EU ship is not sink­ing but it needs re­pairs to weld stronger bonds in choppy wa­ters

Irish Independent - Business Week - - Brendan Keenan -

ONE of the many un­der­cur­rents which led to the Brexit vote, and the sig­nif­i­cant sup­port it still com­mands, is the idea that the Euro­pean Union is an eco­nomic fail­ure. It may not be the main cur­rent, but it is more amenable to anal­y­sis than most of the oth­ers.

The long shadow of Don­ald Trump in par­tic­u­lar, and the Amer­i­can right in gen­eral, comes into play here. Last week’s sen­sa­tion was that the US econ­omy was grow­ing at 4pc, the fastest clip since the peak of the post-crash re­cov­ery in 2014.

The sec­ond-quar­ter fig­ures were driven by higher per­sonal con­sump­tion and busi­ness in­vest­ment; both of them re­spond­ing to the Trump tax cuts. The con­ven­tional view among econ­o­mists is that such a spurt will peter out. Con­sumers will have spent their ex­tra in­come, although busi­ness in­vest­ment may con­tinue to grow in an­tic­i­pa­tion of fresh busi­ness friendly poli­cies.

But in the USA at least, it is just as con­ven­tional to say that this is a shift to higher long-term growth. Keep low­er­ing taxes and cut­ting reg­u­la­tion, a Trumpian an­a­lyst ex­plained, and the econ­omy will keep pow­er­ing ahead.

There is no doubt that the US econ­omy has grown faster than that of the EU for many years. Ergo, Amer­ica is do­ing some­thing right and Europe some­thing wrong, but one has to be care­ful about such sim­ple com­par­isons.

Dif­fer­ent economies have dif­fer­ent po­ten­tial growth rates. Some­times the rea­sons are in­trin­sic, such as an ex­pand­ing or de­clin­ing labour force, and are no cause for con­cern. In other cases, poli­cies are to blame and some­thing should be done.

It would not have been pos­si­ble for the EU as a whole to grow as fast as Ire­land did over the past 40 years, or for it grow as fast as Ire­land is do­ing now (or for Ire­land to grow fast as this for much longer).

The Bri­tish should know this bet­ter than most. A good deal of na­tional trauma, lead­ing to its mem­ber­ship of what be­came the EU, was based on the UK’s poor growth rate in the 1950s and 1960s as com­pared with the likes of Ger­many and France.

Nowa­days, there would be gen­eral agree­ment that Bri­tain could not have achieved those growth rates pre­cisely be­cause it did not suf­fer the same phys­i­cal, mone­tary and fi­nan­cial col­lapse as the coun­tries of the con­ti­nent dur­ing the war.

Yet the sense that Bri­tain was a pas­sen­ger on the EU train rather than a lead­ing mem­ber of the crew ex­plains a lot about its lack of en­gage­ment with the project. It joined a Euro­pean sys­tem which seemed to be far­ing bet­ter than it­self and is leav­ing on the ba­sis that it can do bet­ter than the EU.

The ar­gu­ment is un­con­vinc­ing, not least be­cause, the freer the free trade agree­ments the UK signs with other coun­tries, the more ac­cess it will lose to the Euro­pean mar­ket which ac­counts for half its present ex­ports. That still leaves the ques­tion as to whether the EU is a drag on its mem­bers’ per­for­mance.

We have just had the an­nual IMF sur­vey of the euro­zone – which in this con­text is a good sub­sti­tute for the wider EU (although Den­mark and Swe­den im­prove the sta­tis­tics) and it does show a low­growth zone. Although the euro area is en­joy­ing post-crash re­cov­ery, how­ever de­layed, the IMF thinks it will re­turn to its in­her­ent growth rate of 1.5pc a year by 2021.

Much of this is due to de­pressed de­mo­graph­ics, with Ger­man and Ital­ian pop­u­la­tions age­ing par­tic­u­larly fast. The refugee cri­sis may have ter­mi­nally dam­aged the im­mi­gra­tion of young, ed­u­cated for­eign­ers needed to pre­vent those economies shrink­ing rapidly over the com­ing decades.

To cope with this, Ger­many has built up sav­ings in the form of sur­pluses, and may achieve the pro­duc­tiv­ity re­quire for smaller num­bers of work­ers to sup­port larger num­bers of de­pen­dents. Italy has a moun­tain of debt and stag­nant pro­duc­tiv­ity.

That is the prob­lem in mak­ing com­par­isons with the euro­zone, or even the EU. The eco­nomic dis­par­i­ties be­tween the mem­bers of these en­ti­ties is greater than in any fed­eral na­tion state. The Euro­pean in­sti­tu­tions are semi-po­lit­i­cal en­ti­ties. Not only that, re­cent events have proved that, once in, it is more or less im­pos­si­ble to leave them.

Many years ago I wrote that at least the EU had no Ulysses S Grant to en­force mem­ber­ship. Turns out, there is no need. No one else is likely to at­tempt to leave vol­un­tar­ily, but that does not mean the euro­zone can hold to­gether.

The data cer­tainly gives cause for con­cern. The mea­sure of pro­duc­tiv­ity of all the fac­tors of pro­duc­tion (TPF) has fallen 5pc in Italy since 2000. It is 2pc higher in crash-hit Spain and Por­tu­gal, 4pc greater in France, but up 10pc in Ger­many.

As the IMF says, in its usual care­ful way, such gaps re­main a fun­da­men­tal threat to euro area co­he­sion. The con­se­quences in­clude stalled in­comes, high un­em­ploy­ment and fi­nan­cial deficits in the less pro­duc­tive states. What it does not say – but many oth­ers do – is that with­out more co­he­sion the sys­tem may even­tu­ally break apart.

France is the great co­nun­drum. If any coun­try rep­re­sents the fail­ure of the EU to Brits and Yanks, it is the land of air-traf­fic con­trol strikes and short work­ing weeks. The fig­ures tell a more com­plex story. French de­mo­graph­ics are far bet­ter (as are Bri­tish) than Ital­ian or Ger­man. French TPF is high (higher than Bri­tain’s) but it has been grow­ing more slowly than Ger­many’s . The same pic­ture emerges in a statis­tic most of us are more fa­mil­iar with – labour costs.

French costs re­mained rel­a­tively sta­ble dur­ing the credit bub­ble, while they soared in Ire­land, Italy and Spain. They have since been forced down to pre-bub­ble lev­els in those coun­tries by wage re­straint and un­em­ploy­ment.

The prob­lem is that unit labour costs in Ger­many fell dur­ing the bub­ble while they were sta­ble or ris­ing else­where, and are more than 10pc lower than their level in 1999. The gap is smaller than it was in 2009, but greater than 10 years be­fore that.

The real Euro­pean fail­ure, from which Ire­land can­not be en­tirely ex­cluded, is the in­abil­ity of the less pro­duc­tive economies to form a po­lit­i­cal con­sen­sus on the changes needed to im­prove per­for­mance. In view of its pop­u­la­tion pro­jec­tions, rel­a­tively mod­est changes in France could give it a higher po­ten­tial growth rate than Ger­many, pro­vid­ing that pop­u­la­tion with a wider level of skills and bet­ter op­por­tu­ni­ties in more open mar­kets. The Mediter­ranean coun­tries need more rad­i­cal change and with­out them, may slip into a de­struc­tive down­ward spi­ral.

They have the ob­vi­ous ex­am­ples of the north­ern states to show that ef­fi­ciency and so­cial co­he­sion can go to­gether. Yet if any­thing, their pol­i­tics are mov­ing fur­ther away from dif­fi­cult but promis­ing choices, in favour of at­trac­tive fan­tasies. It is not just the Brex­i­teers who are bark­ing up wrong trees. The IMF says such gaps are a threat to euro area co­he­sion.

The in­abil­ity of the EU’s less pro­duc­tive na­tions to form a po­lit­i­cal con­sen­sus on the best way to boost fu­ture per­for­mance may yet drag the or­gan­i­sa­tion down

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