What is the purpose of Europe? It must act fast: Stephen Jen
We all know someone who seems to be cursed with bad luck. Europe is beginning to resemble that unfortunate person, as it faces both internal and external problems. The region now needs a clear purpose and an ambitious plan to reach it. The challenges that Europe faces are external, like the fraying Transatlantic relations with the U.S. or the competitive pressures coming from China. Some of the challenges Europe faces stem from its past policies, such as over-regulation or an ill thought out energy strategy. These are in conflict with the goal to maximise economic growth and prosperity.
The economic impact is clear in both cases.
Since the Global Financial Crisis, Europe has been far behind the U.S. In 2010, Europe and the U.S. had similar dollar per capita GDPs. Today, the U.S. per capita GDP is about 50% higher than Europe's, and this gap is still growing. My estimate of Europe's core economic growth rate (after adjusting for short-term defense spending and unsustainable transfers to peripheral nations) is 0.9%, compared to 2.5-3.0% in the U.S. Europe’s potential growth is low, partly due its low productivity growth rate. In Europe, between 2010 and 2019 the labour productivity grew only by 0.7%. Then, it fell by 0.7% between 2023 and 2024. It compares to a long-term average of 2.0% in the U.S. and an alarming 4.5% in the past two quarters. The low productivity growth is due to a number of factors, such as the slow pace of innovation, heavy regulations, extensive welfare programs, and high levels public debt, which discourage private investment. The energy policy of Europe is also incompatible with economic prosperity. Energy prices in Europe are 54% higher today than they were between 2016 and 2020. This is roughly twice the increase in inflation that occurred between those two periods. Some of the energy shock is due to Russia. But some was caused by Germany's decision not to use nuclear power. There are contradictions in doing good and being successful.
It's true that Europe's peripheral nations - such as Greece, Ireland and Portugal – have experienced above-trend growth, but a large part of this was due to the unsustainable fiscal generosity from Brussels. In the last five years, each of these countries has received long-dated loans and fiscal transfers from the European Union, representing 10-20% GDP. This includes the 800-billion euro Recovery and Resilience facility (RRF). The RRF will run out in 2026. What's next?
FALLING BACK
Europe, perhaps due to the scars of two world wars, has pursued a larger union of nations in recent years rather than allowing?major power in Europe? to flourish unhindered.
To prevent major European powers from feeling confident enough to wage war against their neighbours, EU has placed emphasis on integration and harmonisation. In 2012, at the height the European Debt Crisis, the Nobel Peace Prize went to the EU. The message wasn't lost on the rest of the world.
Even if the strategy was a good one decades ago, things have changed. China's trade surplus with Europe, which has almost doubled from 2019 to 2024, is a growing problem. This is partly due to U.S. non-tariff and tariff measures. China's bilateral surplus with America, expressed as a percent of the U.S. Gross Domestic Product, has decreased by more than 50% since 2018. China has rerouted goods that it could not export directly to the U.S. through a third country or sent them to other regions including Europe.
If the 2025 trend continues, the bilateral trade imbalance could reach $450 billion in this year. This would be a 35% increase from 2024.
The problem goes beyond U.S. Tariffs.
China is simply too competitive.
The "Made in China 2025 plan" - announced in 2015 – has achieved the majority of the ambitious goals set by the government to move up the value chain in advanced production and other strategic areas.
In consequence, the range of products where Europe has a competitive advantage in terms of quality or price has shrunk significantly.
China displaced Italy in the 2000s because of its lower value-added manufacturing than Germany. It is now Germany's time.
WHAT IS THE OBJECTIVE? Europe needs to first define its main objective before it can begin to tackle these issues. What is the primary objective of Europe? Is it to create a cleaner, more equal world, or to harmonise Europe so that those who are strong do not become too powerful?
Or, is it to maximize Europe's potential and prosperity in order for it to remain competitive even at the cost of the environment and income equality? I believe that Europe's current goal - whatever it is - does not reflect the rise of Donald Trump in the United States or "Made in China by 2025."
The awkwardness of the EU itself has hampered the bloc, even though it made some efforts to reposition Europe globally in the past year, including a shift towards greater defense spending. The member states cannot pursue their own strategy, and Brussels is restricted by the need to reach consensus between 27 different countries. The challenge for Europe is to not be a spectator in the future. Even if Europe tries to defend global order from the past, a strong economy will be needed to achieve these goals. The defensive actions of Europe will only buy more time, and are unlikely to form a strategy that can meet tomorrow's challenges.
Europe needs a technological and economic renaissance.
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(source: Reuters)
