Speech to the ANU Centre for European Studies, Canberra, 13 July 2011

Thank you very much for the opportunity to speak to you today. And a special thank you to Professor Pierre van der Eng who had first invited me to the Centre for European Studies.

I am also grateful to the First Counsellor of the Delegation of the European Union to Australia and New Zealand, Signor Andrea Nicolaj, who will later comment on my remarks. È un grande piacere, per me, parlare di Europa con Lei qui a Canberra. Ma purtroppo dobbiamo farlo in inglese.

So the title of my talk today is also the title of an essay I published with the Centre for Independent Studies last year: Europe’s painful farewell. That is, of course, an incredibly optimistic description of Europe’s current state of affairs. But I can assure that one thing it is not: schadenfreude.

Unlike some, mainly British, commentators I do not derive any pleasure from looking at Europe’s problems. And though I am quite an EU-sceptic, I would still call myself a Europhile. Europe is not only a fascinating continent but it is also a remarkable place because of its interwoven culture and history. As a European, you can never be a complete stranger in another European country.

On moving from country to country within Europe, you may not immediately feel at home but you will certainly feel a closeness that you do not experience elsewhere. Perhaps not even in Australia. That is the wonderful thing about Europe that despite all its obvious diversity there are some common European features. It is this tension between great diversity and a shared history that makes Europe such a special place.

So without any doubt, there are great things to be said about Europe. Great things could also be said about the European Union. The common market is its greatest achievement. The four freedoms, that is the free movement of goods, persons, services and capital, are perhaps not yet fully realised. But great steps have been made in the direction of unifying European markets and thereby increasing competition, reducing transaction costs and maximising consumer welfare.

The Schengen Agreement is another milestone for European integration. Being able to cross borders without controls, travelling freely from the North Cape to Sicily and from Lisbon to Warsaw is a fantastic experience in a continent that in the past was too often defined by borders that were often disputed, heavily controlled and sometimes difficult to cross.

The Single Market and the Schengen Agreement are the most important successes in European integration. But both are past successes. The Schengen treaty was signed in 1985; the Single Market was launched in 1993. Of course, they have been modified and extended since, not least after the Eastern enlargement of the European Union. However, the basic structures were laid in the late 1980s and early 1990s.

I would argue that at this stage the European project should have been declared completed. That was the maximum in terms of European integration that was achievable without overstretching Europe’s political and economic structures, undermining national sovereignty and shifting too much power to unelected and unaccountable institutions. Unfortunately, as we all know, European integration did not stop there. And this is where we are today.

We have left behind the era of the European Economic Community and the European Community and we are now faced with the European Union. The name ‘union’ already implies a greater degree of ‘unitedness’ and maybe ‘harmony’. So it is ironic that dis-union and dis-harmony between member states are stronger than ever before.

That in itself would already be deplorable. But what makes it tragic is that disharmony comes at a time when Europe simply cannot afford to be fighting itself because there are much more important problems that need to be tackled. And besides, I would argue that the very same structures that were meant to unite and harmonise Europe are the reasons for the increasing division we are observing between EU member states.

Now what are the main problems that Europe needs to tackle? In my paper last year I identified three challenges: public debt, demographics and immigration.

Of course, there are many more problems I could have tackled such as Europe’s energy policy and its relationship to Russia. Or the lack of European coordination in security matters as currently on display in Libya. Or the still unsatisfactory state of European democratic structures. Or Europe’s relationship with the difficult tiger economy on its doorstep that is Turkey.

But since I am an economist I want to stick to the core economic challenges for Europe. And these economic issues are also the most pressing and urgent problems for Europe at the moment.

To begin with the issue of public debt, it is important to note that the monetary crisis of the Euro and the sovereign debt crisis are closely linked. But they are not quite identical. Let me explain.

Even before the Euro was introduced, Europe had developed a dangerous addiction to debt. This debt addiction was not limited to those countries that are now almost synonymous with the debt crisis. Even in supposedly strong and healthy economies, financing public expenditure through deficit spending was the normal state of affairs.

The last time Germany, for example, recorded a budget surplus was almost 50 years ago. Between tax revenues and government expenditures there has since been a gaping hole year after year. The result is an almost unimaginable public debt burden of close to 2 trillion Euros. That is 24,000 Euros per man, woman and child in Germany. And every second, public debt goes up by 2,279 Euros. In the few minutes that I have been speaking to you so far, Germany’s public debt has increased by about 1 million Euros.

In relative terms, German debt was 83.2 percent of German GDP in 2010. That is much more than what is allowed under the European Stability and Growth Pact, which permits 60 percent. And yet, the sad truth is that the official debt figure is still an underestimation of the real extent of Germany’s public debt.

If you want to get the full picture you would have to include the liabilities in the social security systems, in health and pensions, and now you should probably also factor in the guarantees given by the German government for Greece and other struggling Eurozone countries. Add to that further guarantees taken on by the government for toxic debt in the financial crisis, and the picture you get is an implicit public indebtedness that is several times higher than the official measure of just 83 percent of GDP.

Given the nature of these data, it is very hard to come up with a precise estimate. But just to give you a rough idea, two years ago the economist Jagadeesh Gokhale published a report with the US National Center for Policy Analysis in which he calculated the unfunded obligations of European countries based on Eurostat data from 2004, so before the financial crisis. But even based on these pre-GFC data, Germany’s real debt burden was 418 percent of GDP.

There is only one reason for the Germans to feel good about themselves. Their level of implicit indebtedness is actually a tad below the average of European Union countries. Because the EU-25 average was 434 percent. Greece, for example, had 875 percent debt to GDP. Slovakia stood at 1,149 percent, and Poland was number 1 for debt at a staggering 1,550 percent.

These debt figures should make a few things clear: First, the Euro is not the cause of the European debt problem. Europe’s debt problem extends across the whole of the continent, not just the eurozone. Also, the debt problem started much earlier than the common currency. Second, current market turmoil about debt is not the result of some conspiracy of rating agencies and evil speculators. What we are witnessing is just market players waking up to debt problems that they had so far overlooked. And third, public debt in Europe has indeed reached such levels that there are no longer any easy solutions to the continent’s debt crisis. I am afraid that in terms of the debt crisis in Europe, and dramatic as events may have appeared, we have only just seen the beginning of it.

So what are Europe’s answers to this debt crisis? Unfortunately, there are no real answers. Where debt issues have come to the boil in recent months, the official responses amounted to little more than buying time. Greece’s debt situation had become so acute that it could no longer borrow on international capital markets. But instead of helping Greece to solve its debt problem, the Greeks were prevented from defaulting and they were burdened with even more debt.

The second big issue facing Europe is demographic change. Europe is not only an old continent. It is also an ageing continent. And it is ageing rapidly.

The ageing of European societies, of course, exacerbates Europe’s debt problems. But it is also a problem in itself. In a number of European countries birth rates have been very low for several decades. The replacement fertility rate, that is the fertility rate at which populations would remain constant over time, is 2.1. That means if women have, on average, 2.1 children over their lives, then every generation would be replaced by a new generation of the same size.

The current average fertility rate for the European Union, however, stands at just 1.5. This means that the next generation will be about 30 percent smaller than the current generation. And if that trend continues, this new generation will be succeeded by another generation that is another 30 percent smaller.

If you combine this drop in fertility with improvements in life expectancy, the result is a rapidly increasing age of society. Currently, the median age in Germany and Italy is around 43 years. But by the middle of the century it will reach 50 years. At the same time, working age populations will collapse. Some analysts predict that over the next four decades Germany will lose about a third of its working age population. These trends are present in most European countries, to varying degrees.

The consequences of these demographic changes will be severe. It will be difficult for European nations to service their debt, let alone repay it, with shrinking and ageing populations. There is only so much that increased productivity can do to compensate for a collapsing workforce.

And then there is a psychological effect. Older societies may be more peaceful than younger ones. But they are also less creative, less dynamic, and more risk-averse. We can reasonably expect Europe to become a less entrepreneurial place in the future. When more than half the population is over the age of 50, how likely is it that the next big technological innovation will emerge in such a social climate?

Which brings me to the third major crisis affecting Europe: the social climate, or the state of social cohesion.

Last year we heard quite startling confessions from European leaders. In October last year, German chancellor Angela Merkel broke with her own political habits and for once delivered a clear-cut statement. She said that “multiculturalism has failed and it has failed utterly.”

And then, earlier this year, it was British Prime Minister David Cameron who joined in the critique of multiculturalism. At the Munich Security Conference, he said:

“Under the doctrine of state multiculturalism, we have encouraged different cultures to live separate lives, apart from each other and apart from the mainstream. We’ve failed to provide a vision of society to which they feel they want to belong. We’ve even tolerated these segregated communities behaving in ways that run completely counter to our values.”

David Cameron and Angela Merkel can hardly be described as ugly, xenophobic, racist right-wingers.

On the contrary, both Merkel and Cameron belong to the same school of middle-of-the-road, modern, compassionate – or whatever you may call it – conservatism. So it is perhaps even more surprising how blunt their rejection of multiculturalism now comes across.

When politicians like Merkel and Cameron speak in such clear terms about the failure of multiculturalism it can only mean that something has profoundly gone wrong. And indeed, by a number of measures we can now see that European integration policies have failed in many EU member states.

To sum it up, Europe has failed to attract the migrants it needs. And the migrants it got, Europe failed to integrate into society.

It’s a double problem with a single consequence: European societies are increasingly fragmented. They are falling apart because unlike previous migration waves into Europe, and unlike Australia’s migration experience, the latest arrivals were less willing, perhaps also less able, to become part of mainstream European society.

Just think of Germany’s Gastarbeiter policy – the famous ‘guest workers’. They were recruited by the German government in the country’s economic miracle years to fill the jobs for which no Germans could be found. And these were often jobs at the bottom rungs of the labour market ladder.

First the ‘guest workers’ came from Italy, Spain and Portugal. Later from the Balkans and then also from Turkey. The term ‘guest workers’ implies that like good guests, these workers would eventually return home.

Left and Right were equally naive. The Left welcomed the newcomers with open arms without taking any interest in them. They assumed the migrants would automatically enrich Germany with their cultures, spices and habits. The Right showed an equal disinterest in them, since it was still believed they would only be a passing apparition.

Both views were wrong. At the very latest, it should have become clear when otherwise intelligent people started talking, entirely seriously, about ‘third generation (!) guest workers’. By then, many of the guest workers were no longer working but welfare dependent.

Germany had never recruited qualified, skilled migrants that would practically integrate themselves. Instead, the Germans had opened the door to temporary, unskilled workers. These workers stayed in Germany longer than expected and then managed to bring over their families as well. However, they remained outside mainstream society, and their lack of formal education virtually ensured that they would form a segregated underclass.

In Berlin, three-quarters of all Turkish migrants lack any school qualifications, and nearly half of the unemployed are of Turkish origin. Almost 40 per cent of all Berlin-based Turks get most of their income via welfare payments.

It is probably true that many migrants in Germany lacked the will to assimilate. But it is equally true that mainstream society showed a corresponding reluctance to accept the newcomers. The lack of education and the stifling effects of welfare dependency only made the process of integration even more difficult. The result is a society that is slowly falling apart.

It is this background that explains why Angela Merkel now speaks about the utter failure of multiculturalism. However, if German politicians were honest they would be taking some of the blame for this failure themselves.

The problem of integrating migrants into society is not specific to Germany. Whether it is the Turks in Germany, the Algerians in France, or the Pakistanis in England: European countries have not managed to integrate migrants from different cultural backgrounds into their societies. Unemployment, welfare dependency, and poor education results are endemic in parts of migrant communities. This is particularly problematic as ageing Europe can hardly afford to waste any talents.

As Europe ages and as working age populations shrink, it is often argued that migration could be the solution to labour shortages, in particular skilled labour shortages. But this overlooks a number of problems: Migrants already in Europe often do not fit the skills profile. Potential migrants outside Europe probably have better options rather than relocating to Europe. If you were an Indian IT specialists, would you rather move to Australia, Canada or the US – or would you bother learning Italian or German to move to Italy or Germany?

I am afraid that Europe as a migration destination is most attractive to poorly skilled migrants, not to the high potential migrants that Europe would prefer.

So these are the three main challenges to Europe as I see them: unsustainable levels of public debt; rapidly ageing societies; and unsolved problems with regard to immigration and integration policies. Each problem on its own would be difficult enough to solve. Taken together, they are a toxic cocktail that could well render Europe ungovernable within the next decades.

But where are the political responses to this crisis? Where are the reformers who could turn Europe around? Are there even honest debates in Europe about its problems?

To ask these questions is to answer them. Europe has not understood the severity of its predicament yet. Instead, it is still pretending that everything will be alright somehow. There is way too much wishful thinking in Europe that tries to pass as policy.

One only needs to remember how little was achieved by the equally ambitious Lisbon Strategy more than a decade ago. At the time, the plan was to transform Europe into the world’s best-performing economy by 2010. As it turned out, the Lisbon agenda became a case study in the best laid plans of mice and men that often go awry. Instead of being the culmination of global leadership, 2010 became the year in which the world talked about Europe’s inevitable decline.

It is astonishing how little Europe has learnt from previous mistakes. The belief in grand strategies with ambitious targets is alive and well.

And this is where the European Union has gone wrong. Instead of focussing on its core competencies of making the Common Market work, the EU has tried to politically integrate Europe. It has given it an unworkable monetary framework. And in doing so, it has revived national antagonisms that we had hoped no longer mattered.

But in terms of practically solving the real problems of Europe, the EU has failed as much as individual member states have failed.

And for this reason, and as much as I am still a Europhile, I expect the European decline to continue. After all that Europe has given to the world over the past millennia, it will be a sad and a painful farewell.

I would like to be optimistic about Europe. But as a German and a practitioner of the ‘dismal science’ I can see very little in Europe to be optimistic about these days.

So with that, I am happy to hand over to Signor Nicolaj. What do they say again in Italy? Alla fortuna bisogna lasciar sempre una finestra aperta. – You should always leave a window open to fortune.

Well, good fortune. Europe indeed needs a lot of it.

Thank you.