Europe will have to “work very hard” to maintain the most generous welfare system in the world and remain globally competitive, German chancellor Angela Merkel has said.

The key to Europe’s ability to survive the challenge of globalisation is to spend more on research and education and overhaul its tax and labour markets to restore competitiveness, she said.

Regarded by many Europeans as the author of excess austerity to curb the euro zone debt crisis, Dr Merkel spelt out her determination at last week’s EU summit in Brussels to see her partners commit to binding contracts for more structural reform.

“If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life,” Dr Merkel said in the interview.

“All of us have to stop spending more than we earn.”

– (Copyright 2012 Financial Times)