Is Europe declining or not?

Although it may seem that Europe is down and out as it struggles with multiple crises, things are in fact far, far better than they appear on the surface. 

By Hans Kundnani & Mark Leonard

This article first appeared in Foreign Policy magazine and European Council on Foreign Relations website.

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“Europe is history”

No. These days, many speak of Europe as if it has already faded into irrelevance. In the words of American pundit Fareed Zakaria, “it may well turn out that the most consequential trend of the next decade will be the economic decline of Europe.” According to Singaporean scholar Kishore Mahbubani, Europe “does not get how irrelevant it is becoming to the rest of the world.” Not a day went by on the 2012 US campaign trail, it seemed, without Republican challenger Mitt Romney warning that President Barack Obama was – gasp – turning the United States into a “European social welfare state.”

With its anemic growth, ongoing euro crisis, and the complexity of its decision-making, Europe is admittedly a fat target right now. And the stunning rise of countries like Brazil and China in recent years has led many to believe that the Old World is destined for the proverbial trash heap. But the declinists would do well to remember a few stubborn facts. Not only does the European Union remain the largest single economy in the world, but it also has the world’s second-highest defence budget after the United States, with more than 66,000 troops deployed around the world and some 57,000 diplomats (India has roughly 600). The EU’s GDP per capita in purchasing-power terms is still nearly four times that of China, three times Brazil’s, and nearly nine times India’s. If this is decline, it sure beats living in a rising power.

Power, of course, depends not just on these resources but on the ability to convert them to produce outcomes. Here too Europe delivers: Indeed, no other power apart from the United States has had such an impact on the world in the last 20 years. Since the end of the Cold War, the EU has peacefully expanded to include 15 new member states and has transformed much of its neighborhood by reducing ethnic conflicts, exporting the rule of law, and developing economies from the Baltic to the Balkans. Compare that with China, whose rise is creating fear and provoking resistance across Asia. At a global level, many of the rules and institutions that keep markets open and regulate world trade, limit carbon emissions, and prosecute human rights abusers were created by the European Union. Who was behind the World Trade Organization and the International Criminal Court? Not the United States or China. It’s Europe that has led the way toward a future run by committees and statesmen, not soldiers and strongmen.

Yes, the EU now faces an existential crisis. Even as it struggles, however, it is still contributing more than other powers to solving both regional conflicts and global problems. When the Arab revolutions erupted in 2011, the supposedly bankrupt EU pledged more money to support democracy in Egypt and Tunisia than the United States did. When Libya’s Muammar al-Qaddafi was about to carry out a massacre in Benghazi in March 2011, it was France and Britain that led from the front. This year, France acted to prevent a takeover of southern Mali by jihadists and drug smugglers. Europeans may not have done enough to stop the conflict in Syria, but they have done as much as anyone else in this tragic story.

In one sense, it is true that Europe is in inexorable decline. For four centuries, Europe was the dominant force in international relations. It was home to the Renaissance and the Enlightenment. It industrialised first and colonised much of the world. As a result, until the 20th century, all the world’s great powers were European. It was inevitable – and desirable – that other players would gradually narrow the gap in wealth and power over time. Since World War II, that catch-up process has accelerated. But Europeans benefit from this: through their economic interdependence with rising powers, including those in Asia, Europeans have continued to increase their GDP and improve their quality of life. In other words, like the United States – and unlike, for example, Russia on the continent’s eastern frontier – Europe is in relative though not absolute decline.

The EU is an entirely unprecedented phenomenon in world affairs: a project of political, economic, and above all legal integration among 27 countries with a long history of fighting each other. What has emerged is neither an intergovernmental organisation nor a superstate, but a new model that pools resources and sovereignty with a continent-sized market and common legislation and budgets to address transnational threats from organised crime to climate change. Most importantly, the EU has revolutionised the way its members think about security, replacing the old traditions of balance-of-power politics and non-interference in internal affairs with a new model under which security for all is guaranteed by working together. This experiment is now at a pivotal moment, and it faces serious, complex challenges – some related to its unique character and some that other major powers, particularly Japan and the United States, also face. But the EU’s problems are not quite the stuff of doomsday scenarios.

“The eurozone is an economic basket case”

Only part of it. Many describe the eurozone, the 17 countries that share the euro as a common currency, as an economic disaster. As a whole, however, it has lower debt and a more competitive economy than many other parts of the world. For example, the International Monetary Fund projects that the eurozone’s combined 2013 government deficit as a share of GDP will be 2.6 percent – roughly a third of that of the United States. Gross government debt as a percentage of GDP is around the same as in the United States and much lower than that in Japan.

Nor is Europe as a whole uncompetitive. In fact, according to the latest edition of the World Economic Forum’s Global Competitiveness Index, three eurozone countries (Finland, the Netherlands, and Germany) and another two EU member states (Britain and Sweden) are among the world’s 10 most competitive economies. China ranks 29th. The eurozone accounts for 15.6 percent of the world’s exports, well above 8.3 percent for the United States and 4.6 percent for Japan. And unlike the United States, its current trade account is roughly in balance with the rest of the world.

These figures show that, in spite of the tragically counterproductive policies imposed on Europe’s debtor countries and despite whatever happens to the euro, the European economy is fundamentally sound. European companies are among the most successful exporters anywhere. Airbus competes with Boeing; Volkswagen is the world’s third largest automaker and is forecast to extend its lead in sales over Toyota and General Motors in the next five years; and European luxury brands (many from crisis-wracked Italy) are coveted all over the world. Europe has a highly skilled workforce, with universities second only to America’s, well-developed systems of vocational training, empowered women in the workforce, and excellent infrastructure. Europe’s economic model is not unsustainable simply because its GDP growth has slowed of late.

The real difference between the eurozone and the United States or Japan is that it has internal imbalances but is not a country, and that it has a common currency but no common treasury. Financial markets therefore look at the worst data for individual countries – say, Greece or Italy – rather than aggregate figures. Due to uncertainty about whether the eurozone’s creditor countries will stand by its debtors, spreads – that is, the difference in bond yields between countries with different credit ratings – have increased since the crisis began. Creditor countries such as Germany have the resources to bail out the debtors, but by insisting on austerity measures, they are trapping debtor countries like Spain in a debt-deflation spiral. Nobody knows whether the eurozone will be able to overcome these challenges, but the pundits who confidently predicted a “Grexit” or a complete breakup of the single currency have been proved wrong thus far. Above all, the euro crisis is a political problem rather than an economic one.

“Europeans are from Venus”

Hardly. In 2002, American author Robert Kagan famously wrote, “Americans are from Mars and Europeans are from Venus.” More recently, Robert Gates, then US defense secretary, warned in 2010 of the “demilitarisation” of Europe. But not only are European militaries among the world’s strongest – these assessments also overlook one of the great achievements of human civilisation: a continent that gave us the most destructive conflicts in history has now basically agreed to give up war on its own turf. Besides, within Europe there are huge differences in attitudes toward the uses and abuses of hard power. Hawkish countries such as Poland and Britain are closer to the United States than they are to dovish Germany, and many continue to foresee a world where a strong military is an indispensable component of security. And unlike rising powers such as China that proclaim the principle of non-interference, Europeans are still prepared to use force to intervene abroad. Ask the people of the Malian city of Gao, which had been occupied for nearly a year by hard-line Islamists until French troops ejected them, whether they see Europeans as timid pacifists.

At the same time, Americans have changed much in the decade since Kagan said they are from Mars. As the United States draws down from the wars in Afghanistan and Iraq and focuses on “nation-building at home,” it looks increasingly Venusian. In fact, attitudes toward military intervention are converging on both sides of the Atlantic. According to the most recent edition of Transatlantic Trends, a regular survey by the German Marshall Fund, only 49 percent of Americans think that the intervention in Libya was the right thing to do, compared with 48 percent of Europeans. Almost as many Americans (68 percent) as Europeans (75 percent) now want to withdraw troops from Afghanistan.

Many American critics of Europe point to the continent’s low levels of military spending. But it only looks low next to the United States – by far the world’s biggest spender. In fact, Europeans collectively accounted for about 20 percent of the world’s military spending in 2011, compared with 8 percent for China, 4 percent for Russia, and less than 3 percent for India, according to the Stockholm International Peace Research Institute. It is true that, against the background of the crisis, many EU member states are now making dramatic cuts in military spending, including, most worryingly, France. Britain and Germany, however, have so far made only modest cuts, and Poland and Sweden are actually increasing military spending. Moreover, the crisis is accelerating much-needed pooling and sharing of capabilities, such as air policing and satellite navigation. As for those Martians in Washington, the US Congress is cutting military spending by $487 billion over the next 10 years and by $43 billion this year alone – and the supposedly warlike American people seem content with butter’s triumph over guns.

“Europe has a democratic deficit”

No, but it has a legitimacy problem. Sceptics have claimed for years that Europe has a “democratic deficit” because the European Commission, which runs the EU, is unelected or because the European Parliament, which approves and amends legislation, has insufficient powers. But European Commission members are appointed by directly elected national governments, and European Parliament members are elected directly by voters. In general, EU-level decisions are made jointly by democratically elected national governments and the European Parliament. Compared with other states or even an ideal democracy, the EU has more checks and balances and requires bigger majorities to pass legislation. If Obama thinks it’s tough assembling 60 votes to get a bill through the Senate, he should try putting together a two-thirds majority of Europe’s governments and then getting it ratified by the European Parliament. The European Union is plenty democratic.

The eurozone does, however, have a more fundamental legitimacy problem due to the way it was constructed. Although decisions are made by democratically elected leaders, the EU is a fundamentally technocratic project based on the “Monnet method,” named for French diplomat Jean Monnet, one of the founding fathers of an integrated Europe. Monnet rejected grand plans and instead sought to “build Europe” step by step through “concrete achievements.” This incremental strategy – first a coal and steel community, then a single market, and finally a single currency – took ever more areas out of the political sphere. But the more successful this project became, the more it restricted the powers of national governments and the more it fueled a populist backlash.

To solve the current crisis, member states and EU institutions are now taking new areas of economic policymaking out of the political sphere. Led by Germany, eurozone countries have signed up to a “fiscal compact” that commits them to austerity indefinitely. There is a real danger that this approach will lead to democracy without real choices: citizens will be able to change governments but not policies. In protest, voters in Italy and Greece are turning to radical parties such as Alexis Tsipras’s Syriza party in Greece and Beppe Grillo’s Five Star Movement in Italy. These parties, however, could become part of the solution by forcing member states to revisit the strict austerity programs and go further in mutualising debt across Europe – which they must ultimately do. So yes, European politics have a legitimacy problem; the solution is more likely to come from policy change rather than, say, giving yet more power to the European Parliament. Never mind what the sceptics say – it already has plenty.

“Europe is about to fall off a demographic cliff”

So is nearly everybody else. The EU does have a serious demographic problem. Unlike the United States – whose population is projected to increase to 400 million by 2050 – the EU’s population is projected to increase from 504 million now to 525 million in 2035, but thereafter to decline gradually to 517 million in 2060, according to Europe’s official statistical office. The problem is particularly acute in Germany, today the EU’s largest member state, which has one of the world’s lowest birth rates. Under current projections, its population could fall from 82 million to 65 million by 2060.

Europe’s population is also aging. This year, the EU’s working-age population will start falling from 308 million and is projected to drop to 265 million in 2060. That’s expected to increase the old-age dependency ratio (the number of over-65s as a proportion of the total working-age population) from 28 percent in 2010 to 58 percent in 2060. Such figures can lead to absurd predictions of civilisational extinction. As one Guardian pundit put it, “With each generation reproducing only half its number, this looks like the start of a continent-wide collapse in numbers. Some predict wipeout by 2100.”

Demographic woes are not, however, something unique to Europe. In fact, nearly all the world’s major powers are aging – and some more dramatically than Europe. China is projected to go from a population with a median age of 35 to 43 by 2030, and Japan will go from 45 to 52. Germany will go from 44 to 49. But Britain will go from 40 to just 42 – a rate of aging comparable to that of the United States, one of the powers with the best demographic prospects.

So sure, demography will be a major headache for Europe. But the continent’s most imperiled countries have much that’s hopeful to learn from elsewhere in Europe. France and Sweden, for example, have reversed their falling birth rates by promoting maternity (and paternity) rights and child-care facilities. In the short term, the politics may be complicated, but immigration offers the possibility of mitigating both the aging and shrinking of Europe’s population – so-called decline aside, there is no shortage of young people who want to come to Europe. In the medium term, member states could also increase the retirement age – another heavy political lift but one that many are now facing. In the long term, smart family-friendly policies such as child payments, tax credits, and state-supported day care could encourage Europeans to have more children. But arguably, Europe is already ahead of the rest of the world in developing solutions to the problem of an aging society. The graying Chinese should take note.

“Europe is irrelevant in Asia”

No. It is often said – most often and loudly by Singapore’s Mahbubani – that though the EU may remain relevant in its neighbourhood, it is irrelevant in Asia, the region that will matter most in the 21st century. Last November, then-Secretary of State Hillary Clinton proclaimed that the US “pivot” to Asia was “not a pivot away from Europe” and said the United States wants Europe to “engage more in Asia along with us.”

But Europe is already there. It is China’s biggest trading partner, India’s second-biggest, the Association of Southeast Asian Nations (ASEAN)’s second-biggest, Japan’s third-biggest, and Indonesia’s fourth-biggest. It has negotiated free trade areas with Singapore and South Korea and has begun separate talks with ASEAN, India, Japan, Malaysia, Thailand, and Vietnam. These economic relationships are already forming the basis for close political relationships in Asia. Germany even holds a regular government-to-government consultation – in effect a joint cabinet meeting – with China. If the United States can claim to be a Pacific power, Europe is already a Pacific economy and is starting to flex its political muscles there too.

Europe played a key role in imposing sanctions against Burma – and in lifting them after the military junta began to reform. Europe helped resolve conflicts in Aceh, Indonesia, and is mediating in Mindanao in the Philippines. While Europe may not have a 7th Fleet in Japan, some member states already play a role in security in Asia: the British have military facilities in Brunei, Nepal, and Diego Garcia, and the French have a naval base in Tahiti. And those kinds of ties are growing. For example, Japanese Prime Minister Shinzo Abe, who is trying to diversify Japan’s security relationships, has said he wants to join the Five Power Defense Arrangements, a security treaty that includes Britain. European Union member states also supply advanced weaponry such as fighter jets and frigates to democratic countries like India and Indonesia. That’s hardly irrelevance.

“Europe will fall apart”

Too soon to say. The danger of European disintegration is real. The most benign scenario is the emergence of a three-tier Europe consisting of a eurozone core, “pre-ins” such as Poland that are committed to joining the euro, and “opt-outs” such as Britain that have no intention of joining the single currency. In a more malign scenario, some eurozone countries such as Cyprus or Greece will be forced to leave the single currency, and some EU member states such as Britain may leave the EU completely – with huge implications for the EU’s resources and its image in the world. It would be a tragedy if an attempt to save the eurozone led to a breakup of the European Union.

But Europeans are aware of this danger, and there is political will to prevent it. Germany does not want Greece to leave the single currency, not least due to a fear of contagion. A British withdrawal is possible but unlikely and in any case some way off: Prime Minister David Cameron would have to win an overall majority in the next election, and British citizens would have to vote to leave in a referendum. In short, it’s premature to predict an EU breakup.

This is not to say it will never happen. The ending of the long story of Europe remains very much unwritten. It is not a simple choice between greater integration and disintegration. The key will be whether Europe can save the euro without splitting the European Union. Simply by its creation, the EU is already an unprecedented phenomenon in the history of international relations – and a much more perfect union than the declinists will admit. If its member states can pool their resources, they will find their rightful place alongside Washington and Beijing in shaping the world in the 21st century. As columnist Charles Krauthammer famously said in relation to America, “Decline is a choice.” It is for Europe too.

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The opinions in this article are those of the author and don’t necessarily reflect the views of the Estonian World Webzine.

Photos: Wikimedia Commons