Hi

I was born shortly after the end of the Second World War and for most of my life have lived in the UK, a nation built on growth, prosperity and optimism. But as a student of history, I am becoming increasingly concerned that the Britain I have grown up in is repeating the mistakes of past empires that have faded away.

As Lord Wolfson of Aspley Guise, chief executive of the high street and online retailer Next, said last week “At best we expect anaemic growth, with progress constrained by four factors: declining job opportunities, new regulation that erodes competitiveness, government spending commitments that are beyond its means and a rising tax burden that undermines national productivity.”

For a quarter of a millennium, the West, with Europe at its heart, has dictated the rhythm of the global economy. Fuelled by the fire of the Industrial Revolution, it became an engine of innovation, production, and unprecedented wealth. This historic dominance created a dividend: the modern welfare state. This intricate system of social protection is arguably the West's greatest social achievement. 

Yet, there is a fatal flaw in the design. While a minority of the world's population resides in Europe, it accounts for over half of the planet's social spending. This largesse is no longer sustained by productive advantage alone; it is underwritten by mountains of sovereign debt.

This reliance on borrowing now leaves the historically dominant West economically exposed. As emerging economies, chief among them China, rise to challenge the established order, the West's debt-funded social contract appears increasingly fragile. The foundation of its prosperity is being tested, and for the student of economic history like myself, the parallels to the decline of previous great powers are as undeniable as they are unsettling.

Echoes of Rome: A Historical Warning 📜

History does not repeat, but it often rhymes. The predicament of the modern West finds a chilling echo in the decline of the Roman Empire. 

Rome, too, was a victim of its own success. Its vast military machine and complex system of state subsidies—including the famous "bread and circuses" to appease the urban populace—created immense fiscal strain. This can be seen as a historical analogue to the West's ballooning welfare commitments.

As the empire's productive core in Italy hollowed out, it grew dependent on the resources and tribute from its provinces. This is mirrored in the West's deindustrialisation and growing reliance on manufactured goods from Asia. 

To meet its crippling obligations, Roman emperors repeatedly debased their currency, reducing the silver content of coins and triggering rampant inflation. Today, while the mechanisms are more sophisticated, the vast creation of money through quantitative easing to finance deficits hints at the same temptation.

Ultimately, Rome's economic decay, internal over-extension, and the rise of determined external challengers on its frontiers proved a fatal combination. 

The lesson is stark: when a great power's financial obligations and internal consumption chronically exceed its productive capacity, it enters a state of managed decline, vulnerable to both internal decay and external shocks.

The Gilded Age of the Welfare State

The story of Western ascendancy begins in the soot-stained factories of 18th-century Britain. The Industrial Revolution triggered a seismic shift, catapulting Europe and later the United States into a position of near-total economic hegemony. They controlled technology, capital, and global trade routes, creating a virtuous cycle of growth and enrichment.

Following the devastation of two world wars, this accumulated wealth was channelled into a new vision for society. Inspired by the likes of the UK's Beveridge Report, which sought to slay the "Five Giant Evils," of want, disease, ignorance, squalor, and idleness. Western nations constructed comprehensive welfare systems. 

The creation of the National Health Service (NHS), expansive pension systems in Germany, and strong unemployment benefits were hallmarks of this new era. This was the peace dividend of economic supremacy, a promise of security from cradle to grave.

For decades, the model worked. Strong economic growth and favourable demographics provided the tax revenues necessary to fund these ambitious programmes. However, as the 20th century drew to a close, the pillars supporting this edifice began to crumble.

The Mounting Bill: From Production to IOUs

Several factors converged to strain the Western model. The oil shocks of the 1970s heralded an era of slower growth. Globalisation, while beneficial in many ways, saw manufacturing jobs migrate to lower-cost nations. Simultaneously, populations in the West began to age, increasing the demand for pensions and healthcare while shrinking the tax-paying workforce.

Faced with a structural gap between soaring welfare commitments and stagnating revenues, governments turned to an age-old solution: debt. 

Rather than making politically painful choices, they borrowed. Government debt-to-GDP ratios began a steady climb. Today, it is not uncommon for major Western economies to have public debt exceeding 100% of their annual economic output.

This debt acts as a fiscal anaesthetic, masking the underlying disease. It allows the welfare state to persist, but at the cost of mortgaging the future. Servicing this debt consumes an ever-larger slice of government budgets, crowding out investment in infrastructure, education, and innovation—the very things that drove Western prosperity in the first place.

The Eastern Challenge: A New Economic Gravity 🏭

This growing vulnerability has not gone unnoticed. While the West has been accumulating debt, China has been accumulating industrial might and global influence. The scale of this shift is two-fold: a revolution in manufacturing and a strategic projection of financial power.

First, the industrial balance has been completely overturned. According to the latest data from the United Nations Industrial Development Organization (UNIDO), China is the world's largest manufacturer by a colossal margin, accounting for approximately 31% of global manufacturing output. In contrast, the entire European Union contributes around 16%. This means China's manufacturing sector is now nearly double the size of the entire EU's combined.

Second, this industrial dominance is complemented by its role as a global creditor and strategist. Through initiatives like the Belt and Road Initiative, China is funding and building infrastructure across Asia, Africa, and even into Europe, creating a new network of economic dependencies centred on Beijing. 

A significant portion of the West's government debt is held by foreign entities, including the central bank of China. This erodes the West's geopolitical influence and its ability to set the rules of the global economy. The high expenditure and debt that once signified a successful society now signal a potential strategic weakness.

The Perils of a Post-Imperial Power

Consider the potential future of the United Kingdom, a nation that spearheaded the Industrial Revolution and once governed a global empire. 

Now, outside the European Union and grappling with sluggish growth, its high levels of public spending and debt make it a microcosm of the West's broader challenges.

In a world where economic power has decisively shifted eastward, a debt-burdened UK could face a grim reckoning. A crisis of confidence in its ability to repay its debts could trigger a flight of capital, a collapse in the value of the pound, and soaring interest rates. This would force a brutal fiscal adjustment.

The response would likely involve a painful process of national austerity far exceeding that seen after the 2008 financial crisis. Successive governments would be compelled to dismantle significant parts of the welfare state. The principle of a universally free NHS could come under threat, pensions could be cut, and eligibility for benefits tightened dramatically. 

This would inevitably lead to significant social and political unrest, as a populace accustomed to a certain level of state support grapples with a new reality of diminished expectations.

Economically, the UK would have to aggressively seek a new niche. This might involve radical deregulation to become a low-tax "Singapore-on-Thames," a strategy fraught with its own risks, or a desperate attempt to corner emerging high-tech markets. 

Geopolitically, its influence would wane further, caught between the orbits of the United States and a powerful China, forced into the role of a client state rather than a major player. This is the stark potential endpoint for a nation, and a continent, that has funded its present comfort with its future prosperity. The empire built on debt is a fragile one, and the creditors are at the gates!

Let me know your thoughts. Next week I'll look at whether the window of opportunity  to reverse a decades-long trend of relative decline is closing too rapidly?

Noel Guilford