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EU towards 2020 – TIRED OR WIRED

EU towards 2020 – TIRED OR WIRED

By Niels Bøttger Rasmussen

The European Union is the largest economic zone in the world, and – historically speaking – the various European cultures have had a major influence on global development. Right now, however, Europe is being viewed as the “tired old man” on the world stage, and the challenges facing it seem almost insurmountable. Nevertheless, the EU Commission has just launched its vision of the opportunities open to the European Union in the run-up to 2020, promising better times ahead through smart and sustainable growth. The question is, however, whether tiredness or smartness will come out on top.

The financial crisis hit the European Union harder than most other economies, causing a four percent fall in GDP. Nor do the prospects for the future seem overly bright. A “perfect storm” of ageing, high debt and low growth has to be dealt with, and a string of challenges – lower productivity, lower employment rates, fewer funds invested in research and development, and a relatively low level of education compared to those of the United States and Japan, to name but a few – must be faced. As if this were not enough, the financial crisis has not only exposed the structural weaknesses of the European economy in comparison with those of its overseas markets, but it has also clearly highlighted differences and tensions within the EU itself. And there are major differences in competitiveness, unemployment, growth and public deficit. There are also great differences in views on socio-economic regulation, and if a political crisis is added to the economic crisis, the challenges can appear nigh-on insurmountable. Some observers claim to see signs of dissolution appearing, which would result in the EU being weaker than it is today ten years down the road, with some countries having left the euro, and others – such as Great Britain – having positioned themselves firmly on the sidelines.

This is the vision of a tired EU, where it is impossible to build up a common basis or to achieve the level of discipline necessary with regard to implementing initiatives intended to rectify the situation. Other observers fear that the crisis will be used as an excuse to introduce a European Government run from Brussels.

We have been here before

It is not the first time that a political crisis has threatened the EU – the concept of “eurosclerosis” reared its ugly head for the first time 30 years ago. Back then, we managed to avert the crisis, and for 20 years from the mid-1980s onwards the EU celebrated success after success. It proved possible to establish the inner market, to expand the collaboration from 10 to 27 member states and to build up a strong euro (up until now, in any event) that was more than able to match the US dollar as a future reserve currency. Towards the end of the noughties, however, the signs of fatigue began to appear. The member states proved unable to create an actual political union with its own constitution, and had to make do with a watered-down version in the form of the Lisabon Treaty. The issue of continued expansion (with Turkey as a prime candidate) also resulted in striking disunity. Could it be that the EU is a project whose time is running out? Viewed from the perspective of future globalisation, the question must certainly be asked as to whether the EU has almost played out its role as an instrument of liberalisation, and may even be turning into an obstacle to continued development. Previously, a country’s most important trading partners were its immediate neighbours; this is still the case today, but in future it is likely that key trading partners will more readily be found on the opposite side of the globe. Germany’s exports to countries in the euro zone amounted to just 17 per cent of the country’s GDP in 2008 – as compared to 23 per cent for countries outside the zone.

Nevertheless, there can be no doubt that the EU has made it easier for European countries to hold their own in the face of global competition. A large number of former private and public sector monopolies have become powerful global players, and the EU is still more open than most other economies. When the crisis was at its height in the first six months of 2009, there was a major risk that EU considerations would have to take a back seat to national interests. However, the EU system proved to be strong enough to resist these protectionist rumblings. The EU has also played a key role in the co-ordination of a variety of rescue packages thrashed out in connection with the financial crisis. First, it stepped in to save the banks, then it provided economic stimulus packages, and most recently – in spring 2010 – it put together a rescue package for Greece and set up a fund of EUR 750 billion to counteract similar, future debt crises in other EU countries. The last item on this list in particular is an example of the level of determination to make the EU system work – especially in times of crisis.

Solidarity comes at a price

This has all created renewed interest in the protection provided by the EU umbrella. For example, Estonia now wants to adopt the euro. The country has been through a dramatic economic crisis, but has succeeded in implemented such far-reaching measures to balance its books that it now fulfils most of the requirements for participation in the euro. This is actually more than can be said for most of the existing members. Iceland is also applying to become a member of the EU, which indicates that the membership of union is still attractive, despite the recent crisis. However, the solidarity expressed in the form of the EU umbrella comes at a price. The risk linked to issuing guarantees of assistance in the event of future debt crises to governments and banks is that there is less incentive to tight control of the economy – known as a “moral hazard”. It is a question of whether to accommodate the interests of the voters or the EU system. The problem now is therefore to ensure that the EU system has sufficient opportunities to exercise discipline in the financial policy arena. Strengthening the EU’s role in the field of financial policy would entail another leap forwards towards an integrated EU union. To date, taxation and the welfare state have been almost exclusively national affairs, but the question is whether the EU is to have a considerably greater role to play in this field in the future. France would be happy to see such a development, while Great Britain is jealously guarding its sovereignty. Germany is very keen on discipline, but only if it is applied on the basis of clear, objective regulations and semi-automatic sanctions, and not in the form of increased power to the political system, as France wants.

So what is the strategy?

So what is the strategy? The EU Commission has published its vision under the title: Europe 2020, A European strategy for smart, sustainable and inclusive growth, which features three priorities, five headline targets and seven flagship initiatives (see illustration above). Time will tell whether these measures have the desired effect, but in spite of the scepticism that is being voiced, there is much to suggest that the EU – for the next ten years at least – will remain the best globalisation instrument available to the EU countries, even though some of these countries may choose simply to coast along. There is still much to be done. The service sector is still fragmented and accounts for around 30 per cent of the difference in productivity that exists between the United States and Europe. Moreover, 50 per cent of this difference can be explained by a lower share of hi-tech companies, and the EU would be able to achieve a four per cent gain in GDP in 2020 by stimulating the rapid development of a digital “inner market”.

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