Like passengers on an up escalator, Britons and other Europeans for decades enjoyed seemingly effortless rises in living standards year after year. Expanding economies and swelling social spending lifted nearly everyone up. Each generation could look forward to much better lives than those of previous ones. Yet in recent years, this growth escalator has broken down.

It has been creaky for a while: since the turn of the century, productivity growth has been sluggish across most of Europe – and wage rises even slower. But piling on debt provided an artificial boost, while bubbly house prices and financial trickery blinded people to the risks.

Then the financial crisis and the panic in the eurozone threw a spanner in the works and the escalator went into reverse. The long slump and governments' subsequent budget cuts have exposed the chasm between the fortunate – and sometimes undeserving – few who continue to thrive and the majority who are struggling. Many people have fallen far – not least the 26 million Europeans who are out of work, many of them for a long time. In Britain, real wages have fallen by nearly a tenth. A typical British household is no richer than a decade ago. Even the much-vaunted German escalator has stalled. The average German earns fractionally less than 15 years ago.

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Some parts of Europe have been in freefall. In Greece, where national income has shrunk by a quarter, children scavenge through rubbish bins for food scraps while hospitals run short of medicine. In Spain, where more than one in four people are unemployed, suicide is now the top cause of death after natural causes. In Ireland, where house prices have halved, nearly one in five homeowners are in arrears on the mortgages on their depreciated homes, while the cost to Irish people of bailing out the banks that made all the bad mortgage loans comes to €14,000 (£11,600) each. In Italy, more than two in five young people are out of work; in Greece and Spain, it's nearly three in five.

Across Europe, 15 million people below the age of 30 are neither in employment nor education. A lost generation is in the making. Is it any surprise that young Europeans are having even fewer babies since the crisis and that someone emigrates from Portugal every four minutes?

Fortunately, prospects look less bleak than they were in 2012, when panic stalked the markets and the euro seemed on the brink of collapse. Finally, most European economies are growing again, while markets are buoyed by easy money. But after the longest and deepest recession since the Great Depression of the 1930s, and even with exceptional monetary support, the recovery is the flimsiest on record. In Britain, the combination of austerity, easy money and a cheap currency without meaningful reform generated three years of stagnation – and now the authorities are cranking up yet another cycle of debt-fuelled consumption, housing bubble and bust.

Far from a "march of the makers", it is a flight of the speculators. Much of Europe remains lumbered with broken banks and crushing debts. Most of Europe suffers from record-low investment and feeble productivity growth. All of Europe is ageing fast – and without immigration most countries' workforces are set to shrink.

The future seems bleak, too. Prominent economists talk of a "new normal" of permanently low growth, a "great stagnation" of innovation and even of the "end of growth" in the West altogether. (Others, on the contrary, think innovation is speeding ahead, but fear that humans will lose the "race against the machine" and that robots will steal people's jobs.) There are certainly many worrying signs. Most of Europe has fallen further behind America's productivity levels. Britain's productivity record over the past decade is as poor as the eurozone's. Germany has performed worse than Greece. Italy did worst of all: a big fat zero.

Europe's productivity pipeline is blocked. Not enough new businesses are launched. Start-ups have trouble lifting off. Growth in promising small companies often stalls. Established businesses don't innovate enough or invest enough in future growth. With a few notable exceptions such as Skype, Spotify and Shazam, the internet revolution has largely happened elsewhere. The new giants of our digital world – Google, Apple, Amazon, Facebook, Twitter, LinkedIn, PayPal, eBay – are all American. There is no European equivalent of Silicon Valley.

Europe isn't just falling further behind the US; it also faces ever-greater competition from China, India, Brazil, Mexico, Turkey, Korea and other emerging economies – not just in lower-end manufacturing but also in higher-tech sectors. Apple's biggest rival in smartphones? Not Finland's Nokia, but Korea's Samsung. The world leader in solar panels? No longer Germany, but China. Britain's biggest manufacturer? India's Tata (which owns, among many things, the luxury car maker Jaguar Land Rover).

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Demography may not be destiny, but Europe's population trends look pretty dismal all the same. As the post-war baby boomers retire over the next 15 or so years, the burden on smaller, younger generations will be huge. In 2010, there were nearly four people of working age for every person aged 65 and over; without migration, there will be fewer than two-and-a-half by 2030. The challenge isn't just financial, it's practical: who will care for the massed ranks of pensioners? As the labour force shrinks (as it already is doing in many European countries), economies will need to notch up faster productivity growth and investment merely to stand still. But if the economy is likely to stand still, why invest?

Europeans can't even comfort themselves that their flaccid economy is getting greener. Despite all the costly policies that Europe has introduced, greenhouse-gas emissions from electricity generation are rising in Europe, whereas in the US, despite policymakers' inaction, they are falling. The EU's flagship emissions-trading scheme has flopped. While the US is dashing for cheaper and cleaner shale gas, Europeans spurn shale while burning more filthy coal. Many countries, notably Germany, are also committed to phasing out nuclear energy, which will further increase emissions (and costs). As a result, energy prices are much higher in Europe than in the US, hitting consumers and curbing growth. Without greater energy investment, the lights might even go out.

Depressingly, an overwhelming majority of Europeans – Britons as well as French, Germans and Spaniards – think their children will have a worse life than they themselves have. This negativity is so deeply ingrained that people scarcely notice it any more. Witness how Europeans tend to focus on the perceived risks of new technologies rather than their potential rewards. One in two thinks one should not start a business if there is a risk of failure – as there inevitably is. Hope of a better future – a belief that progress is possible – is fading.

The present economic pain and fear of the future are poisoning politics, too. Social tensions within countries are multiplying, as are political frictions between them. Understandable anger at the flagrant injustice of bailouts for rich bankers and budget cuts for poor schoolchildren overlaps with a despicable scapegoating of outsiders, in particular immigrants. Scots will vote on whether to split from Britain in September 2014, Catalans from Spain in November. Germans and Greeks are at each other's throats. The project that binds Europeans together – the European Union – has never been more unpopular; Britons may even vote to leave. The EU's crowning achievement, the euro, is increasingly perceived as a sadomasochistic straitjacket.

Many people no longer trust mainstream politicians, EU technocrats and elites in general. They seem captured by vested interests and incapable of improving the lot of ordinary people, let alone setting out a compelling vision of a brighter future. Politics is turning nasty, fractious and inward-looking – with unpredictable consequences. Worst of all, many are losing faith in democracy itself. This anti‑establishment, anti-foreigner, anti-EU mood is fertile ground for extremists and snake-oil salesmen. In next month's European elections, the far left seems likely to top the poll in Greece. An anti‑establishment movement headed by a clown may come first in Italy. Above all, xenophobic and reactionary parties such as Britain's Ukip and France's Front National look set to do exceptionally well. They peddle a return to a romanticised past when the world seemed less threatening: when Europe was less open, less diverse and everyone knew their place.

Worse, they are polluting politics more generally. Listen to the abuse heaped on immigrants – who did not cause today's crisis – by supposedly respectable politicians and pundits in Britain, France or the Netherlands these days. Substitute "black people", "women" or "poor people" for immigrants in their sentences and the vile nature of their sentiments becomes clear. The dehumanisation of people is how the march towards fascism began.

Reactionaries' scapegoating of foreigners is vile but effective. The solutions they propose are false: stop the world, stamp on difference, turn the clock back. But their success is symptomatic of a genuine sickness. Europe's sluggish economies are strangled by vested interests that stifle opportunity and steal the value created by others. EU institutions have become instruments for creditors to impose their will on debtors. Democracy is lacking at an EU level and ailing at a national one. Our open societies – post-war Europe's most wonderful achievement – are at risk.

Our economies and politics need to change. We need to deal with the banking and debt crisis decisively and fairly and create lasting shared prosperity through reforms to make our economies and societies more adaptable, dynamic and decent – reforms that add up. We need to dispel bad ideas such as the austerity delusion, the "competitiveness" myth, the bubble mentality and the notion that economies are inherently stable and predictable. We need reforms that would break the power that vested interests have over our economies and our politics. We need changes to institutions to make them work better, not least a more open, accountable and democratic EU with genuine political choice. And we need a more open politics here at home.

It is an agenda of standing up for those locked out of the system, not in the noxious, hateful way that populist extremists do, but rather by opening up opportunities for everyone to get ahead. An equal chance to get a good education and a decent job. The capital to give every young person a start in life. The opportunity to start your own business and build it up. Shifting tax off hard work and enterprise and on to unearned rewards from land ownership and inheritance. The ability to save for your retirement tax-free without your returns being gobbled up in fees. A future-proofed state pension system. The security that enables you to sleep easily at night – and take risks. Open capitalism, not crony capitalism. The freedom to be who you want to be, live the life you want to lead and still have a place in society.

Europe desperately needs to change. It needs hope, a politics of genuine optimism, a prospectus for a better future. We need a European Spring: economic and political renewal.

'European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right' by Philippe Legrain is out on Kindle (£2.99, CB Creative Books) and in paperback (£12.99) today