €118.1bn, up €15bn on 2023.
France’s deficit was an even more whopping €168.6bn, even though it had been predicted a year earlier to be an already dangerous €146.9bn.
The outturn was the equivalent of 5.8 per cent of GDP, making a mockery of the Eurozone’s supposed three per cent rule, which France has broken every year since 2019. It is still predicted to be at 6.14 per cent by 2030, and that assumes welfare dependency not becoming any worse.
The UK borrowed £57.8bn in the three months from April to June alone. This was exceeded only during the pandemic, when the addiction to state provision really went out of control.
Between June 2024 and June 2025 the interest payable on central government debt more than doubled, from £8bn to £16.4bn.
The country’s net debt is now equivalent to 96.3 per cent of GDP, slightly healthier than France’s 114 per cent but far worse than Germany’s 62.5. per cent. Herr Merz is agitated by a prediction that German debt will be 74 per cent of GDP by 2030: he is lucky.
What should worry the whole of Western Europe is who their creditors are. One reason developed countries suffered a slump in 1931 was that some of their banks collapsed; it was near-insolvency in Britain in August 1931 that caused serious spending cuts, mainly to the welfare bill, to be promised.
Almost all Ramsay MacDonald’s Cabinet resigned rather than implement them, causing him to form a National Government to do so, thereby restoring international confidence in our finances.
Germany is nowhere near calling in the IMF, though Herr Merz is right to seek to correct the unsustainability of his country’s welfare state now before it becomes perilous. Britain and France, however, are already dangerously near that point.
The Bank of England – whose Governor last week warned the Chancellor that her policies had fed inflation, keeping interest rates up – owns a chunk of the nation’s debt. But so too do pension funds, investment companies and retail banks.
Around a quarter of our debt is owned by foreign investors. What happens to all those investors, at home and abroad, if spending, and therefore borrowing, are not brought under control? History suggests that some will stop buying debt for fear of failing their own investors – indeed, the rise in bond yields suggests that is already happening. And that means if we cannot end our addiction to welfare by political means – treating it as what the Prime Minister has called a “moral” question – then the markets, or perhaps the IMF, will end it for us by denying us excessive borrowing. The need to end the binge is undeniable. All that remains to be decided is how that comes about.
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