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Luc Soete

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Director's column
Archived columns by former UNU-MERIT director Luc Soete.

Exploring Europeís future in times of crises

As part of an expert group for the European Commission on the future of Europe in 2050, I’m currently writing the future policy narratives of three different scenarios, which have also been explored quantitatively. At first sight, it may not seem the ideal moment: the euro-crisis appears far from under control with increasing doubts as to the capacity of Greece and now Portugal to be able to repay their debts.

Policy narratives rarely provide useful insights into long-term policy challenges (in the long-run we’re all dead – I will be for sure by 2050), but they can clarify the nature of the most striking trade-offs that policy makers might be confronted with in the years to come.     

The current uncertainty surrounding the future of the euro-zone and other European countries is such that, for once, the traditional, neutral ‘business as usual’ scenario (1) appears rather unlikely but two alternative scenarios: an imploding, ‘fragmented EU’ (2) or the opposite, a more ‘integrated EU’ (3) by contrast, much more realistic. Which one it will be is of course very much open for discussion.

For many if not most economists, the long-term scenario of European fragmentation today appears to be the most realistic one. The narrative I proposed to my forecasting colleagues was actually very easy to write up. It starts from how the basic trust between European states has gradually eroded over time. This predated the euro-crisis in many ways, but the rapidly growing financial concerns in strong euro-countries – including Austria, Finland, Germany and The Netherlands in having to bail out Greece – made the mutual distrust amongst European member states (MS) suddenly much more visible.

Another striking example, from a different angle, was the EHEC food poisoning outbreak around Hamburg and the immediate reaction of German health officials to blame ‘infected’ Spanish cucumbers. Three weeks later French health authorities copied this euro-blaming process, going for British producers of rocket, mustard and fenugreek seeds. Today the blame has shifted to outside Europe, in the shape of Egypt. Only time will tell if the main culprits were fenugreek seeds imported from Egypt in 2009, but the reaction to EHEC in various European countries illustrates the rapidly growing distrust between member states.   

Tensions between various European MS were always there as something popular media could make extra money from during football championships. But with the euro-crisis all this seems to have exploded. The fact that in Europe most popular newspapers remain first and foremost part of nationally oriented media outlets doesn’t help of course.
But back to the narrative of the long-term scenario of European fragmentation. Gradually both in the richer and poorer European countries, the belief in the absolute prerogative of national over European-policy making took form, accompanied with a growing disillusionment with what the EU had actually achieved for European citizens, both on the left and right of the political spectrum.

As most economists are well aware of, those achievements were not just unequally distributed between sectors (growing export as opposed to declining import competing sectors), countries and regions (centrally located countries/regions benefited much more from integration than peripherally located countries and regions), skilled versus unskilled (the skilled in the centrally located countries and regions benefited much more, the others often had to move to find a job), but also appeared increasingly out of their control: imposed by external organizations and institutions which themselves appeared to have organized their activities fully ‘under-internal-control’ with high, tax-free remunerations and little interference from national policy makers. It remains difficult to explain to any US civil servant in Washington why his European colleagues in Brussels should benefit from an international, tax-free status. And of course, it remains as difficult to explain this particular tax advantage feature of having a European job to national policy makers, let alone to European citizens.  

In this narrative, it is ultimately the distance between European citizens and European policy makers which leads to the fragmentation of the EU. One should bear in mind that at the political level, the EU suffers from the fact that administrative constituencies remain national (or regional) even in the case of European elections. Politicians in Europe can never acquire European votes beyond their national or regional circumscription. As a result defending broader European themes as opposed to national interests in political campaigns is something which doesn’t really pay off.

Thus while the overall advantages of European integration, although unequal, remained economically undeniable and well established, those advantages became politically more or less invisible. The disadvantages, the contradictions with countries’ own national or regional policy making preferences became by contrast more visible and questioned every day in national public opinion debates. For somebody here in The Netherlands, this story sounds, I’m afraid all too familiar.

The alternative scenario started from a similar, but opposite narrative. The future trend is now towards further political and economic integration, again directly as the result of the financial euro-zone crisis. At the political level, there is now, contrary to the previous scenario, a gradual recognition that the financial crisis can only be solved through stronger European (as opposed to national) political representation and control.

Again this applies to both the political left and right, as for eurosceptics and europhiles. It is, in other words, not a narrative based on a romanticized vision of a European identity, a common European culture, flag or hymn. Rather it is the outcome of a political realization both among policy makers and broader public opinion that economic integration, and in particular the economic and monetary union with the formal introduction of the euro back in 2002, cannot survive without a certain level of political integration.

The huge financial investments in each other’s economies, both between euro-zone MS and with other MS, leads to the political realization even within the most eurosceptic countries that close mutual control of each other’s fiscal policies, of the functioning of MS’ internal labor markets and more broadly the sustainability of MS’ social welfare systems including pension schemes, is in each country’s national interest. What was politically unthinkable now appears economically the only way forward: further European integration not out of love but out of necessity.

External pressures, in particular complaints from the USA, China, India, Brazil, South Africa and some other emerging countries about the EU needing to speak with one voice further reinforce this trend. Slowly, public opinion and policy makers begin to realize that a number of political integration steps are needed for the EU to fully benefit from its ‘union’ status.

In the meantime, the EC provides the underlying technocratic support for such reforms which also fully benefit from the wide variety of institutions within different European countries. The ECB as a centralized European bank with national banks still in each MS is often used as the example, but other decentralized institutional reforms are also explored. For example in the area of collecting statistical evidence, Eurostat is gradually transformed into a fully decentralized organization exploiting at EU level each MS’ comparative advantage in one particular statistic. The result is a pragmatic approach to EU reform whereby subsidiarity and additionality are key concepts in providing legitimacy to newly created European, decentralized institutions with locations in different MS.

The best performing MS’ public services take the lead in a new phase of economic integration in the EU: that of public services. As a result the performance of the public sector in Europe, still responsible for the largest part of GDP, receives a dramatic boost in efficacy and efficiency. Tax revenues increase substantially in some of the Southern MS as tax evasion and large parts of the over-sized black market economy become integrated into the formal national economy.

All this results in a significant impact on productivity growth for the EU as a whole as the private sector also benefits from the more efficient public sector.  At the same time, mutual trust in MS’ national public sector capabilities, culture and ethics receives a boost. European diversity again has a positive connotation across the EU. The EU becomes internationally a truly attractive place to live and work.

So what is it going to be? Writing convincingly about an optimistic European scenario at the present time, is, I admit, not an easy task. However, what is striking is that the solution to the various internal as well as external crises confronting the EU today can only be found in the final, third scenario.

It is only through further political and economic integration that the EU will be able to provide appropriate responses to crises, both current and future. This not only applies to the financial crisis (as argued above) but also for pandemics such as the EHEC bacteria outbreak where public – and unfounded accusations – between MS resulted in major European losses in agriculture exports (see the initial response from Russia, banning vegetables from the whole of the EU27). And if there is one future certainty, it is that pandemics in one form or another will hit humanity in the years to come. Only an integrated Europe in close interaction with other regions in the world will be able to provide an appropriate response.

Similarly the impact of the Arab spring and Libyan war on the spike of immigration inflows to the Italian island of Lampedusa highlights the fact that differentiated responses of MS with some now wanting to reinstate pre-Schengen border controls such as Denmark, cannot be the solution.

Or what about the nuclear crisis in Japan on the other side of the globe which has directly affected Europe’s future fossil fuel energy dependency as the German government decided unilaterally to quit the nuclear industry? Here too it is the lack of a common European response which is most striking. In short, the need for Europe to embrace further integration appears more overwhelming with every new crisis.

Luc Soete

June-July, 2011


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