The failures of European capitalism and the new debt alchemists

For decades, Europe was the example of balance between well-being and efficiency. Germany manufactured, France financed the State and the United Kingdom moved the world’s money. Three different engines that guaranteed prosperity. Today, those gears grind. The three are still advancing, but on credit. What was once a perfectly oiled industrial and social machine now seems like a system that survives by feeding on debt and growth that is barely noticeable in its pockets.

The continent faces a problem that does not have a single origin. Germany goes through the worst industrial crisis in a generationFrance multiplies its deficits without restraint and the United Kingdom pays the price for having turned its economy into an interest machine. Each one deals with their own imbalance, although the result is the same.

Europe produces less, spends more and depends increasingly on credit

In Germany, the pride in its export model is breaking down. The factories that made the country the European locomotive are going through difficult times. The energy transition increased costs, the end of Russian gas altered its industrial matrix and digitalization is advancing behind schedule. The Ifo Institute confirms that business confidence remains at low levels and growth will be minimal in 2025, 0.2%according to the latest reviews of the German Ministry of Economy.

The Bundesbank recognizes that margins are narrowing and that German industry has lost competitiveness compared to the United States and Asia. The model that relied on exporting high-value products at low energy costs was exhausted. Germany has not stopped being a power, but its structure has become rigid. The benefits that previously came from efficiency They now depend on fiscal stimulus and lower interest rates that alleviate their financial burden.

France is experiencing a different, but more disturbing scenario. The country spends more than it produces and its public debt is close to 115% of GDP. In 2024, the fiscal deficit was 5.8% of GDP and in 2025 the official target is 5.4%, making it the largest in the eurozone.

But the problem is not just the State. French companies are also deeply leveraged. According to the Bank of France, the liabilities of the non-financial corporate sector exceed 200% of GDP. It is the highest proportion in the developed world.

Over the past decade, big firms have taken advantage of years of cheap money to finance acquisitions and mergers. The Bank of France itself warned that, since 2014, interest coverage reached unusual risk levels. Companies took on debt to grow faster, but many failed to generate enough profits to pay for that expansion. The IMF warned that this mountain of credit can become a trap if rates do not fall quickly.

Public spending is not moderating either. France allocates more than 50% of its budget to social spending and 14% of GDP to pensions. In the last fifteen years it has not had a primary surplus in a single year. Debt has become a tool to sustain the social model, not to promote it. IMF economists define it as a double risk: a structural public debt and a private one that can strain the banking system.

The United Kingdom follows another path. The British economy no longer relies on industry or consumption, but in the capacity of its financial system to attract foreign capital. Since the Bank of England raised rates above 4%, the cost of public debt has skyrocketed and interest payments exceed £100 billion a year. GDP is estimated to grow by 1.1% in 2025.

In this case, the Central Bank maintains contractionary policies to support the pound and stop inflation, but the counterpart is more expensive credit that cools investment and employment. The Treasury goes into debt to pay its own debt and the City compensates for the lack of real growth with financial profitability. It is the paradox of a country that dominates money, but cannot make it produce.

Analysts from the Office of Budget Responsibility warn that interest expenses have doubled in five years and that the total debt, public and private, now exceeds 300% GDP. In this context, any movement in the British bond market is transferred to the markets as a great threat to the debt markets.

With the brake applied

Germany, France and the United Kingdom represent three different models of European capitalism and all three show signs of exhaustion. One rusts due to excess structure, another goes into debt to maintain its well-being and the third finances itself so as not to lose value. As a whole, the continent stands on an increasingly fragile foundation.

The OECD and IMF reports agree on the diagnosis. Productivity is barely growing and the weight of debt on European GDP is at its highest level since the post-war. Japan continues to be the most leveraged country, but Europe is already moving in that league.

The difference is that Japan has a central bank willing to support the system at any price, while the European Central Bank maintains its mandate of discipline. The eurozone, and also its neighbors outside it, experience a permanent contradiction between expansive fiscal policy and restrictive monetary policy.

Europe is growing, yes, but it does so with debt. Governments and companies resort to credit to finance day-to-day life rather than to create productive capacity. It is an alchemy that turns deficits into temporary stability, a formula that has worked until now, although it requires more and more effort to obtain the same result.