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Learning from Europe’s mistakes

Published in The National Business Review (Auckland), 4 September 2015

eu flagSometimes it is easier to see things clearly the further you remove yourself from them. For me it has been like that with Europe.

Born, raised and educated in Germany, I left my home country for a year of doctoral studies at Sydney University in my mid-20s. I then relocated to the UK in 2004, moved back to Australia again in 2008 and finally arrived in New Zealand in 2012. You may say that I gradually improved at each step of the way.

Now aged 40, I look back at the continent I came from to see it in a different light. It is not just the European debt crisis that has changed, or rather sharpened, my views. Observing Europe from afar while still keep in the kind of close contact that modern technology allows, I am struck by the way Europe’s self-perception differs from a more realistic, detached assessment.

Europe is suffering from some strange delusions that are less apparent when you live there. That is because certain beliefs and self-images are repeated until they can no longer be questioned without turning yourself into a political pariah. In my new essay, Why Europe Failed, I am dealing with some of them.

Despite more recent economic crises, many Europeans are still convinced that the European way is preferable to any other world region. They regard the process of political integration of countries as a way of overcoming the anachronism of the nation state.

They believe their mixed economy model is preferable to more liberal economic orders of, say, the US or indeed New Zealand. More generally speaking, they believe the world would be a better place if it became more European in nature.

Such a sense of exceptionalism is a remnant from an era when Europe actually ruled the world. However, that ended somewhere between the two world wars. Ever since, the US has taken over Europe’s place as the Western world’s lead power. The world economy has also become more Asian, while Europe’s share of both the world’s population and economic output is shrinking fast.

Let’s illustrate Europe’s decline with just a few core statistics. On the eve of World War I, Western Europe accounted for one-seventh of the global population but one-third of the global economy. Of the 10 largest economies in the world in 1913, six were European.

Today the 28 EU member states account for only 23% of global economic output and only four European countries make it into the global top 10. At the same time, only about 10% of the world’s population is European – and, by some forecasts, that share will fall to under 6% by the end of the century.

Europe still leads the world by a mile in only one area: its 28 member states account for 54% of global spending on social welfare.

Europe’s economic power is waning. Its growth rates are lagging behind other world regions and the size of European governments is choking economic growth. Government spending as a percentage of GDP exceeds 50% in Denmark, France, Finland, Belgium, Greece, Sweden, Slovenia and Austria. These countries could justifiably be called half-socialist – and the rest of Europe is not far behind.

Why follow Europe?

It is not just that these European countries are no longer generating meaningful economic growth. It is becoming increasingly difficult to finance the voracious appetite of European governments as tax and debt financing are both reaching their limits.

Why would any other part of the world regard Europe as a model to follow?

Another major European self-deception concerns the role played by the European Union. The conventional wisdom regards the EU as the guarantor of peace – an insurance policy against the return of rampant, aggressive nationalism. Perhaps the EU can even claim some credit for reconciling European animosities but this has come at a price. It has eroded European democracies and it has removed political decision-making far from the people it is supposed to serve.

In Why Europe Failed, I question whether the founding myth of the EU as a peace project is entirely justified. For Europeans it may be heresy to even query the good intentions at the beginning of Europe’s political integration.

However, it is only fair to stress the birth of the EU and its predecessors resulted from pure and simple power politics. France sought a degree of control over its German neighbour, while Germany tried to be readmitted into the civilised world after the catastrophes of National Socialism and the Holocaust.

Political and economic integration offered that entry ticket back into the international community.

For France, Germany and the other founding members of the European Economic Community, economic and political integration made sense in any case because it united them against the threat of the Soviet Union and its allies.

It happened at the time of the Cold War when Europe divided itself into spheres of influence, each with its own sets of institutions: the EEC and NATO in the West; the Comecon and the Warsaw Pact in the East.

Yes, maintaining peace may have been one motivation behind European integration. But it was not the only one and perhaps not even the defining one. Equally if not more important were strategic and geopolitical considerations.

This has not changed. For example, the euro currency would have never been introduced for economic reasons (let alone be kept alive now). It was introduced part as a prestige project, part as another attempt of curbing Germany’s economic power by breaking the dominance of its former currency, the Deutsche mark.

Political considerations always trump economic concerns when it comes to European integration. In the case of monetary union, the costs are plain to see. Just to keep the euro currency alive, vast sums had to be mobilised in various rescue mechanisms.

At the same time, unemployment rates in the eurozone periphery are scandalously high since these countries struggle to retain their competitiveness.

As a European, it gives me absolutely no pleasure in writing about the Old Continent’s decline. But I do it for two reasons. First, for any economist Europe is just a fascinating region to observe – not least because you can see what happens when flawed policies are tried on a grand scale. Second, I hope that by studying the European example closely, countries such as New Zealand may draw their own conclusions and avoid a replay of Europe’s mistakes.

I left Europe not least because I was attracted to this part of the world by its more pragmatic, more realistic and in many ways more liberal attitudes and institutions. We have to work hard to keep it that way. We certainly would not want to end up like Europe.

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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