Wakeup Call for Europe

Europe has squandered its potential with crushing debt, declining living standards, high unemployment and little innovation. “Europe isn’t just falling further behind the United States; 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,” writes economist Philippe Legrain and author of “European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right.” Depressed demand, poor productivity and an aging population put the continent on a path for decline. But rather than support radical reforms, many voters endorse extreme policies that target immigrants. Leadership has been clubby and class-based, he contends. Instead, the continent needs bold leaders who could tackle Europe’s real problems of vested interests, crony capitalism, troubled banks and unsustainable benefits. Political entrepreneurs and a grassroots movement must vigorously pursue accountability and boost productivity, wages and optimism. – YaleGlobal

Wakeup Call for Europe

Europe fails to deliver opportunity, and a lost generation is in the making
Philippe Legrain
Tuesday, August 5, 2014

Revitalizing Europe: Can Italy's youthful Prime Minister Matteo Renzi be bold? (top); the cost of Europe's retired citizens remains a drag.

LONDON: Europe is in a mess. Its economies are failing to deliver higher living standards for most people, and many have lost faith in politicians’ ability to deliver a brighter future. Only 43 percent of Europeans bothered to vote in the May 22-25 European Parliament elections – and many of those deserted mainstream parties, often for the anti-EU extremes. It’s a wakeup call that Europe desperately needs change.

After an unnecessarily long and deep recession, Europe’s recovery is the flimsiest on record: feeble in the eurozone, a return to housing bubble and bust in Britain. 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. Real wages in Britain have fallen by nearly a tenth since the crisis, while the average German earns fractionally less than 15 years ago. Living standards in crisis-hit southern Europe have fallen off a cliff: Greece has suffered a slump worse than Germany’s in the 1930s. In all, 26 million Europeans are out of work – including 15 million young people neither in employment nor education. A lost generation is in the making.

Much of Europe has zombie banks and crushing debt. Most of it has feeble productivity growth and weak investment. All of it is aging fast, and without immigration, workforces are set to shrink. In both Britain and the eurozone, bank credit to businesses continues to fall: While zombie banks are extending existing loans to zombie companies, they are denying new loans to promising businesses. In many countries, private debt remains huge while public debt continues to rise. Southern Europe threatens to sink into a deflationary debt trap.

The problem isn’t just shortfall of demand, it’s chronically poor supply-side prospects. Europe’s economies are often strangled by vested interests that steal the value created by others and stifle opportunities for growth. Far from closing the gap with American productivity levels, Europe is falling further behind. Britain’s productivity gains over the past decade are as poor as the eurozone’s. Germany has performed worse than Greece. Italy did worst of all: a big fat zero. The gap is glaring in the internet economy. The giants of our new 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 United States; 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 – its declining mobile-phone division is now owned by Microsoft – 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 subsidiaries, luxury carmaker Jaguar Land Rover.

Demography may not be destiny, but Europe’s population trends are dismal. 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 labor force shrinks, 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?

Combine depressed demand, inadequate investment, poor productivity and demographic drag, and Europe seems set for stagnation and decline unless it radically reforms. Depressingly, most Europeans think younger generations will have a worse life than they do.

The present economic pain and fear of the future are poisoning politics too. Many people no longer trust mainstream politicians, EU technocrats and elites in general, who seem self-serving, captured by vested interests, and incapable of solving Europe's problems, let alone setting out a compelling vision of a brighter future. Worse, in the eurozone, successive governments of all stripes have been bullied into implementing flawed and unjust policies demanded by the German government and imposed by the European Commission. Some are even losing faith in democracy itself.

Social tensions within countries are multiplying, as are political frictions between them. Understandable anger at the injustice of bailouts for rich bankers and budget cuts for poor schoolchildren overlaps with a despicable scapegoating of outsiders, notably immigrants. Scots will vote on whether to split from Britain in September, Catalans from Spain in November. Bombs go off when German Chancellor Angela Merkel visits Athens.

The project that binds Europeans together – the European Union – has never been more unpopular; Britain may even vote to leave. The EU's crowning achievement, the euro, is increasingly seen as a sadomasochistic straitjacket. As a result, most Europeans now associate the EU with austerity, recession and German domination, with constraints on what they can do, rather than on how all can achieve more together.

This anti-EU, anti-foreigner, anti-establishment mood is fertile ground for extremists and charlatans, who have done extremely well in the European elections. Xenophobic reactionaries came in top in Britain, France and Denmark. Outright neo-Nazis came second in Hungary, third in Greece and grabbed a seat even in Germany. The far left came first in Greece. An anti-establishment movement headed by a comedian came second in Italy. Ultimately, Europe’s open societies – post-war Europe's most amazing achievement – are at risk. So along with radical economic reforms, Europe’s politics needs to change too.

Europe needs bold leaders, political entrepreneurs and a grassroots movement for change. Perhaps the man to start shaking things up is Matteo Renzi, Italy’s dynamic 39-year-old prime minister. In office only since February, he won a whopping 41 percent of the vote in Italy, twice as much as his nearest rival. Already committed to reforming his country’s crony capitalism, he now has a mandate to challenge Merkel’s crisis response. The timing is perfect: Italy takes over the EU’s rotating presidency in July. Renzi has already called for a €150 billion EU investment boost and greater fiscal flexibility.

Instead of a eurozone caged by Germany's narrow interests as a creditor, Europe needs a monetary union that works for all its citizens. Zombie banks should be restructured; excessive debts, both private and public, written down; and investment increased. Instead of a mercantilist pursuit of wage-shredding, beggar-thy-neighbor “competitiveness,” reforms should focus on boosting productivity and thus wages. The economically damaging and politically poisonous fiscal straitjacket imposed by Berlin needs loosening. To create lasting shared prosperity, Europe needs to break the grip that vested interests have over its economies and make them more adaptable, dynamic and decent through reforms that add up.

The EU also needs to become more open, accountable and democratic. Europeans need a greater say over its direction – and the right to change course. And instead of a closed, clubby, class-based politics from a bygone industrial age, Europe needs a more open politics for the internet age. Above all, Europe needs hope, a politics of genuine optimism, a prospectus for a better future. It needs a European Spring: economic and political renewal.


Philippe Legrain, who was economic adviser to the president of the European Commission and head of the team that provides him with strategic policy advice from February 2011 to February 2014, is the author of European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right. It is available from Amazon worldwide. Read an excerpt.