There will, whatever the British electorate decides this month, still be a European economy, just as there will still be a UK one. But how is the European economy likely to perform over the next 20 or 30 years? Is there anything sensible that can be said about that?
There are two questions here. One is whether the eurozone is performing to its potential now. The other is what are its long-term prospects? The first is relatively easy to answer: no, it isn’t, but it may improve from now on. The second is much harder.
The problems the eurozone has imposed on itself are widely accepted, for Germany apart, the entire region has made only a poor recovery from the disruption of the financial crash. If you want one measure, take unemployment. In Germany it is below 5 per cent; in most of the rest of the Eurozone it is in double digits. Were it not for the movement of workers from southern Europe to northern Europe, including the UK, unemployment in Greece, Italy, Spain and Portugal would be even worse.
All that we know. But – and this point has not attracted enough attention – some parts of the eurozone, notably Spain and Ireland, are growing fast. This follows radical reforms in both countries, reforms that naturally have been spotted elsewhere. So people who focus on the problems of Italy, France and Greece, are not noticing that there has been a decent bounce elsewhere.
The point here is simply that continental Europe may perform rather better in the next two to three years because it has so much ground to catch up. We don’t of course have figures yet, but it is quite possible that the eurozone will have grown faster than the UK in the first six months of this year. It did in the first three.
Look a generation ahead and the picture is rather different. The most important single factor that determines a developed country growth is what happens to the size of the working age population. Of course there are others, especially productivity and labour market participation rates. But as a rule of thumb, a larger workforce generates more growth.
Looking at some HSBC/UN stats, there are five countries where the workforce is projected to grow by more than 10 per cent over the next 35 years. They are Ireland, Australia, the US, Canada and Norway. Two other countries, the UK and Sweden, are projected to have increases of between 5 and 10 per cent. Every other developed country should expect their working populations to fall. In Japan, it is falling already and is projected to decline by 35 per cent by 2050. Germany faces a decline of nearly 30 per cent, Portugal, Italy and Greece by more than 20 per cent. And so on.
Now, these are only projections and 2050 is a long way away. It may be that the massive immigration into Germany will increase sharply its potential workforce. It may be that the present drain of people of working age from Eastern Europe will cease. And it may be that the UK will take action to stem the flow of migrants at present coming thanks to the availability of jobs.
But while you should always take such projections with a pinch of salt, it does seem likely that growth in continental Europe and Japan will be slower over the next generation than it will be in the English-speaking developed world. The Centre for Economics and Business Research reckons that the eurozone’s growth potential is only around 1.5 per cent. If that were so it would be better than it has managed for the past decade, but it would be slower than the long-term performance of the UK economy, of around 2.25 per cent.
Douglas McWillams, the CEBR president, observes: “As such Europe will become an increasingly peripheral part of the world economy, losing out not only to Asia but to the Anglophone areas like US, Australia and Canada as well as parts of Latin American and Africa.”
So Europe becomes less important in relative terms. But it will continue still to be important in absolute terms, and that is one of the points being made in the referendum campaign by the Remain camp.
Are there things that Europe might do to improve its long-term growth prospects? Well, yes, it could accept more skilled immigrants. It could reform its labour laws, as Germany has done, to encourage job creation. It could follow the lead of its Scandinavian members and encourage higher labour participation. It could improve education and thus help push up productivity.
So within Europe there are responses to its predicament. But somehow the whole is less than the sum of its parts, and the challenge will be to change that – whether or not the UK is a player in that difficult game.
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