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The roots of Europe’s decline

Published in Business Spectator (Melbourne), 3 September 2015

Five years ago, Alan Kohler kindly offered me a weekly slot to comment on the European economy. Since then, I have been covering the various aspects of the European debt crisis in more than 200 Business Spectator columns. With ongoing bailouts, emergency measures and unorthodox monetary policies, there certainly was no shortage of issues.

In the breathlessness of the euro crisis, it is easy to miss the wood for the trees. By looking at individual trouble spots, we may be ignoring the roots of the crisis. For this reason, I have just written a longer essay, ‘Why Europe Failed’. It is my attempt to distil the core mistakes Europe has made over the past decades and explain the continent’s ongoing decline through a historical lens.

“One of the uses of history is to free us of a falsely imagined past”, American legal scholar and educationalist Robert Bork once wrote. “The less we know of how ideas actually took root and grew, the more apt we are to accept them unquestioningly, as inevitable features of the world in which we move.” Bork may have issued this warning in the context of antitrust policy, but it equally applies to the European Union and its drive towards closer political integration.

There is a whole mythology around the raison d’être of the European Union and European integration. Its founding myth goes something like this: After repeated wars between Europe’s great powers (the Franco-Prussian War of 1870/71, World Wars I and II), binding European countries together was meant to reduce the potential for conflict. Seen from this angle, the European Union was always meant to be a peace project.

The idea of peace through integration and cooperation is the European Union’s leitmotif. It is what European politicians routinely implore whenever they need to justify their latest initiatives. And yet this glorified account of European history is a falsely imagined past. The real background of European integration is much less prosaic.

There are two things to keep in mind about the founding years of European integration in the immediate post-War era. First, this was the time of the Cold War in which western Europe felt threatened by the Soviet Union and its allies. Second, western European countries were concerned about Germany that it could either become aggressive once again or, even worse, be lured into the Soviet sphere of influence.

To all of these fears, (western) European integration was the answer. Binding Germany into a tight corset of political and economic institutions allowed greater control of Germany while simultaneously consolidating Western Europe against the Soviet Union. Little wonder the process of European integration began with the European Coal and Steel Community: coal and steel were the two industries that were crucial for developing military capacity.

Of course, there were idealistic reasons given for European integration — and some people certainly believed in them. But those reasons would have never been strong enough on their own. What really drove the European project was cold-hearted realpolitik, a realistic assessment of the geostrategic challenges faced by Western European nations at the time.

As I argue in ‘Why Europe Failed’, this dual nature has been with the European Union since its predecessors were established. The EU has always been a project with an idealistic superstructure and a means of achieving less idealistic political goals. It has been a tool for overcoming nationalistic egotisms and a means of promoting national interests at the European level. It has been a framework for enabling trade between its members and a way of protecting its own industries.

One thing, however, is clear. The European Union has never been an economic project, or a project driven primarily by the desire to improve economic efficiencies. It has always been about power politics, pure and simple.

The problem with Europe is that it treats economic problems as political ones. This is the direct result of its founding years. European integration has been a political project. The most visible aspect of this is Europe’s monetary union. There are no (and never have been) good reasons for integrating vastly divergent economies under one common currency.

The euro is a pure example of power politics: it is the (unsuccessful) attempt of curbing Germany’s economic power by forcing it to give up its monetary sovereignty. Keeping the euro alive despite ample evidence of its failure is, once again, a case of political ambitions trumping economic realities.

What is astonishing about Europe’s integration is the fact that it has managed to progress without ever receiving much public backing. In opinion polls, Europeans have at best been lukewarm about giving more power to Brussels. The public’s enthusiasm for the great European project has been severely limited and, on the few occasions that referenda were held on questions of European integration, they often resulted in ‘No’ votes, which meant that they had to be repeated until the people got the answer right.

My hypothesis is that the main reason why European integration could proceed as it has is because of the way in which the public’s acquiescence into their political elites’ actions was bought through the welfare state. In no other part of the world has government grown to the same extent as in Europe.

To their subservient citizens, the European elites provide free or heavily subsidised education, healthcare, TV and radio programs, roads, income support and pensions, public transport, libraries, opera houses, and theatres. The only problem was the government only bribed the people with their own money. One of the most astonishing statistics about the state of Europe is this: despite accounting for only 7 per cent of the world’s population, the 28 member states of the European Union are responsible for 54 per cent of global spending on social welfare.

As we can see clearly in the euro crisis, this European model is past its use-by date. European governments have spent too much, they have taxed too much and where that was not enough, they have borrowed too much.

Over the past decades of political integration, Europe has made severe economic mistakes. It has grown its governments to the point where they are crowding out private economic activity. It has removed political decision-making to largely unaccountable political and bureaucratic elites at the European level. It has routinely treated economic questions as political ones, with the Euro being the prime example. At the same time, Europe has failed to find answers to some of its most important questions, not least the challenge from its ageing society.

As we are discussing the latest news from Europe’s ongoing monetary and debt crisis, it is worth bearing in mind that these are just the symptoms of a more severe underlying malaise.

When Alan Kohler asked me if I would like to cover Europe’s troubles in a column, he mentioned I could write it “as long as this European crisis lasts”. The way things are going, this could turn out to be a job for life.

Dr Oliver Marc Hartwich is the Executive Director of the New Zealand Initiative. His essay, ‘Why Europe Failed’, was published by Connor Court.

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