Sometimes it is easier to see what will happen in three or four years’ time than what will happen in three or four days. And so it is with Greece. One of the things that many of us will have found distressing, alongside the hardships heaped on the Greek people, has been the tone of the debate between the country and the EU’s dominant economy, Germany: fury on the one hand, and something close to contempt on the other. This is not the ever closer union envisaged by the founders of the EU and enshrined in the Treaty of Rome. Ironically the key device designed to pull Europe even closer together, the euro, is driving it apart.
But an ever closer union was at some stage always going to be transformed into some sort of multi-speed Europe, with the members wanting to integrate further doing so, while those that didn’t staying put, or retreating a bit. That is where Britain is now, and the elections in Denmark last week point the same way. The governments of Finland and Sweden also face push-back from their electorates, though there is no question of Finland dropping the euro.
It is a harsh truth that EU members of the eurozone have grown substantially more slowly since its inception than EU countries outside it. That is not straightforward cause and effect; there are other reasons, such as demography, to help explain this. Greece might appear an extreme case, for after a mid-2000s surge its real GDP is back to the level of 2002. As is Italy’s, more or less. For much of the eurozone it has been a lost decade, or worse.
Whatever Greece does about its membership of the eurozone, or, indeed what Britain does about its membership of the EU, we will in three or four years see a looser Europe in political terms. The bigger challenge will be whether we will see a more successful Europe in economic terms.
There is a temptation in the UK to write off the European economy, Germany apart, as a failure. I think that is because we are so aware of the floods of young Europeans coming here for jobs. Eurozone unemployment is 11.1 per cent and would be even higher were it not pulled down by Germany’s 6.4 per cent. We are at 5.5 per cent. There are now nearly two million non-UK, EU nationals working here; against 600,000, 10 years ago. In one sense this is wonderful, notwithstanding social pressures. But it does raise questions about the rest of Europe’s ability to grow faster and create jobs.
Some argue that for the EU to survive it must have more political union. I would argue that it must have more economic success.
A new paper from McKinsey Global Institute, “A Window of Opportunity for Europe”, suggests how the EU could lift its game. Without reform it calculates its economy will grow at 0 to 1 per cent a year, up to 2025. That is a dismal prospect – for if some countries grow faster than that, it suggests others will not grow at all, or worse. It would be another lost decade. Yet the convergence of low oil prices, a competitive euro exchange rate and the continuing impact of QE, ought to create an environment where Europe could do better.
McKinsey suggests there are three areas of reform that could lift the overall growth rate to 2-3 per cent: mobilising the workforce, boosting productivity and investing for the future.
Much of this is common sense. Some EU countries, ourselves included, have managed to get a high proportion of people into the workforce. Our employment rate, of 73.5 per cent of working-age people, is the highest since comparable records began in 1971. We have a million people of more than the official working age in jobs, and since we still have a youth unemployment problem it should be possible to push participation up yet further. The task is for the laggard countries to push through the reforms done by the frontier ones.
If that requires political drive, then boosting productivity, the second plank, is more a task for the private sector. We know we have a problem in the UK, but there is a problem across much of Europe. Even Germany has stagnant productivity. To some extent high employment and lower productivity go together because the higher the employment the more the marginal workers (the old, the low-skilled and so on) are sucked into jobs. But Europe could surely do better than it does and the interesting question here is whether, as the labour market tightens, our productivity will recover.
As for investment, it might seem a bit of a no-brainer when the cost of capital is so low, and McKinsey makes that point. But it has to be useful investment: look at the way Japan has had low interest rates for 20 years, and wasted much of the stuff it has built. Even cheap money has to be paid back.
With faster growth, even Greece’s problems would become more manageable. If a multi-speed political Europe is a faster-speed economic Europe, what’s wrong with that?Reuse content