Tuesday

26th Jul 2016

Opinion

The never-ending crisis of European leadership

  • Belgium's Michel, France's Hollande, EU diplomacy chief Mogherini and Germany's Merkel. Europe’s leaders have failed to implement effective strategies. (Photo: Consillium)

Here we go again. Just when we might have thought global financial markets were starting to simmer down, investors are now worried that policymakers may stoke the fire yet again.

The European Central Bank (ECB) met on Thursday (10 March) and, as many market watchers expected, it announced more interest rate cuts and additional asset purchases.

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  • Refugee crisis has showed limits of collective European leadership (Photo: europarl.europa.eu)

While Europe has carried out a number of impressive reforms since the outbreak of the 2010 euro crisis, much more needs to be done.

Europe’s leaders have failed to implement an effective strategy to deal with economic challenges like the Great Recession, or to prepare a pan-European plan for addressing socio-political issues like the migration wave from war-torn countries in the Middle East and Africa.

The resulting rise of populist, often extremist, political parties and movements is seriously threatening Europe’s western liberal democratic order as protests, violence and disenchantment all grow.

This outcome is particularly striking considering that between 1945 and 1990 Western Europe was catching up with the US in economic performance, and that its drive to create a democratic European Union was relatively successful.

Lost momentum

In the late 1980s and early 1990s global discussion focused on when and in what areas Europe would overtake America.

The fall of the Berlin Wall and gradual integration of Central-Eastern Europe into the EU was seen as strengthening the region and creating a path to further European integration and advancement.

So what went wrong?

Europe lost economic momentum in the 1990s by lagging in business applications of new, internet-based technologies and slowing down in market integration.

Relatively rigid regulation, less venture capital and the lack of an entrepreneurial culture were among the factors that slowed the emergence of an internet economy.

Together with slow integration of the financial markets and limited dynamics in many labour markets, this contributed to a slow rate of innovation and growth.

Once European companies finally started exploiting the internet, the stock market crash of 2001 bankrupted many of its nascent businesses.

The same carnage occurred in the US, but a number of businesses had already become sustainable ventures and the economy had reaped considerable gains.

Politically, Europe registered its first important setbacks when Dutch and French voters rejected the EU constitution in 2005. Still, European leaders charged ahead, leaving the masses behind.

The EU ideal was taken for granted rather than explained and marketed to the public. The introduction of the euro without banking and fiscal union further undermined the long-term viability of the European project. 

The first real stress test came in 2008 as the financial crisis spilled over into Europe and contributed to the 2010 eurozone crisis.

Disintegration

A turnaround came in the summer of 2012 with the establishment of a banking union and the promise to do “whatever it takes” by Mario Draghi, the ECB president. But the validity of that promise is now being questioned.

While the US readily undertook painful, fundamental reforms to clean up its banks and stimulate its economy, Europe’s leaders were unable to agree on a common set of similarly strong measures - and Europe has been “muddling through” in decline, stagnation or slow growth ever since.

The very fact that Greece, representing less than 2 percent of Europe’s GDP, has preoccupied all of Europe and threatened to derail the entire euro project is symptomatic of Europe’s inability to act decisively and find solutions.

The problem is clearly a lack of effective European leadership. Europe’s workers are as good as their Asian and American counterparts. Europe’s design and many areas of manufacturing are second to none.

What is striking is how much less Europe generates with these resources than does the US.

So how can Europe escape its long-term crisis?

At one extreme there is the nationalist option favoured by many populist parties and movements.

Europe would again disintegrate into individual states, each relatively unimportant. This carries the danger that the EU’s disintegration would include the breakup of the common labour and product market. If this happened, living standards would fall precipitously.

Confronting extremist

Rather than disintegrating, Europe should create an even stronger union and - as one of the world’s two largest economic blocks - use its economic might and acumen to become a true leader on the world scene.

Ideally Europe would move speedily toward supplementing its monetary union with a full-fledged economic, fiscal and political union, but this is politically infeasible in the short run.

What should be feasible is to complete the banking union, eliminate the resurgent link between banks and their governments, restructure debts of severely over-indebted countries, coordinate fiscal policies, and move aggressively to complete necessary structural reforms aimed at integration and liberalisation of European markets.

Europe needs to confront extremist populism with a clear-cut solution leading to economic growth and improved living standards.

The populists stress nationalist self-interest, but Europeans can benefit much more from a functioning union than from fragmentation and likely protectionism of individual states. 

Jan Svejnar is professor of global political economy studies at Columbia University’s School of International and Public Affairs in New York

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