Europe, USA, China? Let’s Hear It For The EU

I would like to nominate the average, everyday EU citizen as the “Hero of the Year.” Europeans have been bombarded for nearly a decade by a media firestorm of “headline schizophrenia” — Brexit, Grexit, eurozone instability, Russia-Ukraine, refugees, terrorism, the rise of populism…each of these a seemingly deadly affliction. About a year ago, France’s Prime Minister Manuel Valls solemnly declared that Europe could “fall apart within months.”

Except it didn’t. In fact, just recently the European Commission has boasted that “the European economy has entered its fifth year of recovery” and that growth in the eurozone will be even  stronger than previously forecast. Indeed, growth in the European Union has outstripped that of the United States over the last two years, now standing above 2% for the Union as a whole and at 2.2% for the euro area. Various economic vital signs have returned to pre-global financial crisis levels, with unemployment at a nine-year low as a result of a net creation of nearly eight million new jobs and more employed people (235m) in the EU than ever before. The European Central Bank says the eurozone’s recovery is expected to  continue at a steady pace, and Germany’s federal statistics office says the economic engine of the EU is in the middle of a broad-based expansion.

The truth is, things were never as bad in Europe as some liked to portray it. Nor was this the first time that various populist leaders and media outlets have declared “the end of Europe.” Prior to the economic crisis of 2008, the European economy (and especially Germany’s) was written off by most analysts, both in Europe and in the US, as a “sick old man” condemned to decline. Here’s a small sample of inflammatory headlines from leading media outlets:  “The End of Europe”; “Europe Isn’t Working”; “Will Europe Ever Work?”; “What’s Wrong with Europe”; “Is Europe Dying?”; “The Decline and Fall of Europe;” “Why America Outpaces Europe”, and many more.

The EU has been an especially favorite punching bag of many political leaders, a convenient scapegoat to blame for the shortcomings of one’s own country. So, the average EU citizen should be congratulated for having coped in a mostly dignified and sober way with the ups and downs of the last decade. Unlike the US, which appears to be falling off a dangerous cliff into the abyss of Trumplandia, most member states have so far rejected the populist option.

Indeed, if we pull back and look from the 10,000 meter level it becomes clear that an economic and politically vibrant Europe is needed now more than ever. In the aftermath of Donald Trump’s controversial election, Brexit, the rise of China’s “enlightened dictatorship,” and the resurgence of the Russian bear, the world is in great need of a leadership based on the principles of humanitarianism, robust democracy and a free market with a human face. The US is clearly struggling in that regard, with little relief in sight until the next election, four years away.

If Europe does not take the lead, who will? Japan? Canada? India?  Saudi Arabia?

Europe is far from perfect, and should be held accountable for its shortcomings. But compared to the alternatives, it doesn’t look so bad. By the year 2100 — which is no further into the future than the Great Depression and the rise of the Nazis in the past — the world is going to look very different.

The advent of new digital technologies – robotics, artificial intelligence, “smart” machines and the “future of work” – will change our civilization in dramatic ways. How the digital economy develops in Europe is key to the global future, and to whether it will rest on the values of humanism, equality and a broadly shared prosperity, or will become the newest and most powerful means for exploitation and usurpation of human rights and dignity. The invisible hand increasingly has a robotic arm and so far it has not been in a sharing mood. The struggle over the shape of the new age has already begun, and I firmly believe that Europe must assume leadership and not just leave it to Silicon Valley, Wall Street and Washington DC to determine it for everyone else.

We face multiple forks in the road, and an uncertain path forward. The EU must rise to the occasion. As Voltaire once said, “Every man is guilty of all the good he did not do.” What then must Europe do?

Renewal of social capitalism

Europe must revitalize its unique brand of “social capitalism,” and modernize it for the digital age in a way that ensures that a more tech-driven future doesn’t increase authoritarianism, Big Brother surveillance, and further widen the gap between the “haves” and the “have nots.” As the US and its elite-driven “Wall Street-Silicon Valley capitalism” shows, this won’t be easy without the right regulations that recognize the virtues of an inclusive economy and a broadly shared prosperity. If Silicon Valley and Wall Street have their way, “The factory of the future may be  1,000 robots and one worker manning them,” says economist Nouriel Roubini.

But Europe has several assets that can propel it forward. Despite its chronic disunity, it is powered by one of the world’s great economic engines. The EU-Plus (EU28 + Norway and Switzerland) chugs along with one of the top three largest economies in the world (with the US and China). It has as many Fortune 500 companies as the US, India and Russia combined (140), more small and medium-sized businesses, and 11 out of 20 of the world’s most competitive national economies,  according to the World Economic Forum. Even Brexit does not change this fundamental reality.

Beyond its workhorse capitalist engine, many EU member states also have been leaders in providing greater economic democracy and power-sharing between management and labour, based on practices like co-determination (worker-elected boards of directors), works councils and effective labour unions. That in turn has fostered a “culture of consultation,” and a more broadly shared prosperity with social supports like universal health care, child care, education, senior care, retirement, workplace protections and more. In an age of growing inequality that has spread even to wealthy Europe, most EU member states still exhibit the smallest income gaps in the world, and have set a standard that must be carried forward into the digital age.

While there are clear differences between member states, there is an identifiable “European Way” that has become the global leader in supporting economic fairness and a strong middle class. Meanwhile, the “American Way,” even before the rise of Trumpism, has lagged behind in its support for families and workers, and in fostering a vision that values economic equality.

The EU also has been the world’s leader in reaching another crucial goal – environmental sustainability. Led by Germany and its Energiewende’ initiative, Europe has moved forward ambitiously with renewable energy technologies like solar and wind, as well as efficient mass transit. Europe has tried to incorporate “green design” into everything from public buildings, homes and automobiles to low-wattage light bulbs, motion sensor lights and low flush toilets. And these efforts have not hurt the economy, as hundreds of thousands of new green jobs have been created.

Creating economic as well as ecological sustainability – preserving what I call our “EconoEcoSphere” — is one of the defining challenges of our time. The key factor in achieving this unprecedented goal is “productivity.” In this “age of limits,” all our institutions and practices must become as efficient and cost-effective as possible in order to allow each national/member-state economy to generate and distribute the wealth needed to take care of its population. That means getting more energy with less fuel, more health care with less public funding, more economic production with less labor, and realizing greater service sector efficiencies. The EU has been a world leader in this crucial endeavour.

It also means having robust political systems, and vibrant media and online worlds, that not only connect diverse communities but translate popular consensus into the right policies. It means having better ways of measuring and mobilizing the “wisdom of crowds,” as well as assessing the efficiencies of our various institutions and practices, and figuring out best practices. And it means harnessing the new digital technology so that it works for us, not against us, and creates jobs instead of destroying them.

Indeed, one of Silicon Valley’s dirty little secrets is that its companies don’t create that many jobs. Facebook employs only about 12,000 direct, full-time employees. Google and Apple directly employ around 70,000 each, and Uber, Airbnb and Twitter employ about five to ten thousand direct employees each. These are small-time job creators compared to traditional economy companies like BMW, Mercedes, Bosch, Volkswagen, Ford, IBM and Siemens, which each employ hundreds of thousands of people. Germany’s Mittelstand generates 25m jobs; Facebook, Google, Amazon, and Apple combined have total employment less than one percent of that. In fact, the tech gurus are boastful about how their inventions are injecting software and algorithms into ever smarter machines, in a bid to replace the humans. These companies supplement their core workforces by hiring armies of freelancers and contractors, but many of those jobs are precarious, with no security or welfare benefits. That type of employment is a poor foundation for a strong economy.

Europe, USA or China?

So, which development model today among the Big Three – Europe, the US or China – fosters the best chance of achieving the historic challenge of economic and environmental sustainability?

The US has many strengths and admirable qualities, but the nation’s politics is plagued by paralysis and deep partisan polarization, even though the country has a well-established federal union. The US economy has benefited in recent years from low energy costs, but it has become bitterly divided into unequal camps of winners and losers. All these tensions have boiled over and resulted in the phenomenon of Donald Trump, whose erratic presidency is stalling badly needed reforms and furthering national division.

Meanwhile, China’s hybrid brand of “communist capitalism” remains an authoritarian puzzle of immense contradictions. While it has moved forward vigorously with renewable energies, a growing middle class is still proportionally small compared to the vast numbers of poor, even as inequality, corruption and cronyism thrive. Impressive levels of industrial production have resulted in astounding levels of environmental ruin.

It turns out that strong executive leadership as in China and the US is only great when it leads in the right direction. In comparison, the EU doesn’t always look so bad. Europe’s social capitalism is clearly the global leader in several crucial dimensions  more so than either China’s state capitalism or America’s Wall Street-Silicon Valley capitalism.

The challenges of the European Union

Yet Europe also is plagued by major challenges. These include: 1) a shortage of economic solidarity between member states, 2) resurgent tribalism, and 3) institutional incoherence at the EU level. The three of these are intricately linked.

Solidarity or… austerity?

Despite recent economic gains, the EU is still slowly recovering from the economic crisis of 2008 and the eurozone crisis of 2010. This is especially true when compared to other international competitors. Europe’s overall share of global economic output has declined since 2008, even more than America’s; meanwhile, China and India’s share of global economic output has increased by about 40%. Recovery has been uneven across the continent, with member states like Germany having recovered faster than others. But in others, such as France, Greece, Italy, and some of the eastern countries, recovery has been less impressive.

Part of the reason that the EU is underperforming is because several member states, led by Germany, have refused to implement any kind of “transfer union” for the eurozone. That is the mechanism usually deployed in a currency union to grow the overall economic pie. In the US, for example, wealthier states like California, New York and Illinois contribute a lot more to the federal treasury than they receive back; poorer ones like Alabama, Mississippi and Alaska receive an annual subsidy from these states, which is accomplished in a non-controversial manner via the normal legislative appropriations process. One of the goals in a currency union is to provide solidarity between its members as a way of growing the overall economy so that “a rising tide floats all boats.” Ironically, while EU member states provide more solidarity to individuals, workers and families than do American states, the US provides more solidarity between its member states than does the EU.

This lack of institutional and ideological support for a currency union has held back the EU during its economic recovery. In addition, austerity economics has led to a hollowing out of the middle class, with job growth being strongest in the lowest and highest-paid occupations. Full-time, permanent jobs have been hit hardest during the “recovery,” with those good jobs being replaced by more precarious part-time and temporary jobs. Some of that economic loss has been reversed recently, and some forms of institutional solidarity have been created by the European Commission and member states, such as the beginnings of a banking union to support the financial infrastructure. But overall, austerity economics, an extension of the Commission’s flawed Lisbon Strategy, which vowed to make the EU ”the most competitive economy in the world,” has resulted in a decline of middle class jobs and left the EU losing ground compared to global competitors. Europe should end austerity by investing smartly in infrastructure, education and digital innovation via the launch of its own Marshall Plan, this time funded by Europeans.

Resurgent tribalism.  In the aftermath of the collapse of Soviet-led communism, the rationale for contesting politics has shifted dramatically over the last two and a half decades. As European societies have become more affluent, many center-right parties, like the Christian Democrats in Germany, have become “social democrats,” even if not Social Democrats. The political contest has shifted away substantially from economic issues to a battle over a new kind of tribalism – north-south, east-west, left-right, and especially white Christian vs racial-ized Islam. The Spanish struggle over sovereignty with the region of Catalonia is the latest manifestation, with more such cracks and fissures still ahead. Some eurosceptic partisans, both in Europe and America, who want nothing more than to see the demise of the European Way, have gleefully and wrongfully predicted the imminent collapse of the EU over these divisions.

It is instructive to remind ourselves that various tribal-isms have been a major part of the human experience for thousands of years. The national, ethnic and religious instinct to ensure the success of one’s own tribe at the expense of another is an age-old response. We cannot ban or legislate away this instinctual drive, but can we at least blunt its impact?

Yes, I believe we can — by crafting the right institutions that uphold fairness, democracy, a broadly shared prosperity and the rule of law. That’s why the incoherence and disunity of the current EU and eurozone institutions amount to an existential challenge.

Too many presidents = institutional incoherence

The EU is governed by an odd form of quad-cameralism (i.e. four chamber political system) with multiple governing bodies that all sound alike:  the European Commission, the European Council, Council of Ministers and the European Parliament. Each of these even has its own “president” – who can keep track of four different presidents? Why not call one a premier, and another a prime minister or regent? Even a superpower only gets one president!

This confusion over titles is just the tip of the iceberg, a reflection of deeper institutional incoherence. Divisions of power in this semi-democratic and overly complex bureaucracy leave even the most ardent europhile dissatisfied. Given the pressures of the new tribalism, ineffective governance in Brussels has contributed to it becoming a target for popular frustration. Partly for this reason, German chancellor Angela Merkel, as the head of the largest member state, has been thrust by recent events into the role as the de facto prime minister of Europe.

Yet, how does a German chancellor rise above domestic passions and politics to do what is best for Europe, in the absence of clear-cut institutional coherence at the EU level?

In her makeshift role, Merkel has done an admirable job in certain respects. But she also has made mistakes, in part because her role as the EU’s prime minister conflicts with her domestic priorities as German chancellor.

Various scholars, including  myself,  Thomas Piketty,  Jürgen Habermas  and others, have proposed more simplified and integrated  political structures to close this democracy gap. In his recent State of the Union speech, entitled “Wind in our Sails,” Commission president Jean-Claude Juncker smartly proposed merging his office with the presidency of the European Council, saying the European ship should be “steered by one and the same captain at the helm.” Juncker also proposed a European Monetary Fund, the creation of a new EU minister of economy and finance, as well as a European Labour Authority to ensure fairness and workers’ rights across the EU’s single market. In the past, I had thought that the eurozone would eventually require a separate governance system from the EU, but in his speech Juncker pointed out that, once Brexit is completed in 2019, the eurozone will represent  85 percent of the EU’s GDP. Juncker says it would be a mistake to widen the institutional and political gap between the 19 eurozone members and the eight non-euro countries. Instead the remaining eight should be set on a path toward eventual euro adoption, including if necessary technical and financial assistance to help them fulfil the required criteria. In this process, Brexit should be regarded as an unexpected blessing, since the UK has often played the role of spoiler in developing a EU consensus over these important matters.

Juncker’s proposals were predictably greeted with a mixed response by most EU leaders. It is clear that until more political leaders make the case to their national electorates for “ever closer union,” progress toward a more robust union will remain elusive. Thus, for now a multi-speed Europe is a reality.

Other challenges, such as Russian adventurism and a flood of refugees from the near-abroad, will continue to cause alarm due to Europe’s disjointed institutional design and unity. But as in the past, each crisis will spur further evolution toward union because, more than ever, Europe – and the world — needs a modernized humanism that offers a viable alternative to the return of tribes, scapegoats, bluster and walls.

National union or…

The historian Arnold Toynbee once wrote, “Countries have characters that are as distinctive as those of human beings.” Those “national characters” are deeply embedded in history, culture and institutions, and change very slowly over decades and generations. Progress can be hard to discern.

For example, it is not widely recognized that it took many decades for a young United States of America to solidify as a federalized union. At its founding in 1789, the nation was torn by regional tensions and sovereign-minded member states that pushed back against central government and “ever closer union.” Initially, young America had no single currency — each state, even individual banks, used their own script. In the ensuing decades, the economy suffered at least seven bank and financial crises, each of which make today’s euro difficulties look mild. A full 70 years after its first government, Americans fought a bloody civil war over “states’ rights” — over whether a central government could overrule the member states about a charged issue like slavery.

One could still see these centrifugal tensions reflected in the 1960s during the civil rights era, when the states and federal government fought over the rights of racial minorities. One can see it today in Trump’s presidency and its anti-government posturing. In short, such tensions are visible in Europe today, as well as in the US.

While this comparison is instructive, it is also imperfect. The EU has divisions that are rooted in centuries of conflict and culture. It is a miracle that it has come this far. But when you read the next “Europe is dying” headline, remember that “old Europe” actually is quite young. The expanded EU and the eurozone were launched barely ten years ago. The EU can survive the UK’s folly, Poland’s retrenchment and Viktor Orbán’s audacity, and a few million refugees, plus radical Islamic terrorism, and too much austerity – as long as the heart of the Project remains beating.

Watching the EU is like observing a planet in formation – a work in progress, on a decades-long trajectory. In this make-or-break century, the future is up for grabs and the European Way still has great potential to nudge the world forward. At this point, the EU can be said to have reached “the end of the beginning,” to borrow Winston Churchill’s useful phrasing.