CER Bulletin Issue 121 | August/September 2018
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CER Bulletin Issue 121 | August/September 2018 Regime change? The European economy to 2030 By John Springford The EU’s problem with May’s plan for Brexit By Charles Grant Dead or alive? A UK-US trade deal By Sam Lowe and Beth Oppenheim Regime change? The European economy to 2030 by John Springford “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” Five years before Jean Monnet wrote those words in 1976, Richard Nixon had suspended the convertibility of the US dollar into gold, bringing an end to the Bretton Woods system of fixed exchange rates. The breakdown of Bretton Woods led to currency instability in Western Europe, which in turn curbed trade and investment. Monnet was writing as the 1970s oil price shocks pushed up inflation. Europe’s weakly contested goods and labour markets, which were still fairly closed to foreign competition, made Western Europe’s economies slow to adjust to shocks. The EU’s current economic regime is the sum of raising hopes that a decade of disappointing the solutions adopted after the 1970s crises. The productivity growth might finally be over. But, European Economic Community established the after the present bounceback, the European Exchange Rate Mechanism in 1979, which first economy looks set to grow more slowly than it reintroduced a managed exchange rate regime did before 2008 – thanks to an ageing society and in Europe, and culminated in the single currency. the scars of the crisis. The 1986 Single European Act sought to raise trade and investment through common rules Meanwhile, big economic changes are afoot. and tougher enforcement, thereby making the The next phase of globalisation, driven by digital European economy more efficient. After a decade technology, will see services become more of putting out the fires of the Great Recession tradable across borders. German technicians may of 2008-09, the euro crisis of 2010-12, and the soon be able to fix machinery in China remotely, migration crisis, which blew up in 2015, it is the using telerobotics, for example. Automation right time to ask: what regime does the European and artificial intelligence may help to drive up economy need by 2030? productivity growth but will also displace some workers. And if history is any guide, there will be Europe’s economy is finally recovering, with the two more recessions in the next decade – yet EU as a whole now growing in line with pre- the eurozone still lacks the counter-cyclical tools crisis rates. Investment has picked up strongly, needed to rapidly stabilise its economy. [email protected] | WWW.CER.EU CER BULLETIN ISSUE 121 | AUGUST/SEPTEMBER 2018 3 The movement of people within the Union is easing (whereby the ECB buys up the sovereign lessening, but young, skilled workers migrating debt of all member-states in exchange for newly towards the core of the EU economy have created money). But debtors have not been implications both for economic convergence allowed to default. Such heavy debt burdens and for the sustainability of welfare states in are manageable now, but the ECB may not be the member-states they leave. Meanwhile, able to keep sovereign borrowing costs down immigration into Europe looks set to continue in future recessions. If the euro area countries at a high rate, and may accelerate: the bulge of cannot agree to a deposit insurance scheme young people in Africa and the Middle East is and a meaningful resolution fund for banks much larger than that of Latin America in the in distress, member-states risk being dragged 1970s, 80s and 90s. The latter led to faster rates of down by failed banks based in their jurisdiction. immigration to the United States and contributed So far, Germany, the Netherlands, Austria and to the radicalisation of the Republican party. other countries have successfully stymied attempts to share the costs of recessions more All of these trends have implications for European evenly between creditors and debtors. The two growth as a whole; whether poorer countries recessions due between now and 2030 may force can continue to catch up with richer ones; the issue. and whether the European project will survive politically. Unlike in the 1970s, solutions to the The politics of ageing, slow-growing societies EU’s current problems require the Union to also tend to be dominated by distributional get involved in distribution – of the costs and issues. This is a particular concern for countries benefits of technological change; of the burden such as Germany, Italy and some Central and of adjustment to recessions; and of migrants from Eastern European states, which have low outside the EU between member-states. birth rates or high rates of emigration. For poorer member-states, the continued loss of Technological change – and continued offshoring young skilled workers will slow their rate of – will make it harder for poorer EU countries to convergence with rich ones. pursue an export-based industrial growth model. The proportion of European workers employed in Disorderly migration across the external border industrial jobs has fallen, even though industrial of Schengen has led to rising support for nativist, output has risen. The EU will continue to use anti-EU parties, largely because of distributional competition policy and create standards and issues: Italy and Greece sought solidarity from regulations to try to stop digital monopolies from other member-states, but Poland, Hungary, the damaging consumer interests. But it could also Czech Republic and many others have taken in do more to prevent most of the production of very few asylum-seekers from Greece and Italy. new digital technology from taking place in the In the long-run, the pressure to co-ordinate US and China. More EU and national funds could member-states’ migration and asylum regimes be spent on science and the development and more closely is likely to increase. Migrants and dissemination of new technologies across the refugees granted citizenship in one EU country economy, rather than on physical infrastructure have the right to move to others; and migration and farm subsidies. EU funding should be to the EU is likely to rise, not fall. awarded to the institutions and companies most able to use it effectively, which will probably be in Over the next two years, the CER will be richer member-states, raising questions about the conducting a research programme on the industrial strategies that poorer member-states European economy to 2030, which will be run can pursue. from our new Berlin office. By focusing on the long-run trends that will shape the European The eurozone has created so much tension economy, we hope to provide a strategy for since 2010 because the member-states had to European policy-makers, who have spent the last decide who paid for the debts incurred in the decade fighting crises. It seems likely that the run-up to 2008. Such distributional issues have EU will have to become less technocratic, and historically been the preserve of nation-states, in while the EU will continue to focus on efficiency, which democratic politics could determine the institutions and rules will be needed that allow it winners and losers. The eurozone crisis led to to distribute the costs and benefits of economic bail-outs of both the European banking sector change in a way that national publics consider to and the Greek state, and the European Central be fair. That will not be an easy task, but we will Bank has succeeded in lowering interest rates in try to offer some guidance. southern Europe through the Outright Monetary Transactions programme (by which the ECB promised to buy the sovereign debt of a member- John Springford state on the brink of default) and quantitative Deputy director, CER @JohnSpringford The EU’s problem with May’s plan for Brexit by Charles Grant Theresa May’s scheme for the future UK-EU relationship has been attacked by both pro- and anti-EU Conservatives, which makes its passage through Parliament problematic. Yet the prime minister has proved resilient over the past two years and if any plan for Brexit can scrape through Parliament, it is likely to look something like hers. Whatever the views of British MPs, the scheme cannot work without the support of EU leaders. And their initial reaction, though polite, is negative. May’s white paper on Brexit would keep the The European Commission emphasises that UK de facto in the single market for goods and these days it is hard to disentangle goods and agricultural , as a rule-taker, and in something services, given that the latter contribute so with the characteristics of a customs union. This much to the value of the former (consider the would remove the need for border controls post- design, financing, marketing and servicing of a Brexit, thus protecting manufacturing supply jet engine). And if the UK were free to undercut chains and resolving the issue of the intra-Irish EU standards on services (say by regulating border. Service companies would have to cope in such a way that business received cheaper with poorer access to EU markets, but May thinks credit) it could distort the level playing field for the UK financial services industry is too big and goods. This is not the strongest of arguments, important to be a rule-taker. May is probably given that the EU does not regulate many of right that her plan is the least-bad model for the the services involved in making goods. But UK economy that might work politically. it reflects the EU’s great fear that the UK may undermine the level playing field by lowering But the EU dislikes the idea of the British being standards on social, environmental, consumer in the single market for goods alone.