Europe’s future?

I wrote earlier in the year about the difficulties facing the European Monetary Union as a result of the confluence of a rising Euro, increased public sector spending and declining tax revenues. It’s a perfect storm of overlapping crises that risks fracturing the 27 member community of European nations. The debt crisis in Greece, and potential for similar fiscal crises in Portugal, Ireland, Italy and Spain, highlights how deep the pain might run across the EU27.

But should it surprise us?

It certainly wouldn’t surprise Nobel laureate Milton Friedman, who in 1999, shortly after the launch of the Euro, predicted that the Eurozone would not survive its first economic crisis.

It now seems as if the EU will prove him wrong, using a massive bailout from the EU and the IMF to save Greece from insolvency. However, this won’t be last, and if the past year of economic turbelance has taught us anything about Europe, it’s that old traditions die hard.

As geography aside, and a fear of a belligerent Russia aside, what do they share?

There are few historical precedents for a supra-national body such as the EU. Some might argue that the United States is a perfect model, one which allows for State power within a Union. However one can’t ignore the relatively homogeneous cultural identities that formed the basis for the USA in the late 18th and 19th centuries.

Similarly, the Ottoman Empire, before its fall in the early 20th century, was a conglomerate of States based on the supremacy of shared culture and religion, Islam. One of the keys behind the Ottoman’s dissolution was the rise of Nationalistic pride in the sub-cultural groupings of Balkans, Arabs and Turks that rose under it.  The Habsburg Empire suffered a similar ethnically-driven fate.

National identity and national self-interest has long trumped cooperative cross-border ventures. So can Europe avoid the same fate?

If the past year is any indication, then probably not.

Why do I think so?

  1. The perceived need to protect domestic jobs in richer European countries.
  2. Public sentiment against subsidizing poorer EU countries.
  3. The irony of a strong Euro.

Since the economic crisis began in 2008, several “old” EU countries, notably France, Germany and the UK have sought to protect their domestic industries and domestic jobs at the expense of their European neighbours. In France, President Sarkozy angered many across the Union with his remarks about the need to stop outsourcing to other EU countries. The remarks were made in conjunction with France’s multi-billion Euro bailout of struggling French automakers. He noted “I want us to stop out-sourcing and if possible in-source. If we give money to the auto industry to restructure itself, it’s not so we can hear about a new plant moving to the Czech Republic or wherever.” Perhaps more poignantly, he added “Gordon Brown can’t do what I’ve done for the car industry … because they haven’t got one.”

And Mr. Brown would likely have wanted to join Mr. Sarkozy given sentiment across the UK, in particular from labour unions, that sought to promote “British jobs for British workers,” a movement with blatant anti-immigration undertones.

Neither leader was alone in looking to protect domestic interests over the strength of the EU.

In Germany, negotiations between Canadian auto-parts manufacturer Magna and General Motors regarding the sale of Opel were influenced in large part by the German governments desire to protect jobs in Germany. As a condition of the takeover (which ultimately fell apart), Magna planned to cut 20 per cent of Opel’s workforce. However with production facilities in Germany, Belgium, Spain and the UK, the proposed deal saw respective governments seek to outspend themselves to protect their domestic employees. While innately reasonable, Germany’s final offer of 4.5 billion Euro in state aid to protect domestic production ran head first into production efficiency figures that showed that Magna (or GM for that matter) would have been better off transferring production to other, lower-wage facilities in Spain.

National self-interest trumped economic sense.

And so too did it trump citizen belief in the oneness of the EU. In a poll taken in July 2009 by the OpenEurope thinktank, over 70 per cent of German respondents voiced their opinions against using German tax dollars to bail out other EU countries. Politicians in England voiced similar opinions as to the UK’s role in such bailouts.

Such voices have helped keep large impediments to cross-EU labour mobility. After the ascension of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic and Slovenia in 2004, several countries, in particular the UK, were awash in new labour. The UK received approximately 500,000 new workers in the two years after their ascension (30 times what was projected). As a result, newcomers to the EU since the EU8 have been left with little opportunity to make the same move. Bulgaria and Romania, for example, were allocated only 20,000 work visas after their ascension, a dramatically less-liberal allocation despite the lack of any clear evidence that the influx of new labour was in direct competition with existing labour supply.

And therein lies one of the problems and ironies of the European Union.

When times are good within the EU’s core states (England, France and Germany), it means jobs are outsourced out of the core to periphery states in Central, Eastern and Southern Europe, with output sold back to the prosperous Core. It’s the perfect capital/labour exchange.

Such a scenario, however, relies on the concept of ceteris paribus – all things remaining equal.

But all things never remain equal, and economies are subject to exogenous shocks.

So as the Core and Periphery prosper, the Euro appreciates, lessening the competitiveness of EU exports in non-EU markets. And given that only 400 million or so Europeans live in the richer, Core EU, a significant share of exports are destined for non-EU markets. So as the EU prospers, its poorer countries paradoxically suffer more as exports decline, capital retrenches to the core, and labour mobility stiffens.

A union of unequal states will always suffer from such a paradox.

Unless, that is, it truly seeks to set aside the definitions and traditions of ‘nations’ and open the borders of the entire Union to full labour mobility and labour flexibility. Doing so would allow for a long-term accumulation of capital by labour in Core states and an eventual transfer of capital elsewhere in the EU – and assuming that the Core continues to build new, high-value service economies – it would build up real long-term, semi-independent economic strength throughout.

And with all labour mobility restrictions set to expire in 2014, there’s a slight chance that Europe might make it afterall. Moreover, talk of extending the responsibility of Brussels into domestic government spending would go a long way to creating unity and shared rights and responsibilities across all member states.

Unfortunately, meaningful agreement on both those points necessitate an an optimistic perspective on sociology and political science that I’m not well trained at believing!

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