A bright(er) outlook for Europe after the Euro-crisis

The European Union surely has had better moments. What first entered centre stage with some troubling fiscal gaps in Greece’s budget in late 2009 has now turned into a much more sustained challenge for the continent itself – and equally for the rest of the world. However, things are still undecided. At this time people can probably argue with equal justification that we are nearing the end of the downward spiral or that things continue to get much worse if and when a Euro-zone break-up eventually occurs.
I tend to be an optimist and I am convinced that within a few years things will become better than they were before the crisis. This essay sets out the justification for my optimistic perspective and, if realised, what repercussions the optimistic evolution would have for Europe and the rest of the world. It will look at a ‘return of Europe’ and will suggest the implications it has on three dimensions, namely the economy, Europe’s role in the world and the evolution of its identity. These three dimensions shall be analyzed along a chronological perspective, starting with the origins of the crisis and the structural context, recent and current developments with a lasting impact on Europe and eventually an outlook of Europe’s perspectives beyond 2014.

It wasn’t us…
Since the global financial crisis hit Europe, the prevailing narrative there has been that evil bankers and profligate private and public spending in the US were the root of the problem. Yes, Europe has been affected but this was primarily London-based investment banking and it is up to the UK government to sort it out. Unfortunately, that narrative is not only a poor simplification of the origins of the crisis, it also misses out important details on the complicity of European banks (and governments) in the crisis. Firstly, EU member states have been at the forefront of receiving bail-outs. These are non-Euro members Hungary (2008), Latvia (2009) and Romania (2009). Maybe because they are outside the single currency, their plight has received less attention – and was forgotten once Greece got into trouble. Nonetheless, extraordinary loans have been provided by EU governments to these troubled countries. At least Latvia is on a road to recovery but economic and political problems seem to have worsened in Hungary and Romania. Secondly, the imbalances in the financial system might not have hit (continental) Europe as hard as the US in the initial phase but underlying issues of risk and under-capitalisation seem rather similar and challenges have surely arrived by now. The different timings of the hits in Europe and the US may be coincidental but very similar problems in the banking sector (and fiscal policies) are persistent in Europe as well as the US. In that way, the European narrative on the economic side of the crisis is surely blended and many adjustments remain to be done in order to prevent a similar crisis from happening again.

Europe’s economic challenges
Two issues stand out as particularly challenging in Europe. Firstly, the competitiveness and sustainability of many European economies can surely improve. This concerns inflexible labour markets, outdated industries, tourism-construction bubbles in sensitive ecological zones but also unsustainable infrastructure developments that mirror concrete-and-steel policies of the past instead of the smart connectivity that a resource-poor continent requires. Secondly, huge trade imbalances have arisen in the Eurozone since the single currency’s inception in 1999. The root of this is to be found mostly in Germany which has witnessed real wage decreases over the past decade, resulting in higher trade surpluses (and it retains its beloved status as ‘Exportweltmeister’). While the export story might sound good in the German national news, it has come at the cost of falling domestic purchasing power. If nothing changes economically in the rest of the EU (more than half of Germany’s trade is with the rest of the EU), the German export drive has not only diminished wages at home but also rolled over southern European economies in such a way that they will not be able to afford any (German) imports in the near future because their industrial base will have vanished.

A structural revolution of Europe’s foreign policy
Just as the financial crisis hit Europe and the rest of the world, European leaders also faced the finalization of the decade-long project of constitutional changes that culminated in the enactment of the Lisbon Treaty and the naming of the EU’s new top dogs. The new post of the permanent president of the European Council and the re-branding of the foreign policy chief together with the establishment of the External Action Service (EAS) paved the way for stronger cohesion and action. Unfortunately for Europe’s current capacity to be heard internationally, both jobs were filled with low-profile people. In the case of the European Council president this has helped to keep the current holder, Herman van Rompuy, focused on the job of chairing meetings of heads of state. The outcome in foreign policy is more disappointing. Catherine Ashton has been the kind of lowest-common-denominator compromise person for the job of EU High Representative who would not alienate anyone but also oversee five years lost of pushing Europe’s global agenda. But despite her lack of initiative and international clout, the slowly moving EU institutions have finally seen the set-up of the EAS and first experiences of designing a comprehensive foreign policy approach both in policy and in personnel. In the future the current Commission and the role of Catherine Ashton might be seen as the ‘testing-the-waters’ term in which the division of responsibilities and resource-sharing between Commission, Council and EAS have to be established.

Next to the institutional and personal challenges, it should also be remembered that the Union is and has been deeply involved in the struggles of the Arab Spring, the EU’s most challenging phase since the Yugoslavia wars. Events starting in Tunisia in late 2010 have kept foreign policy makers intensely involved, including overt military action by some EU members in Libya.

Moving closer together at the top
In terms of forming European identity, the ongoing economic problems do not appear to have helped European solidarity. National prejudices are too often exploited – at least when you ask northern Europeans about their willingness to support struggling southern economies. The caveat of course is that intra-EU loans have never been required before so that it is hard to compare sentiments over time on the issue. A more promising picture can possibly be drawn at the higher echelons of power. The crisis has led to an increase in European Council meetings. Heads of state now meet on a monthly basis (if not more often) and also bilateral meetings and contacts have increased. Such closer coordination should subsequently not only lead to better policy outcomes but also to a stronger (European) ‘esprit de corps’  among leaders. At the same time the prevalence of common economic challenges around the Euro and EU governance remain on the everyday news plate of EU citizens. Given their high salience, news reporting on EU economic issues has clearly increased and with it the coverage of issues affecting the different parts of the continent in the specific ways.-  A higher quality debate and – most importantly – a more common discourse about the join challenges and the different situations in different countries is likely to increase senses of European identity in face of the common challenges.

A more sustainable Europe after the crisis
It is likely that 2013 will be another tough year for the EU as troubled economies continue to struggle in the crisis. But let us assume that at least by the end of 2013 the Euro has not broken up and southern Europe has returned to growth and employment-creation. At what stage would that leave Europe and the Europeans in 2014, the next rendez-vous between the EU and its citizens with the European Parliament elections and a new Commission to be elected?

The most robust economy by 2020?
There is a good case for sustained growth in the Eurozone, if not the whole EU, after the worst has been overcome. Firstly, there should be a convergence effect with southern economies catch up with ‘core Europe’ once more. This in turn will create better export opportunities for the rest. It is also likely that central and eastern European economies will sustain their growth story, with more of them joining the Eurozone in coming years, adding to growth and opportunities in the EU single market. Secondly, it is likely that Eurozone debt levels remain lower than those of their peers (USA, UK, Japan) indicating a more solid fiscal situation than elsewhere in the non-resource-dependent developed world. This should go hand in hand with a low inflation rate – as has been seen during past months and the tougher times of the crisis. Thirdly, a renowned confidence and growth story are likely to channel back liquid (Asian) assets into European investments and it will hopefully tie European and Asian actors even further together, enhancing the special trade relationship of the two biggest traders in the world. This process is likely to be accelerated by the foreseeable signing of the new generation Free Trade Agreements (FTAs) between the EU and a number of Asian countries like Singapore, India, Vietnam, Japan (South Korea is already in force), while pan-pacific trade negotiations are more likely to stall or be inefficient due to the irreconcilable (domestic) positions of and within countries like the US, Japan and Malaysia. Fourthly, and most importantly, the ongoing Euro crisis has led to the evolution of a new institutional framework for budget surveillance and responsibility in the EU. Not only should memories of the troubles that countries go through during fiscal adjustment lessen the appetite for loose spending policies in the future, new EU legislation is also building much stronger institutions to prevent fiscal troubles to arise in the first place. When the new provisions are firmly in place, Eurozone countries will have the most credible set of policies to sustain fiscal responsibility among non-resource-dependent (western) democracies. Key elements of fiscal supervision will be taken out of national policy-makers’ control and be shared between the (neutral) European Commission and a peer review process of (other) national governments. No other advanced economy has found a comparable structural answer to the deficit bias inherent in national policy-making.

Taking foreign policy to a new level after 2014
2014 will see the new round of multi-year funding to be channeled towards the global challenges in a more comprehensive way than previously. This will be followed by the selection of a hopefully more assertive foreign policy chief to take over from Catherine Ashton by the end of 2014. The next occupant of the job will then have the advantage of being able to draw on a functioning EAS where he or she can promote new and further initiatives with a running bureaucracy, highly experienced staff and based on the EU’s own embassies in almost any country of the world. Surely, the Union will and should put an emphasis first on the development of its immediate neighbours in the east as well as south of the Mediterranean. But with growing civilian and military experience (not least the availability of the new generation of long-distance transport aircraft Airbus 400M), the EU might also find itself in a wider set of missions abroad if invited by local governments.

A new momentum of Europe – and the 2014 elections
The experience of having overcome the difficult Euro crisis should reaffirm many Europeans’ confidence that sharing and exercising solidarity and responsibility for the common future of the continent are in everyone’s interest. It is also very likely that the overcoming of the deepest moments of the crisis coincides with the European elections in summer 2014. These elections are likely to be of a new quality, after at least the two biggest political groupings in Europe, the European People’s Party and the Party of European Socialists, have indicated that they each want to put forward a common pan-European candidate for the Commission president. Should they do that, possibly even following pan-European primaries, we are likely to see a serious debate about policies across the continent. Most importantly, the next president of the Commission will have a much stronger mandate and one linked closer to the European Parliament. This should result in clearer and more comprehensive ambitions exercised at the European level by the next Commission. With the opportunity to participate in such a pan-European voting exercise, Europeans might for the first time discuss their individual concerns during a common debate. The joint evocation of their next European leader can form the peak of a new confidence and a much stronger European political identity.

Many assumptions I make here are by no means guaranteed to become reality. But if an economic recovery begins to evolve in 2013, the ground for optimism about the continent’s future is strong. Economic recovery in the south is likely to have a multiplier effect across the single market and subsequently the global economy. This brings benefits to everyone. On top of that, the timing of the recovery should also coincide with crucial decisions over political leadership in Europe after 2014. This may allow for a much stronger global engagement of the EU, led by a new European Commission and following a proper pan-European debate over its election.

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