If There Is No Welfare State, What Will Europe’s Social Contract Be?

The underlying social contract between individuals and the state in Western European nations over the last hundred years has been that the state would grow to regulate and tax virtually every sphere of life—public or private—in exchange for a measure of order and comfort for its citizens. If the state begins to reduce those comforts as order starts disintegrating, but continues to grow and to tax even more, it could be interpreted as a breach of the terms of the agreement.

As I was finishing this article, France’s youngest citizens took to the streets to defend the welfare state under the banner of the “Block Everything” movement. Their demands include greater investment in public health and education, rent controls, retirement at 60, and stronger environmental policies. Protesters have erected barricades, blocked highways and public-transport stations, in an effort to bring the country to a standstill. More than 400 people were arrested. The demonstrations erupted after President Macron appointed Sébastien Lecornu as prime minister, a move widely seen as signaling the continuation of his predecessor’s austerity policies.

These protests underscore the central argument of this article: the welfare state is the social contract that binds Western European citizens to their governments. When those benefits are eroded, many view it as a breach of that contract—one that, in their eyes, justifies civil disobedience.

Friedrich Merz, often dubbed Germany’s “BlackRock” chancellor, has already indicated that there has to be a reduction in state benefits: “The welfare state as we know it today is no longer economically sustainable with what we are producing as a national economy.” That the welfare state suffers from a viability problem is not news. What is news is that the head of the largest economy in the eurozone, with a relatively low debt-to-GDP ratio (~65%), is publicly preparing citizens for a rollback of state benefits.

But Germany is not alone in this conundrum. France’s government, the second-largest economy in the eurozone, with a much higher debt-to-GDP ratio (~119%), has lost a confidence vote in parliament and been dissolved over a budget that slashes public spending. According to deposed Prime Minister François Bayrou, nearly €44 billion in cuts is necessary because, he argues, France has not balanced its budget for roughly 50 years. The economy is expected to grow by no more than 0.6% in 2025, with a public deficit of about 6%. Some have even floated the prospect of an IMF bailout.

Another European nation that might need an IMF bailout—perhaps even more urgently than France—is the UK. The UK’s debt is becoming significantly more expensive to service due to a sharp rise in borrowing costs, which now amount to over £100 billion annually—nearly 10% of the national budget. This comes despite decades of mass privatization of social services. According to many economists, both France and the UK are going downhill in slow motion toward a debt crisis.

The Wall Street Journal, of course, has no doubt why this is happening: “Britain and France aren’t illiquid. They’re insolvent. Their future spending commitments, primarily in the form of expected social-welfare and old-age benefit payouts, far exceed any realistic estimate of the economic growth that will be available to pay those bills.”

Other European nations, such as Spain—whose GDP is expected to grow around 2.5% in 2025—will face a very similar problem with their welfare systems. Spain’s debt-to-GDP ratio is around 100% (compared to Germany’s ~65%), but its share of the budget devoted to social services is almost identical.

Spain’s current growth is predicated on a general increase in the money supply and a relatively successful immigration strategy over the last two decades. The immigrant population has gone from 3.5 million in 2005 to 7 million in 2025. This has contributed to lower GDP per capita, which is why many Spaniards have barely felt the macroeconomic growth. Despite immigration, the birth rate in Spain is among the lowest in Europe (1.12, lower than Germany, France, and the UK), which makes the long-term sustainability of the welfare state questionable under the logic that it is the current workforce that pays for it.

The case for slashing public spending is usually the same: slower economic growth and a smaller workforce reduce the state’s revenues, while the aging population continues to grow and unemployment rises due to slower economic growth. This discourse presents budget cuts as almost inevitable and frames “slower economic growth” as a natural phenomenon, almost like a drought, occurring outside the control of politicians.

That it is outside the control of politicians—who have limited control over financial policy—might be correct for the most part. However, to present it as a natural phenomenon implies assuming that markets operate under objective natural forces, like gravity, unaffected by the actors involved. That is simply not the case. The “markets” respond to the actions of individuals and companies. A case in point is the 2008 crash, which was brought about by a set of specific practices, such as the sale of mortgage derivatives, which were known—at least by some—to be fraudulent and to potentially cause the collapse of the entire system.

The 2008 crisis is a good example because the financial crisis engineered by big financiers, with or without knowledge, was ultimately paid for by ordinary citizens, and virtually no one was held accountable. It will again be ordinary citizens who pay the price of the geopolitical crisis that now affects Europe with the war in Ukraine. The conflict has unleashed war momentum against the interests of most European citizens, both economically and existentially, which could have been avoided or at least settled early on. Its effects are now precipitating a collapse of European economies and societies.

It is not that Europe did not have structural problems before—such as severe demographic decline, chronic underinvestment in digital technologies, a fiscal sustainability problem, or the loss of national sovereignty to an unelected bureaucratic class—but with the war in Ukraine, all these issues have become more pronounced. These problems have been compounded by the loss of cheap energy supplies from Russia—which were a lifeline to both industry and individuals—and the Trump administration’s demand that Europe foot the bill for the war in Ukraine and pay back the U.S. for years of supposedly favorable trade terms.

While Merz warns Germans that they should be ready to see cuts in public spending, he continues to support Ukraine with €9 billion this year and has changed the country’s debt rules, which will skyrocket the debt-to-GDP ratio. According to a recent interview, he claimed that if he had not done so, the “NATO alliance would have disintegrated in June.” NATO member states, compelled at Trump’s behest to raise defense spending to 5% of GDP, will necessarily see cuts in public spending to offset this defense rise.

Germany, France, and the UK are leading European support for Ukraine, promising to give Ukraine €100 billion to buy arms from the U.S. To this spending on Ukraine must be added the “Rearm Europe” plan, which, as Conor Gallagher very aptly argues, will result in armies ill-equipped to face Russia’s forces but well suited to face Europe’s own citizens:

“Defense spending by EU member states is now projected to reach 381 billion euros this year, up over last year’s record of 343 billion. Despite all the money being burned at the altar of Project Ukraine, sober analysts conclude that European nations are woefully ill-equipped to successfully do much of any fighting there, and no amount of money is going to change that for the foreseeable future (…) But all the additional weaponry and surveillance goodies that aren’t immediately tossed into the corrupt pit of death that is Ukraine could be more likely to be used on an increasingly discontented population rather than against Russia. We’re already seeing it happen.”

No wonder many Europeans are discontent when they are told that the basic underlying logic of their relationship with the state—the social contract embodied in the welfare state—has changed, yet they are unable to exit the contract. They are told there is no money for education, healthcare, or pensions, yet there appears to be an unending flow of money for weapons and war—a war that does not seem to be in the interests of most European citizens.

The sovereignty of modern nation-states, which are paradigmatic European creations, rests on the assumption that the state embodies the “will of the people.” The somewhat abstract concept of “will to representation” is converted into “sovereign will” and vested in the “state.” This presupposes that the role of the state and the state bureaucracy is to safeguard the interests of its citizens.

In Europe, the rise of the welfare state dates back to the end of the First World War. But it was really after the Second World War, in a Europe destroyed and impoverished, that the Western European states, with the help of the Marshall Plan, began developing a new social model. The war had left Europe ideologically and morally dead, so rather than ideals or morals, the state offered comfort and security in exchange for obedience and taxes.

This model seemed to work and offered a compromise—a European way—between the capitalist model of the U.S. and the communist one of the Soviet Union. Although some of this is true, the success of the model was predicated on and expanded through the economic preeminence of Western Europe allied to the U.S.—some would say a vassal—especially after the fall of the Soviet Union.

Parallel to, and as a consequence of, the rise of the welfare system was the growth of the state and the ever-increasing tax burden on its citizens. Starting in the 1960s, to finance the state, the value-added tax was implemented—first in France and later throughout Europe. The justification for this new tax was that the state needed the funds to finance welfare benefits. Europeans accepted this and other substantial tax increases, as well as sweeping new laws and regulations, afraid of returning to a pre-war scenario and comfortable with state benefits. So much so that, in Europe, “the state” has become almost synonymous with “the welfare state.”

This logic—Europe’s underlying social contract—has held Western European society together. Though not without critique, it was widely accepted. When François Bayrou proposed the €44 billion cut to social services that ended his government, both the right and the left voted against it. In France, where society is currently extremely polarized, this is not a minor detail but a significant indicator. The protests that have erupted in defense of the welfare state—on which both left and right are trying to capitalize—are further proof.

The current push for costly military readiness and arms spending seems to go against the logic of the welfare state, which is to say, against the interests of ordinary Europeans, thus changing the state’s side of the social contract. Now the state offers security and protection, not order and welfare, and asks more—not less—of citizens. That logic, in turn, requires new threats and enemies—and the launching of new wars. This happens because the state is, economically and ideologically, bankrupt.

This is not an anomaly but a feature of this model of state sovereignty as now embodied in the European Union. If the state embodies the “will of the people,” then the goal of the state, conceived as an expression of sovereign will, has to be nothing more than its perpetual existence. “It is not an end among others; it is that end for which all others can be sacrificed,” writes Paul W. Kahn in Putting Liberalism in Its Place.