Thursday, 29 September 2011

What would the world look like without the EU?

They used to say that when America sneezes, Europe catches a cold. That’s certainly what they (and I) were saying during the 2008 economic crisis, when misadventures on Wall Street and the subsequent collapse of Lehman Brothers created a disaster that quickly spread to Europe. How the tables have turned. Now the US is waiting helplessly to see if Europe can avoid a disaster that would eclipse Lehman Brothers in scale and could throw the US back into recession.

It’s a testament to just how important Europe has become to the global economy that it is now Europe’s sneeze that can give the world a cold. The EU is now a larger market than the United States, and over the past twenty years it has literally become the world’s regulator. Is it conceivable that this entire project could now collapse?

This is the question that is now being asked in the United States. When I was home last weekend I was asked by friends, “Is the EU going to fall apart?” Trying to show a bit of false confidence, I assured them that it is not. Germany is in the end going to suck it up and do what needs to be done to save the euro, I insisted, because the alternative is complete economic meltdown. The vote for the increased bailout fund today in the German parliament seems to go some way in justifying that optimism. The truth is that Europe’s problems are not insurmountable.

The EU actually has a combined debt much smaller than that of the United States, and the vital signs of the EU economy, in the North at least, are much more promising than in the US. Europe has a structural problem, not an economic one. It has states with individual sovereign debts that can be set upon by international markets. Can you imagine if the same were true of the individual American states?

At this time three years ago I was in Paris watching Europe panic as it looked like the US congress would not pass the bail-out to shore up the failing US banks. Eventually they did pass the enormous fund which stopped the contagion of the crisis. That was hard enough. But if they thought that was tough, imagine having to pass such a bail-out in 27 parliaments. The Obama administration should keep this in mind as they express increasing impatience with Europe's slow reaction.

The problem is that Europeans went only halfway with the European project. They thought they could create monetary union without financial union, and that is how they’ve ended up with the problem they now find themselves in. But that problem is still solvable, perhaps even (depending on who you ask) without treaty change. It will take a measure of sacrifice from the Germans, but if there’s any people willing to make a sacrifice for Europe it is them. They have been, after all, the ‘best Europeans’ over the past fifty years.

The EU’s importance to the world

But what if it did all collapse? What would that mean for the world? Personally, I believe that the EU is the last best hope for the world. It’s why I came here, after all. So I believe that a collapse of the European project would not just cause a short-term economic collapse and recession. It would fundamentally alter the 21st century, and for the worse.

In the 21st century we are guaranteed to have two superpowers – one on the rise and one in decline. One is an authoritarian colossus that tramples over human rights and doesn’t seem to have any defining ideology outside of profit and growth. The other is a creaking, aging democracy struggling under the weight of an antiquated governing structure and a political discussion increasingly divorced from reality. As different as they are, China and the United States have one thing in common – neither seems to be in a position to take on a role of strong global leadership today.

There is the possibility of a third superpower -a union of former world powers who dominated previous centuries but whose influence today is, individually, weak and growing weaker by the day. Though of low significance individually, acting collectively they take on an importance that can equal or even dwarf that of the US or China. The EU is already a larger common market than the United States, and it has a higher GDP. Before the current crisis came along there was talk of the euro becoming the world’s new reserve currency (China was requesting it no less).

The EU’s importance today doesn’t just lie in its size. Over the past three decades, as the US has adopted a laissez-faire, light touch attitude toward regulation, the EU has stepped in and become the world’s regulator. The huge recent growth in the lobbying presence in Brussels is a testament to this. US companies operating globally no longer worry so much about constraints coming from Washington, they worry about Brussels. Because if they want to operate in Europe, then they have to make their products conform to European environment, health and safety requirements. And the European market is just too big to ignore.

The examples are myriad. For example, the REACH chemicals regulation, adopted in 2006, requires companies to identify and test all chemicals they use in their products. Believe it or not this has never been required before, and no government knew exactly which chemicals were being used in items people use every day. US companies now have to identify all the chemicals they use, because Europe requires it.

Environmental policy is another area in which the EU is the only one showing leadership. It’s not just that Europe has better public transport, recycling, and emissions levels within its borders than elsewhere in the developed world. Europe is now the center of development and deployment for green technologies. It is also the center of the world for setting environmental standards, for instance for unleaded fuel. Automakers tend to make their worldwide fleets according to European standards, because they're not going to make separate cars for Europe. The same goes for the EU's ecodesign legislation, which specifies green standards for products. Those standards then get applied to the products worldwide, because manufacturers aren't going to make separate products for Europe.

In previous decades it was California that was the leader for green technology and environmental standards, and these would then spread to the rest of the US and then to Europe. It is now the opposite, with Germany taking the mantle as the world’s generator of environmental technology and standards. The EU is also the one driving forward international talks on combating climate change, in the face of huge resistance from the US and China.

Regulations covering anti-trust, consumer rights, privacy and finance now also generate from the European Union, and the world’s corporations must follow them. GE CEO Jack Welch learned this lesson the hard way in 2001 when his takeover of Honeywell was easily cleared by US anti-trust authorities but was then smacked down by EU authorities, forcing him to abandon the deal. It would have been the biggest industrial merger in history, and without the EU it would have gone ahead. Microsoft was also caught off guard by the EU's regulatory muscle, and may soon happen to Google.

Europe has also provided the world with moral leadership in modern times, something that used to be the purview of America. Unlike in the US and China - the two most prolific state killers in the world – the death penalty is forbidden in the EU. Europe has been on the forefront of the gay rights movement, with same-sex unions now the law of the land in 18 out of the 27 EU member states. The United States was only recently able to join the rest of the Western world in ending a ban on gays in its military, something that hasn’t existed in Europe in many years. Europe’s social model is also an example to the rest of the world, with healthcare systems that care for all and welfare systems which, though they may have problems, prevent large numbers of citizens from falling into abject poverty. The United States and China cannot claim these successes.

Even in the realm of foreign policy, undoubtedly the EU’s biggest weakness, EU member states have often acted as modifiers in conflicts, as opposed to their more bellicose American cousins. If that propensity for peace by individual member states could be unified into a single voice at EU level, and if Europe could become capable of defending itself militarily and not rely on US military protection, it could make a huge difference in the world. The EU is a long way from this point, but it could get there.

Doomsday scenario

So what if this all went away tomorrow? The practicalities of a ‘European divorce’ are enormously complicated, so complicated that it seems very unlikely to me that it would even be possible to break up the EU. The entire structure of how European states interact with each other are now contained in the EU treaties. If these were suddenly torn up it would mean a nightmare of redrafting bilateral treaties between all the various states.

In term of law, EU directives have been transposed into national law so all those areas would remain the same. But regulations, the type of EU law that does not need to be transposed but is automatically effective in member states, are not encoded in national law. So these would disappear. These include, for instance, the REACH chemicals regime and food safety standards.

For Europeans the consequences would be extreme. But what about the rest of the world? If companies no longer had to fear the regulatory power of the EU and only had to deal with the light-touch US authorities, its safe to assume that the level of consumer protection in products and services would quickly deteriorate.

Economists say that just the euro’s collapse alone would plunge the world into a global recession, a crisis that could even develop into a long-term depression. The collapse of the world’s number two currency, combined with the collapse of the world’s number one economy, would be catastrophic.

And what would happen to the states of Eastern Europe if they no longer had the EU or the goal of EU accession to bring them toward the West? It’s easy to see these states falling easily back into the Russian yolk. And however you feel about the question of Turkish EU accession, it seems that the death of the EU would seal the deal of Turkey’s transformation into an Islamic state oriented toward the Middle East.

Then of course there is the most extreme scenario – that the break-up of the EU could result in another European war down the road. As unimaginable as that seems in today’s Europe, the Polish finance minister actually suggested this last week when he said that the collapse of the EU could eventually lead to another large scale war on the continent. It is often said that the EU’s greatest achievement was making war on the continent of Europe inconceivable, because the countries are bound together by an intergovernmental structure. If that structure disappears, logic would hold that war is once again a possibility. That is a future nobody wants to envisage.

“The EU faces its greatest challenge”

Clearly, the stakes are high. European Commission President Jose Manuel Barroso indicated this in his emotional ‘state of the union’ speech to the European Parliament Wednesday. "We are today faced with the greatest challenge our union has known in all its history," he told MEPs. But he said it was both possible and necessary to overcome it. Only more Europe can solve the current crisis, he insisted, not less. Despite the current mood of nationalism in Europe, there is no other way out of this crisis but to complete the European project. "I think this is going to be a baptism of fire for a whole generation," he said.

But despite the impassioned speech, it still seems like European leaders aren’t grasping the enormity of the crisis. German Chancellor Angela Merkel has been paralyzed with inertia since the euro crisis began, afraid to vigorously make the case to a skeptical German public that they must make sacrifices to save the common currency. Barroso himself has seemed sidelined and irrelevant as the bail-out mechanisms used so far to combat the debt contagion have been intergovernmental rather than institutional in nature. Newly-appointed council president “Haiku Herman” Van Rompuy has been missing in action (he told an audience in the US last week that he was a “poet lost in politics”). UK leader David Cameron has seemed confused about what role the UK should have since it is not in the Eurozone, and French President Nicolas Sarkozy’s solutions have seemed disjointed.

The problem is that everyone knows what must be done to end the crisis - establishment of financial union with one EU finance minister dictating finance policy to the member states. But at this time of heightened nationalism and euroscepticism amongst the European public, they are too afraid to take this case to the public. So they have stumbled ahead with half-measures, putting off the pain and hoping that the problem will just go away. Eventually though, they’re going to have to do what needs to be done. And the first steps in this direction may be taken at next month’s enormously important European Council – perhaps the most anticipated council in the EU’s history.

If Europe’s potential is the best hope for the world, it is now the European people themselves who are the biggest obstacle to this hope. As I’ve said before, this continent is long on comfort and short on ambition, and Europeans don’t like to see themselves as leaders in the world. But as the European project seems to teeter toward collapse, Europeans need to start thinking about what the alternative to that leadership will look like. It’s something the rest of the world needs to start thinking about as well.


Anonymous said...

Interesting article. But can't European countries still lead the world in these things if they all adopt these standards individually? Why does it have to be done at EU level, and who's to say each state wouldn't adopt them on their own and the companies would still need to respect those standards globally?

jolyonwagg1 said...

I think your analysis and blog post is misguided and wrong. Europe needs less big govt and over bearing directives from Brussels and Barosso, and much more economic freedom and innovation, sadly lacking in southern EU economies like Portugal, Italy, and Greece.

dagmawielehu said...

Dave, I think you are spot on, exactly correct in this blog post. You are right about the role the EU has regarding the environmental and safety progress in the world. It would be impossible to achieve without the single market, which prevents the possibility of divide and conquer tactics. Individual regulations would create a race to the bottom by countries individually to small to resist the corporate persuasion. Individual regulations would also be too expensive and complicated to comply with, greatly reducing the competitiveness of the economies of the European countries as well as the interest in investment from abroad.

You are correct in the attraction that the EU exerts on our neighbours, countries further away and individuals all around the globe. Just by existing EU is inspiring countries near and far to raise the level of accountability and transparency. Banning the use of government killing is an example and a statement. For our closest neighbours, still including Turkey, the prospect of closer cooperation and even joining is a concrete incentive for progress, as well as the internal pressures between the member countries. This benefits our citizens by calming our neighbourhood and the world, giving European individuals and companies nicer, stabler and richer partners and consumers to work with.

The description of the lack of a coherent foreign policy, while occasionally a strength but almost always lessening the strength of the points the countries already agree on, is also right. As single voice on the things we agree on could and would be another way to strongly improve the world and give citizens a sense of hope, being part of the solution, not just conquering the world or dragging them into our wars. The lack military spending, especially compared to the increase in China, Russia and others, is especially terrifying with the effects multiplied by the inefficiencies of having 27 different armed forces. We are not there yet but the potential is real and for us to grasp.

dagmawielehu said...

It is clear that we are not in a currency crisis, a debt crisis or even a crisis brought on by irresponsible behaviours by the targeted countries. It is a crisis of an uncompleted EU that has never worked without the courageous leadership by individual statesmen and -women. It is a political crisis in the sense that our politicians are failing us when we need them the most. As you write, almost everyone involved knows what needs to be done and how difficult it will be. But they do not have the courage to attempt and try to weasel their way out of the situation with half measures. A federative EU is the only solution, which doesn't in any way mean more supranational powers, just that those powers are wielded in an accountable and transparent way. If anyone that tries to understand and follow EU activities thought that Barroso and the commission in any way is "to blame" for what comes out of the EU the recent events would prove that the Commission and its president cannot do anything without the blessing of the heads of state and government. If they don't trust the commission to do exactly as they want they'll just create a new institution even further from transparency, accountability and the rule of law.

As for the importance of the European Union for the world I would just like to add another perspective of our last, best hope. The European Union is the only credible project of expanding the rule of law from current nation states to a new wider body in a peaceful way for a long, long time, probably since the creation of the USA. Regional organisations all over the world, from Africa, to South East Asia, to South America, are looking to the EU as an example of expanding markets, rule of law and individual liberties. For it to fail would mean setting back the progress of non violent international problem solving in an almost inconceivable way, not just within Europe, but throughout the world.

What I feel you have not addressed in this blog post is of course the benefits of the EU for its own citizens and companies. I have just briefly touched on some in this comment, but they deserve a lot more. Peace, stability, common regulations, access to jobs markets, consumer markets, capital, travel and rule of law is just scratching on the surface of what the EU guarantees its corporate and private citizens - and their national politicians take credit for while letting the blame of anything unpopular pool in the mystical Brussels.

Thank you for this wonderful post, let's just hope for some inspirational leaders daring to speak the truth to their constituents. I have hope for the future!

Anonymous said...

An excellent read, I wish the average European would understand how important this is.