Monday, 29 September 2008

Europe’s New Golden Age? Fat Chance!

Europe could become the centre of the world, simply by not screwing up. Europe is big and loves government. But it will miss its chance for want of revolution.
When in globalisation, huge and mature is the best. The size of the European economy relative to that of the world makes it the largest economy on Earth that is both mature and integrated. The consequence: Europe possesses internal demand that could bridge over a global recession. 
Some emerging market people talk about China or Brazil being able to do the same. But this is a dream. Neither of these countries has made sufficient progress in economic transition to achieve a structure that could produce the necessary demand dynamics. As we have seen in numerous emerging markets before, hopes for a long-lasting domestic dynamo vanish shortly after the export impetus dries up. When things looked good, it was not that external demand had truly diminished in importance, it merely looked that way. Furthermore, despite the impressive expansion so far, neither of these countries is big enough to withstand a crisis. China is the size of Germany.  Brazil is the size of Canada. In comparison: the EU is larger than the US, Canada and Mexico put together. 
Furthermore, Europe’s potential to integrate its neighbourhood is much stronger than is the case for other regions. The number of people on the labour market with at least secondary-level education in Europe and its neighbourhood is more than double that in North America, for instance. At the same time, regional integration on a level even remotely similar to that in Europe is out of the question for decades in East or South Asia for obvious political reasons. Witness the ASEAN’s hopeless efforts at policy harmonisation. 
So Europe could be the dominant global region. If only there was a policy-making body to ensure that...
You must love your government. The European approach to governance makes it well-placed to withstand a global economic storm. Now is the time when it should perform at its best. 
Although, there are quite a few versions of the ‘European model’, the main theme is always the same, based on the notion of collective responsibility among independent individuals. 
The pure version is the semi-socialism of Scandinavia. The four North-West European countries have the largest presence of the state in the private economy of any other country group north of the 10,000-dollar annual income per capita mark. (Their tax revenue share of GDP is a staggering 47% as opposed to the rest of Europe’s 36% and the non-European OECD countries’ 29%.) But, crucially, their large state works: in the ‘institutions’ bit of the World Competitiveness Index, the four Scandinavian countries occupy four of the top eight slots. Markets and socialism clearly can form a good team. 
The rest of Europe acts out a series of variations on the pure case: lingua-etatist France, inflexible but strong Germany, the would-be socialist Mediterranean, the dreaming-of-being-different Britain, and the large-state-rampant-corruption new kids in Central and Eastern Europe. Still, even the UK, which sees itself as closest to the US model, will at one point have to come to terms with the reality of having strong state involvement. (Just as a passing example: the nationalisation of Northern Rock was swallowed much more easily than the US’s Fannie Mae and Freddie Mac a couple of months later. The temporary outrage subsided in seconds on the etatist-side of the Atlantic.)
European economic history is evidence that strong government - if done badly - may translate into non-performing economies. But if done well, it can create a framework in which the private economy thrives. Moreover, and critically for the current crisis, it can provide buffers against external shocks. It is, you could argue, to the latter form that Europe’s economic management needs to converge. And - there it is, or would be - the world’s new economic leader born.
Or maybe not...
A sclerotic pensioner with the identity problems of a teenager. A couple of years ago I was invited to moderate a roundtable discussion on the ‘European social model’. I wouldn’t have subjected myself to the pains of discovering the meaning of this concept, had the conference not taken place in one of the most beautiful Mediterranean villages, in Turkey. (I would have brushed up on the Inquisition for that…)
So when my friends called to say they needed a last-minute replacement chair, I signed up right away, although I did not know anything about the topic. (Shameless, I know.) I spent the following two weeks learning about the origin of the concept of the ‘European social model’. What I found was complete intellectual chaos. There is no common element - zero overlap in the 15 or so different definitions that are in use. The term does little more than fill the vacuum left by the absence of real common identity. It is empty. 
The elites that created the EU, an otherwise sensible project, failed to design a way to react to a crisis like this. There is no EU-level institution that could deliver the kind of governance that would make the European economy live up to its global potential. The current EU is a decrepit, ineffective and largely illegitimate body, more like a labour-union committee than a source of global leadership or cutting-edge governance. 
As we learned in the Central European transition countries, it is much easier to build brand new institutions than reform the old ones. The temptation is to ‘mend’ the system rather than truly reform it. Re-form it. ‘Mending’ means more regulation on top of the overbearing current regime, it means larger state French-style rather than re-thinking the content of governance Scandinavian-style. 
The institutional scleroticism of the unfinished EU calls for complete overhaul. But, for that, we would need a way to decide what ‘Europe’ is. In a legitimate way, in the form of Demos Kratia.
Funny how the European society, arguably the origin of globalisation, manages to react to the global challenges with the worst combination of age and youth.  It is as sclerotic as an elderly pensioner, but with the identity problems of a teenager.  Wisdom and dynamism would be a much more promising combination.


  1. Well, this will indeed show us if the European model is more viable. But mixing capitalism with socialism is a delicate issue. Not so surprisingly the US has not gone down on this road yet.

  2. Maybe what we should really ask if the US is going to be a failed state. There is no amount of European success that could balance out the impact of that.

    The news from tonight are definitely pointed that direction. Krugman calls it a Banana Republic.

  3. I am not sure if Krugman is fair. This has been a badly defined deal, and now it got rejected. Throwing it back for meaningful changes would not be that of a problem. It is more an issue that the reasons for voting it down had were all about short term politics. The chances of a successful alteration are slim. More populism to come.

    The cost will be rather dear. The term 'bank run' is on the rise on the usage-monitor. An example is here.

  4. Bank runs in the US? I don't think that is very likely.

  5. In the US, and elsewhere.

    Notice the bank run four days ago in HK, or the troubles with Fortis in Europe, for instance.

    In any case, the crisis has already spilled over to banks from investment banks. Witness Wachovia's near-death experience today. People taking some 'safety money' out en masse is not necessarily that far away from this.

  6. What happens now, then? Total meltdown?

    I wonder about the political consequences. History tells us that economic collapse precedes the rise of the extreme right, no?

  7. I take an issue with both of your arguments.

    First, I don't think that the Armageddon is upon us, although this is going to be a rough ride and we are only at the beginning of it.

    Second, for the extreme right to come in, particular circumstances are needed. However, I would agree that extreme policy reactions might appear. Overregulation and mis-regulation will be our subject matter for years to come, unfortunately.

  8. You gave a very nice analysis of how Europe differs and how little that may help under the present circumstances.
    Can you explain why repeated mass injections by the central banks all over the world look like they have no effect at all. Do the banks pick up the money and put it in the larder for safe-keeping? If so, can't the central banks put some strings on the money they give out?