To say that Western Europe is “poor” would be inaccurate and intellectually dishonest. Compared with developing countries, Western Europe remains wealthy. But that is not the correct benchmark. The real question is whether Western Europe has reached the level of dynamism, innovation, and economic vitality that its history, institutions, and human capital should allow. On this standard, the answer is increasingly no.

When one travels today between the United States, mainland China, the Republic of China on Taiwan, Eastern Europe, and Western Europe, the contrast is striking. In artificial intelligence, electric vehicles, digital infrastructure, and entrepreneurial ecosystems, Western Europe is clearly lagging behind—not only the U.S. and mainland China, but in some dimensions even parts of post-socialist Eastern Europe. This outcome is not accidental. It is the predictable result of decades of welfare-state expansion, heavy taxation, and regulatory overreach.

Innovation Without Markets Is a Slogan, Not a Strategy

Western Europe talks more about environmental protection and “sustainable development” than any other region in the world. Yet when we examine outcomes rather than rhetoric, the results are sobering.

The United States dominates global artificial intelligence development, hosting firms such as OpenAI, Google, Nvidia, and Microsoft. Mainland China, despite its political system, has built globally competitive electric vehicle and battery industries, with firms like BYD and CATL now leading world markets. According to McKinsey and BloombergNEF, Mainland China accounts for over 60% of global EV production and battery supply chains.

Western Europe, by contrast, produces neither globally dominant AI platforms nor leading EV ecosystems. This is not because Europeans lack talent. It is because innovation cannot survive in an environment where taxation penalizes success, regulation punishes experimentation, and energy policy is driven by ideology rather than economic calculation.

Welfare States and the Slow Boiling of Economic Incentives

Western Europe’s decline is not a story of sudden collapse but of gradual erosion. Since World War II, most Western European countries adopted social-democratic models that expanded welfare provision, centralized redistribution, and increased state intervention. For decades, this model appeared stable—what might be called “warm-water prosperity.” But warm water eventually boils.

Economic freedom indices consistently show this trend. According to the Heritage Foundation’s Index of Economic Freedom and the Fraser Institute, Western Europe has experienced declining scores in labor flexibility, taxation, and business regulation since the 1990s. Growth did not disappear—but innovation, entrepreneurship, and risk-taking weakened.

The result is a region that still consumes wealth but increasingly struggles to generate new sources of it.

Demographics, Migration, and the Welfare Trap

Europe’s demographic crisis is often blamed on cultural change, but incentives matter. When retirement is privatized through family and savings, people have children. When retirement is socialized through the state, fertility collapses. This is not ideology—it is basic economics.

According to Eurostat, fertility rates in Spain, Italy, and Germany remain far below replacement level. At the same time, welfare systems attract large-scale immigration without adequate skill-based selection. Migration itself is not the problem. Incentive structures are.

In countries without expansive welfare states—such as Singapore, Canada, or Australia—migration systems filter for skills. In welfare-heavy systems, low-skilled migration increases fiscal strain and social fragmentation. This is not a moral judgment; it is an institutional one.

Progressive Taxation and the Destruction of Incentives: The Spanish Case

Western Europeans often underestimate how damaging progressive taxation can be to work, consumption, and investment. Spain provides a clear example.

In Spain, combined marginal income tax rates (national + regional + social contributions) can exceed 45–50% for middle-to-upper income earners. This creates a situation where increasing working hours by 50% may raise net income by only 20%—or less. Rational individuals respond accordingly.

Progressive taxation discourages:

• additional labor supply,
• entrepreneurial risk-taking,
• long-term investment,
• capital formation.

By contrast, Singapore demonstrates that high-quality public services do not require confiscatory taxation. According to the Inland Revenue Authority of Singapore, the top marginal personal income tax rate is 24% (as of 2024), applied only to very high incomes, while the corporate tax rate remains at 17%. Total tax revenue amounts to roughly 13–14% of GDP, one of the lowest ratios among developed economies.

Yet Singapore consistently ranks near the top globally in infrastructure quality, public transportation efficiency, healthcare outcomes, and fiscal sustainability (World Bank; World Economic Forum Global Competitiveness Report). By contrast, Spain’s tax burden exceeds 38–39% of GDP (OECD), with marginal personal income tax rates in many regions approaching or exceeding 47–50% when national and regional taxes are combined.

The widespread belief in Spain that “good public services require high taxes” is therefore not merely incorrect—it is anti-economic. It confuses revenue extraction with efficiency and ignores the decisive role of incentives, tax bases, and institutional discipline.

High Taxes, Low Growth, and the Laffer Reality

Even if one assumes that some government provision is necessary (classical liberalism does not deny all government roles), it does not follow that higher taxes generate more public revenue.

The Laffer Curve theory of economics illustrates this clearly: beyond a certain point, higher tax rates shrink the tax base, reduce compliance, and slow growth. OECD data shows that countries with lower effective tax burdens often achieve higher long-term revenue through broader tax bases and stronger growth.

High taxation does not strengthen the state. It weakens it by eroding the very economy it depends upon.

Housing Policy: From Credit Mania to Artificial Scarcity

Western Europe’s housing crisis is one of its most self-inflicted wounds. Before the 2008 financial crisis, banks expanded credit irresponsibly, fueling construction bubbles. After 2008, the reaction was equally extreme—but in the opposite direction.

After the 2008 financial crisis, housing construction in many Western European countries collapsed and never fully recovered. In Spain, annual housing completions fell from over 600,000 units in 2006–2007 to fewer than 100,000 units per year after 2013 (Banco de España; Eurostat). Similar trends occurred in Italy, France, and parts of Germany.

At the same time, governments quietly discovered that rising housing prices inflated property tax revenues and balance sheets, which could be redirected to finance pension obligations and local government spending. Rather than expanding supply, policymakers tolerated—if not encouraged—artificial scarcity. The result was a structural mismatch between housing demand and supply, driven not by environmental necessity but by fiscal incentives.

The social consequences of these policies fall most heavily on young Europeans. According to Eurostat, the homeownership rate among people aged 25–34 has declined sharply across Western Europe, while the average age of first-time home purchase continues to rise. In Spain, youth unemployment remains above 25%, and housing costs consume more than 40% of disposable income for many young renters in major cities such as Madrid and Barcelona.

Renting has also become increasingly unaffordable. OECD data shows that rent inflation has consistently outpaced wage growth in Western Europe since 2015. Housing has ceased to function primarily as a consumer good and has instead become a fiscal instrument—used to stabilize public finances at the expense of generational mobility.

In the name of not building new houses and apartments to prevent CO2 emissions is not environmentalism. It is fiscal opportunism disguised as urban planning. It is fiscal opportunism disguised as urban planning.

Why Eastern Europe Is Catching Up

Ironically, parts of Eastern Europe—once dismissed as economically backward—now display greater dynamism than much of Western Europe. Since the 2008 crisis, countries such as Poland, the Czech Republic, and Estonia have recorded consistently higher average GDP growth rates than Spain, Italy, or France.

According to World Bank data, Poland’s real GDP grew by approximately 55–60% between 2008 and 2023, while Spain’s growth over the same period was below 20%, and Italy’s barely exceeded 10%. Estonia and the Czech Republic similarly outperformed Western Europe by embracing flatter tax systems, labor-market flexibility, and aggressive digital governance reforms.

This divergence is not cultural. It is institutional.

History matters, but policy matters more.

A Counterexample: The Economic Achievements of the Republic of China on Taiwan

If one seeks a real-world counterexample to Western Europe’s welfare-state stagnation, the Republic of China on Taiwan stands out immediately. Taiwan combines relatively low taxation, administrative efficiency, strong property rights, and export-oriented industrial policy—not welfare-state redistribution—as the foundation of its economic success.

Taxation and Incentives: Taiwan vs. Spain

Taiwan’s corporate income tax rate is 20%, significantly lower than Spain’s 25%, and—more importantly—far more predictable and uniform. According to the OECD Tax Database, Spain’s effective corporate tax burden is often higher due to compliance costs, sectoral exceptions, and regulatory uncertainty, while Taiwan maintains a comparatively simple tax structure.

Personal income taxation in Taiwan is also more incentive-compatible. The top marginal personal income tax rate is 40%, but it applies to a much narrower income bracket than in Spain, where combined national and regional rates can reach 47–50% at relatively modest income levels. The result is clear: in Taiwan, additional work and entrepreneurial risk are more likely to be rewarded rather than absorbed by the state.

This difference in incentives matters more than ideology. Taiwan does not pretend that high taxes are a moral virtue; it treats taxation as a technical necessity to be minimized in order to preserve

Administrative Efficiency: How Long It Takes to Start a Firm

Perhaps the clearest illustration of institutional efficiency is how quickly an entrepreneur can start a business.

According to World Bank Doing Business data (prior to its discontinuation in 2021, still widely cited), starting a business in Taiwan typically takes 3–5 days, with most procedures completed digitally. In Spain, by contrast, it takes 12–14 days on average, often longer once regional licensing and notarial procedures are included. In Italy and France, the process is similarly slow and fragmented.

This difference is not cosmetic. Time is capital. Administrative delay is a hidden tax—one that disproportionately harms small firms, startups, and young entrepreneurs. Taiwan understands this. Much of Western Europe still does not.

Semiconductor Leadership: Chips as an Institutional Outcome

Taiwan’s most visible achievement in recent years is its dominance in semiconductor manufacturing—but this dominance is not accidental.

Through firms such as TSMC, Taiwan produces over 60% of the world’s foundry chips and more than 90% of advanced logic chips below 7 nanometers (TSMC, 2023; Semiconductor Industry Association). These chips are essential for artificial intelligence, high-performance computing, electric vehicles, and advanced defense systems.

What matters is not only technological sophistication, but institutional design. Taiwan’s chip industry emerged from: secure property rights, long-term capital accumulation, export discipline, and close—but limited—state coordination without bureaucratic micromanagement.

Western Europe, despite decades of industrial subsidies, has failed to build a comparable ecosystem. Recent EU “Chips Acts” are reactive attempts to compensate for decades of regulatory and fiscal hostility to entrepreneurship.

Innovation Without Welfare-State Paralysis

Taiwan consistently ranks high in innovation efficiency, not because it spends the most on social programs, but because it preserves incentives. According to the Global Innovation Index, Taiwan ranks among the top economies worldwide in patents per capita, high-tech exports, and R&D commercialization.

Spain, Italy, and France, by contrast, suffer from what economists politely call “innovation gaps”—the distance between public spending and marketable outcomes. Heavy regulation, rigid labor markets, and high marginal taxation translate public ambition into private inertia.

Taiwan proves that innovation does not require a massive welfare state. It requires institutional restraint.

Why Taiwan Moves Faster Than Western Europe

The contrast is not cultural. Spaniards are not less capable than Taiwanese engineers. Italians are not less creative than semiconductor designers in Hsinchu. The difference lies in institutions.

Western Europe treats economic growth as something to be managed, redistributed, and morally corrected. Taiwan treats growth as something to be produced, competed for, and defended. The results speak for themselves. In this sense, the Republic of China on Taiwan is not merely more successful than Western Europe—it exposes the structural failures of the welfare-state model. It reminds us that prosperity flows from incentives, discipline, and freedom, not from redistribution wrapped in moral language.

Conclusion: Europe’s Problem Is Institutional, Not Cultural

Western Europe is not declining because Europeans are lazy or incapable. It is declining because incentives have been systematically distorted. Welfare states replaced responsibility with entitlement. Regulation replaced experimentation. High taxation replaced ambition.

Markets reward judgment, risk, and adaptation. Welfare states reward conformity and dependency. No amount of moral rhetoric can overturn this logic.

If Western Europe wishes to regain vitality, it must relearn an old lesson: prosperity is created by free individuals operating in competitive markets—not by states attempting to manage outcomes they do not understand.

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How to Cite this Article (APA 7th edition)

Wang, H. H. (2025, December 10). Why Western Europe is falling behind: welfare states, interventionism, and the loss of economic vitality. [Blog post]. William Hongsong Wang. https://williamhongsongwang.com/2025/12/03/entrepreneurs-not-the-state-are-the-driving-force-of-the-market-economy