An ageing continent must find new financing models in era of digital and climate transformation.
Europe’s welfare states, long the envy of the world, now face an existential challenge. The financing models that sustained generous social safety nets throughout the post-war era are buckling under modern pressures.
A fundamental reinvention is needed, according to researchers from the EU-funded Project WeLaR, who have highlighted these concerns in a recent policy brief.
The continent’s current predicament stems from a growing misalignment. “We’re seeing a clear mismatch between how Europe funds its welfare state and the economic realities it faces,” says Laurène Thil, one of the authors and a senior researcher at HIVA-KU Leuven.
“Without major reforms, public finances will fall short of what’s needed to protect people and respond to long-term risks.”
Eroding fiscal foundations
At issue is the competitive downward spiral in corporate taxation. As member states vie to attract mobile multinationals with ever-lower tax rates, they simultaneously erode the fiscal foundations upon which their welfare systems depend.
Brussels, which has historically struggled to coordinate tax policy across the bloc, must now develop stronger mechanisms to harmonise rules and enforce minimum corporate tax rates.
Climate change presents perhaps the most pressing reinvention imperative. Despite ambitious green commitments, European governments continue channeling billions into fossil fuel subsidies—a policy contradiction that undermines climate goals while depleting public treasuries.
Eliminating these subsidies and implementing proper carbon pricing could unlock an estimated 2.4 trillion US dollars in global revenues while cutting emissions by nearly a third. The proceeds could fund everything from renewable infrastructure to easing the transition for vulnerable households.
Demographics add further urgency to Europe’s reinvention necessity. The continent’s birth rates have plummeted while longevity increases, creating an unsustainable equation for pay-as-you-go pension systems designed for very different population structures. Without substantial restructuring, these systems face inevitable strain as fewer workers support more retirees.
Digitalisation creates both challenges and opportunities. Traditional tax frameworks designed for tangible goods and services struggle when confronted with automated production and borderless digital business models. The researchers suggest taxing digital services, financial transactions and automation technologies to ensure tech-driven sectors contribute their fair share to social protection systems.
“Tackling the fiscal sustainability of welfare systems is not just about balancing budgets – it’s about preparing for the future,” says Sebastian Rausch, one of the authors and researcher at the ZEW Leibniz Centre for European Economic Research. “If we act now to modernise how we fund welfare, we can build a fairer, greener, and more resilient Europe.”
A comprehensive reinvention
The researchers’ recommendations amount to a comprehensive reinvention of how Europeans approach welfare funding. Beyond the traditional labour-based contributions, they advocate diversifying revenue sources to include property, wealth and environmental taxes. This reimagining recognises welfare not as a cost to be minimised but as a long-term investment in societal resilience.
Without such reinvention, Europe risks watching its celebrated welfare model deteriorate under the combined pressure of global tax competition, climate change, population ageing and digital disruption.
Those countries that embrace reform most decisively may well become templates for welfare systems fit for an uncertain future.
Photo: Dreamstime.
