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The European Union’s Resilience

06 Dec 2018
By Herman Van Rompuy
Van Rompuy at the EUALF. Source: Flickr.

At a time of uncertainty and anxiety, the European Union has proven remarkably resilient despite facing considerable economic challenges.

This is an extract from Herman Van Rompuy’s speech at the EU-Australia Leadership Forum 2018. For the full speech click here.

If one were to ask me to characterise the mood in Western societies today, in one word, I would say: uncertainty, even anxiety. However, there are still many reasons to be optimistic.

Most economies are still doing well, although at different growth rates and with growing inequalities in advanced economies outside of Western Europe. Twelve million jobs were created in the Union since 2014. Our economic growth rates are on average 2% and our recovery is now lasting 21 consecutive quarters. Those figures are satisfactory for a mature economy. It is absolutely normal that emerging economies are growing faster. One has also to look at the evolution per capita. Taking into account the very slow population growth on average in Europe – in Germany already now a negative one – this performance has been better in recent years than in the US. Our growth rate is less credit fuelled than the Chinese one and thus more sustainable.

The most immediate threat is, of course, the “trade war” launched by the US. Companies are anticipating an all-out war and let their investment decisions depend on this negative prospect. This behaviour is weighing on our economies much more than the pure mechanical impact of tariffs.

But we must preserve the sense of proportion: the IMF was particularly critical of the United States, saying that, if the US follows through on various threatened tariffs, long-term growth will decline by one percentage point per year in the US and by half a point globally. This is a material effect. But it looks less alarming in the context of a global economy that is expected to grow by more than 10% over the period until 2020. The IMF Chief Economist says that eurozone would be one of least-affected regions, losing no more than 0.4% in worst-case scenario while US, China and emerging economies stand to lose the most. The message is that, even after the new measures, protectionism is likely to dent, but not derail world economic growth.

Barriers to trade are now still close to record lows. The average global – or ‘most favoured nation’ – tariff is 5.4% according to the latest data from the World Trade Organization. In the 1990s and much of the 2000s it was above 8%. In the 1970s and 1980s tariffs were higher still.

The tariffs of the US, Canada, and the European Union are roughly similar and are fairly low. On a trade weighted basis, the average US tariff is 1.6 percent, the average EU tariff is 1.6 percent, and the average Canadian tariff is 0.8 percent according to data from the World Bank.

Another nuance in this effort to preserve the sense of proportion: the immediate threat of an EU-US trade war has diminished, due to the deal made by European Commission President Juncker and US President Trump.

Three observations about trade deficits: Structural imbalances in the current account of the balance of payments need to be corrected, but it takes an effort from both sides. Some countries have to increase their competitiveness and productivity and others have to save less and invest or consume more.

The U.S. trade deficit is widening this year due to a boost of domestic demand, stemming from the tax cut, triggering more imports and due to weaker exports suffering from a stronger dollar. A inconsistent mix between fiscal and monetary policy creates the opposite effect of what the American administration meant.

Protectionism mainly has to do with domestic policies and much less with any geopolitical power play, for example between China and the US. Let’s have a look at the domestic situation in the US. The unequal distribution of income and wealth that has been building up in the last decades, especially in the US, creates huge tensions in societies. Wages have been stagnating for 40 years. Adjusted for inflation, the median male worker earns less now than he did in 1979. The CEOs at the largest companies now make 270 times as much as the average worker, up from 27 times as much in 1980. Today, low unemployment and low wages are no longer contradictory. European economies are, thankfully, not suffering from that kind of disease. There are less ‘leftbehinds’ and less cuts in social security expenses in Western Europe, but our countries are confronted with populism nonetheless! Inequality is not the only cause of polarisation. I’ll come back to this issue.

The answer of American leaders to this imbalance, or injustice in society is to look for guilty parties outside of the country: “The others are hell”. The underlying reason for this reaction is domestic and not geopolitical. Those kind of political leaders try to make their own economies stronger by weakening other ones. They try to take away the uncertainties of their own people by blaming others. But the real solution is a more competitive and a more productive economy for all. Targeted policies can also correct market failures. In regions where many sectors are in decline, public authorities can promote reconversion (as the EU and its member states have done in the coal and steel industry), by retraining people or restructuring (as the US did with the automotive industry). It is a long-term option. A trade war will not even produce results on the short term. Here too, there is nothing to gain and everything to lose.

The Union remains a strong defender of open markets. The EU itself started as a common market! We continue to conclude and to negotiate free trade agreements with global players such as Canada, South Korea, Singapore, recently with Japan and hopefully very soon with Argentina and Brazil. We will pursue those efforts even after Brexit (29 March 2019). The EU doesn’t need the UK to remain the most open trading block in the world and the biggest single market.

By the way, the EU-institutions proved their relevance when Commission president Juncker managed to avoid a further escalation of the trade war launched by president Trump. Neither Macron or Merkel could obtain that result.

Of course, all countries have to abide by the WTO-rules to ensure that trade really is free and fair. The EU is a defender of the rules-based system. That result can be obtained by negotiations within the multilateral organisations. A trade war creates a climate of distrust, preventing a rational discussion and deepening the rift between countries. We have to talk or use existing dispute settlements procedures. Dialogue instead of ‘war’.

Europe matters even more today than yesterday. It is still a worthwhile ambition.

The European Union shouldn’t forget the reasons why it was founded, the stability and prosperity it brought to so many people. It is fully aware of the role it can play in the world, totally different from some of its member states’ past hegemonic ambitions. “Making Europe great again” or even “Making Europe great” is on nobody’s agenda. Power is now less of an issue. We are more realistic and at the same time we try to make the world a better place to live. You can call it: moral realism. It is a worthwhile ambition. Yes, Europe still makes sense!

Herman Van Rompuy is President of the European Policy Centre. He is a former Prime Minister of Belgium and a former President of the European Council.

This is an extract from her speech at the EU-Australia Leadership Forum 2018, which took place from 18-22 November. For the full speech click here. It is republished with permission. 

The AIIA is part of the international consortium selected to deliver the EU-Australia Leadership Forum project, a three-year initiative funded by the EU. Click here for video highlights of the forum.