Europe will have to “work very hard” to maintain the most generous welfare system in the world and remain globally competitive, said Angela Merkel, the German chancellor, in an interview with the Financial Times.

The key to Europe’s ability to survive the challenge of globalisation is to spend more on research and education and overhaul its tax and labour markets to restore competitiveness, she said.

An unrepentant Ms Merkel, regarded by many Europeans as the author of excess austerity to curb the debt crisis in the eurozone, spelt out her determination at last week’s EU summit in Brussels to see her partners commit themselves to binding contracts for more structural reform.

No final agreement was reached, but details of such contracts between eurozone countries and the European Commission are supposed to be finalised in the next six months.

The chancellor went to Brussels seeking agreement on yardsticks to boost competitiveness as a big step to closer economic co-ordination.

“If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life,” Ms Merkel said in the interview.

“All of us have to stop spending more than we earn every year.”

Although Ms Merkel stopped short of suggesting that a ceiling on social spending might be one yardstick for measuring competitiveness, she hinted as much in the light of soaring social spending in the face of an ageing population. Indeed, she says Germany is facing one of the greatest demographic challenges.

Even if a country controlled its debt and deficit, but devoted all its budget to social spending and nothing to research, it would create bad conditions for business to be globally competitive, she said.

The German chancellor failed to get full endorsement for her stance at last week’s summit, not least from François Hollande, the French president, who insisted that future contracts for “competitiveness and growth” would not be compulsory for all the eurozone members.

But Ms Merkel rejected the suggestion that the traditional Franco-German “motor” for closer European integration was not working properly since Mr Hollande’s election in May.

“Even though we represent different countries and come from different political backgrounds, we always find solutions together,” she said.

She sees their relationship as something like a “grand coalition” between her centre-right Christian Democratic Union and the centre-left Social Democratic party in Germany. She headed such a government from 2005-09, and may well be forced do so again after next year’s general election.

At the Brussels summit, however, it was clear that Ms Merkel and Mr Hollande had different priorities.

The French president was keen to see a generous budget agreed to revive growth in recession-hit member states. Ms Merkel was adamant that any such finance should be modest, “time-limited and project-specific”, totalling no more than €10bn-15bn.

The chancellor said her experience as a citizen who lived through the collapse of communist rule in the German Democratic Republic had coloured her political thinking ever since.

“We witnessed in the GDR and in the entire socialist system that an economy which was no longer competitive was denying people prosperity and ultimately leading to great instability,” she said.

“I find it worrying that many people in Europe simply assume that, alongside the US, Europe provides the only frame of reference for the world – that Europe is traditionally strong and that the world looks to us.

“Other models have long since emerged: China, India, Japan, Brazil, and they will be joined by other countries that are working hard and proving to be innovative.”

Get alerts on Eurozone economy when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article