Monday, November 24, 2014

The European-American Dream

MADRID – Today, three European countries are among the world’s seven largest economies. Ten years from now, only two will remain. By 2030, only Germany will still be on the list, and by 2050, none will remain. Indeed, by then, the United States will be the only representative of the West in the top seven.

What this means is that the European states are too small to compete separately in the world of the twenty-first century. It’s as simple as that. By 2030, according to the World Bank, there will be two billion more people, mainly Asians, in the middle class. The pressure on the planet’s resources, commodities, water, and food will be huge, making a global rebalancing practically inevitable. And in a world marked by interdependence and constant change, Europe will find that unity is strength.

Indeed, unless Europeans work toward integration, they may find themselves surpassed by emerging countries in terms of technological development, job creation, production costs, talent, and creativity.

The European Union is still the place where economic and social institutions assure a better quality of life. In this sense, the demand for a European voice in the world is clear – Brazil’s former president, Luiz Inácio Lula da Silva, spoke of the EU as a “singular international heritage” – because it guarantees the values that represent humanity at its best.

Those values are embodied partly in Europe’s well-developed welfare states, which are an important component of Europeans’ collective identity and a principal point of pride. True, in terms of economic equality, there is only a two-to-one difference in per capita GDP between the richest US state and the poorest (excluding the District of Columbia), while in the EU the ratio is 6.5 to one. But, in terms of conditions within US states and EU countries, things are very different.

The average Gini coefficient (where zero is absolute equality and one is absolute inequality) in Europe is 0.30, compared to 0.45 in the US. China’s coefficient is 0.47. American society is very unequal (and China’s is slightly more so). In Europe, the opposite is true. Its societies are much more egalitarian, while convergence among them is still a long way off (this is, indeed, the great task that Europe faces).

From this perspective, it is not difficult to comprehend Europe’s international appeal. Consider the following thought experiment (a variation on the “veil of ignorance” conjured by the philosopher John Rawls in his effort to design a just society): Taking into account the level and quality of social protection, public education, and health care in the EU and the US, and without knowing beforehand what your social position would be in either society, where would you prefer to be born?

But, if Europe wants to maintain its prosperity-sharing institutions, it must generate economic growth in order to pay for them. That means raising productivity and strengthening competitiveness – and, equally important, asserting Europe’s place in the world.

Europeans have a new reason for hope as they seek to achieve these goals: a transatlantic free-trade agreement. Not long ago, in the 1980’s, Europe was dismissed (by conservative Americans in particular) with the term “eurosclerosis.” The decade following the oil crisis of 1979 was marked by a spike in unemployment, fiscal paralysis, and, indeed, frozen accession negotiations for Spain and Portugal. European economies were stagnating, while the US and Japan were growing.

At the time, Europe’s common market was not yet a single market. Then, a historic convergence of national interests and ideological positions (from François Mitterrand’s Socialists to Margaret Thatcher’s Conservatives to Helmut Kohl’s Christian Democrats) occurred. With great foresight, Europe’s leaders concluded that it was their economies’ lack of integration that was keeping Europe from growing as strongly as the US and Japan.

The solution was to create a much larger market: a single market. This effort culminated in the Single European Act of 1986, which laid the foundation for the virtuous circle of strong growth and lower unemployment in the 1990’s.

Today, the Transatlantic Trade and Investment Partnership (TTIP) is finally on the table, promising to boost growth in the EU and the US alike. In 2012, US exports to the EU totaled roughly €206 billion ($272 billion), while EU exports to the US amounted to nearly €300 billion. Thirty million jobs in Europe (about 10% of the total work force) depend on foreign trade. The quantities are huge, which suggests that the TTIP could have an effect comparable to that of the single market for Europe.

But realizing the TTIP’s potential requires completion of the European integration project. That process is long and slow, but it is the only way to maintain Europe’s relevance as an international actor, with something to say and to offer. Indeed, it has been this process – now in its seventh decade – that has enabled Europeans to enjoy the highest standard of living in the world.

Read more from the "What Now for Global Trade?" Focal Point

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    1. CommentedC. Jayant Praharaj

      Economic integration has its pros and cons for sovereign nations. Will Europe's combined economic strength and the living standards of its citizens in 2050 be helped by further economic integration or the continuation of the current integration framework as much as Mr. Solana thinks ? For example, integration of the eurozone type ( primarily monetary integration ) has the problems of a slowly responding Central Banks or a Central Bank that finds itself unable to respond adequately to the conflicting needs of different nations within the monetary union. Too strong a European fiscal union will impinge on the sovereignty of nations ( after all, from historical and cultural perspectives, Europe and the United States have had different evolutions ) in Europe. Mr. Solana needs to come up with more detailed arguments about whether he thinks the potential downsides of integration will be outweighed by the upsides between now and 2050. Living standards and human welfare in Europe may not be helped by economic integration as much as Mr. Solana thinks.

    2. Portrait of Pingfan Hong

      CommentedPingfan Hong

      The concept of "average Gini" for Europe is erroneous and misleading. You cannot take the average of the Gini coefficients of individual European countries and compare it with the Gini of the United States. The correct comparison is to calculate the Gini of Europe by pooling all individual households of all European countries together. This correctly measured Gini coefficient of Europe can be higher than that of the US, given the fact that the income disparity across European countries is much larger than that across the states of the US.

    3. CommentedPaul A. Myers

      There is a big difference between a common market and an integrated economy. And a free trade area with North America is really just an expansion of a common market.

      What is the difference between a common market and a integrated economy? I would answer that it dramatically affects the distribution of comparative advantages among the countries in one form of organization over the other. The Germans have created an economy within their state that has very different comparative advantages over Italy. If you had truly integrated economies and the two countries just became different regions in one integrated whole, then you would see a wholesale shift in economic activity as the comparative advantages redistribute themselves.

      And as recent experience shows, a single currency union does not work well over a common market area but really needs to comprehend an integrated economy. The reason the single currency doesn't work is because the underlying maldistributions of comparative advantages results in large structural imbalances that create financial dysfunction.

      So Solana is making a very valid point: Europe integrates or dies the death of getting ever smaller and less competitive.

    4. CommentedFrank O'Callaghan

      The Gini number is important. Greater equality is related to a better quality of life.
      Zsolt Hermann makes a fair point, the pursuit of growth is illusory. It is also true that we can now produce much more with much less. We do have the possibility of a world of plenty with distributed leisure, work and wealth.
      Today the god of growth is pursued only to absolve gambling debts of profligate casino addicts.
      Is The Atlantic State a route to this? I doubt it.

    5. CommentedZsolt Hermann

      All the problems originate from a very fundamental mistake, misunderstanding: Humans are not born to consume, produce goods, to constantly grow or expand and exploit.
      Humans are born to live a social life, look after each other, make meaningful and positive relationships with each other, create, bring up and educate offsprings.
      Somewhere along our evolution we have lost the plot.
      We created this illusion, this artificial Matrix where everything is revolving about economical growth, financial gains, chasing artificial and unnecessary goods, competition, dominating each other.
      Today over 90% of our activity is obsolete, harmful and simply unsustainable. We are slaves to the system we ourselves created.
      Very soon as the present socio-economic system collapses unemployment figures will be around 70-90% world wide, but it will feel as liberation, long awaited freedom, provided we use the remaining interim period to prepare for those times.
      Humanity has to start organizing a truly global, equal and mutual human society, with proper education preparing each and every person for this new lifestyle, for the return to the natural, positively interconnected social life we have lost long time ago.
      So far our selfish ego drove us off the natural path, but we are capable of correcting ourselves.
      The advantage of the human intellect over the other instinctive animals is the capability to examine and understand why we have to return, remain inside, and adapt to the vast, surrounding natural system, becoming benevolent partners with it, instead of behaving like petulant children exploiting and destroying everything in their path.
      We have reached the crossroad of becoming truly Human, which means rising above our instinctive, blind inherent nature, becoming the conscious rider being aware of itself and the system it exists in.
      There is no economic, financial or political path to social welfare, only a human path through changing ourselves.

        CommentedEdward Ponderer

        Cancers and goldfish tend to consume and grow to death. The entry of simple chemistry into the great symphony of life, is due to organic bonding.