\n Europe and the life of abundance\n <\/p>\n
\n\tIn many respects, the EU appears likely to become one of the artificial intelligence revolution\u2019s biggest losers, with China and the US leaving its economies in the dust. Even if European energy policies were not already making a massive data center buildout prohibitively expensive, its fragmented capital markets would make raising the necessary financing extraordinarily difficult.<\/p>\n
\n\tEurope\u2019s high tax burden, in particular, makes it harder to cultivate and retain AI superstars, much less attract them from abroad. Meanwhile, its ever-expanding regulatory state discourages business formation and entrepreneurship.<\/p>\n
\n\tBut even without the AI boom, Europe\u2019s aging welfare states look increasingly unsustainable. Economic growth has been glacial \u2014 Germany, the continent\u2019s largest economy, has effectively stalled \u2014 while rearmament is placing ever greater demands on public finances. Compounding these problems is a shortage of centrist political leaders capable of containing populist movements on both the left and the right, both of which would likely favor higher public spending if they gained power. As a result, a major crisis seems inevitable.<\/p>\n
\n\tAnd yet, Europe does have one decisive advantage: its societies are far further along than those of the US and Asia in adapting to a world of abundance. Thanks to generous welfare states and tax systems that encourage individuals to seek refuge in nonmarket activities, Europeans are generally less career-oriented than most Americans or Asians, placing greater value on leisure, community and culture. They take longer vacations, work fewer hours and spend more time with family and friends \u2014 though this has not spared the continent from the global collapse in birth rates.<\/p>\n
\n\tTo be sure, the EU is currently pursuing abundance while sapping its economies of the dynamism needed to achieve it. If global real interest rates remain elevated for a prolonged period, its heavy debt burden will continue to act as a drag on growth. Given their strained public finances, it is far from clear how Europe\u2019s economies could absorb a major shock \u2014 whether cyberwar, conflict over Taiwan or something else \u2014 without triggering another debt or financial crisis.<\/p>\n
\n\tThe good news is that debt crises eventually end. If AI ultimately delivers extraordinary productivity gains without giving rise to any of the catastrophic scenarios predicted by tech skeptics, Europe could emerge as the world\u2019s premier lifestyle destination. People may travel there not only to buy luxury goods but also to learn how to make the most of their newfound free time.<\/p>\n
\n\tIf Europe can teach the world how to live in an age of abundance, it may have just as much to teach policymakers about governing one. Its value-added tax system, for example, looks increasingly like a tax structure designed for a postwork economy \u2014 or at least for one in which consumption is taxed more heavily than labor income. Consumption taxes are generally more efficient and less distortionary than income taxes and encourage saving, even if they can be somewhat more difficult to administer.<\/p>\n
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\n\t\tEurope\u2019s long-standing political consensus in favor of income and wealth redistribution may prove an unexpected strength.<\/p>\n
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\n\t\tKenneth Rogoff<\/p>\n
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\n\tMoreover, VATs are more politically feasible than wealth taxes yet achieve many of the same objectives by reducing the purchasing power of capital. While a VAT can have regressive effects, these become much less concerning when the revenues are used to finance large transfers to low- and middle-income households.<\/p>\n
\n\tEurope\u2019s long-standing political consensus in favor of income and wealth redistribution may prove an unexpected strength. If AI significantly reduces labor\u2019s share of income, societies already accustomed to redistributive policies may adapt more easily than those built around work as the primary source of income.<\/p>\n
\n\tImmigration, however, remains a major challenge. Europe\u2019s relatively generous welfare states have found it much harder to integrate large migrant inflows than America\u2019s market-oriented system. In the US, many immigrants understand that they need to find work, as access to federal benefits is generally contingent on immigration status. In much of Europe, by contrast, asylum seekers and recognized refugees receive publicly funded housing and benefits, adding strain to increasingly overburdened welfare systems. With more time on their hands and fewer economic outlets, citizens may become even more resentful of perceived competition from immigrants, creating fertile ground for increasingly noxious politics.<\/p>\n
\n\tFor all of Europe\u2019s current energy problems, the picture could look very different in another decade or so. Assuming green technologies continue to improve, the continent may ultimately find itself on the right side of energy history. Conversely, America\u2019s renewed emphasis on fossil fuels under President Donald Trump could leave it with comparatively high energy costs, rather than the cost advantage it has long enjoyed.
\n\tEurope has another, subtler political advantage: it has not spawned the same class of tech oligarchs that the US has. That, along with the absence of a Trump-like political figure, may be one reason it has been somewhat more successful at preserving democratic norms.<\/p>\n
\n\tNone of this diminishes the formidable challenges facing Europe in an AI-centric world. Its relative economic decline may continue for years to come. Still, if AI lives up to its promise and ushers in an age of material abundance, Europe may discover that its greatest comparative advantage lies not in building the most advanced systems but in demonstrating how to live well in the world they create.<\/p>\n
\n\tUnfortunately, as chess players like to say, before the endgame, fate has placed the middlegame. Europe may have compelling ideas about how to live in an age of abundance, but it must first find a way to get there.<\/p>\n
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\n\t\tKenneth Rogoff, a former chief economist of the International Monetary Fund, is Professor of Economics and Public Policy at Harvard University and the recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is the co-author (with Carmen M. Reinhart) of \u201cThis Time is Different: Eight Centuries of Financial Folly\u201d (Princeton University Press, 2011) and the author of \u201cOur Dollar, Your Problem\u201d (Yale University Press, 2025). \u00a9Project Syndicate
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