Europe’s economic decline started a long time ago, but it is only recently that people noticed. Its underlying force is the massive technology gap between the EU and both the US and China. It is a political story first and foremost. Underinvestment was a political choice and its main consequence is also political: the decline of the EU as a geopolitical power.
Complacency is ultimately to blame: complacency over the forces of technical innovation in the 21st century, over geopolitical risks, and over Europe’s ability to shape the world.
For me, the moment that encapsulated this complacency was the Brexit negotiations. I am not blaming the EU for Brexit. But its leaders misjudged the political dynamics in the UK and overplayed their hand. The result was the hardest of all possible versions of Britain’s withdrawal.
Brexit was a calamity for the EU too. It reduced exports. It shifted the power balance within the EU from the north-east towards the south-west. And it deprived the EU of its only viable capital market. The EU’s chief negotiator was Michel Barnier, who has just been appointed France’s prime minister. In many ways, he epitomises haughty European overconfidence. France has entered a phase of secular decline and I struggle to identify a French party or politician who even pretends to have a plausible plan to arrest it. The same is true of Germany.
Mario Draghi, the former Italian prime minister, might have been such a person for the EU. He has now warned that the EU is facing a threat to its very existence. In a long-awaited report on Europe’s competitiveness, he writes that the EU’s purpose is to provide its citizens with prosperity, opportunity, freedom and democracy. “The EU exists to ensure that Europeans can always benefit from these fundamental rights. If Europe can no longer provide them to its people – or, worse still, if it has to trade off one against the other – it will have lost its reason for being.” Draghi, who was also once president of the European Central Bank, knows about how politics and economics interact.
The EU’s leadership does not. But this is the battle they should fight. The EU is in a life-threatening crisis. It has been squeezed by the US and China. It is losing the technology race. On 2 September, Volkswagen shocked everybody when it announced that it may have to close factories in Germany for the first time ever. We are entering a new world of electric cars where service comes in the form of a software update. It does not look as though most of these cars will be made, or designed, in Germany any longer.
It’s not just cars. The EU has given itself a data-protection regime so restrictive that it constitutes an obstacle to the development of artificial intelligence. It introduced a Digital Services Act that treats social media platforms as hostile to European culture. It has a banking system that is more fragmented today than 20 years ago. It is falling behind in spending on research and development. The EU is stuck in a technology trap of mid-20th-century mechanical engineering.
Economic decline is the deep cause for the rise of the far right. Immigration is the trigger. If a town has lost its only factory, if there are no alternative business opportunities, and if immigration is rising, we should not expect that town’s voters to support the parties that allowed this to happen.
Europe’s economic decline will shape its political geography. The EU remains attractive for poorer countries that stand to gain through direct transfers when they join. It will be interesting to see how Polish attitudes towards the EU evolve once Poland becomes a net contributor to the EU budget – which will happen if Ukraine joins. Norway chose not to join. There was once some momentum for EU membership in Switzerland, but this has now faded.
Keir Starmer has said the UK will not rejoin in our lifetimes. He is probably right, and this has a lot to do with the way the EU itself is developing. If the EU were a model of successful economic management in the 21st century, rich countries on its periphery would queue up to join it. Even Turkey is now looking towards alternative alliances.
I agree with Draghi’s diagnosis. But I am not optimistic that the EU can stem the decline. The EU’s instinct will be to impose tariffs and other barriers. Draghi recommends extra investments of €750-800bn a year for the EU to close the investment gap with the US. It will also need to reform its financial sector to end the misallocation of private capital through the European banking system.
The EU does not have the money to co-finance the investments. For that it would need to become a sovereign country itself, with the power to raise taxes and issue debt. But therein lies the problem: a failing EU with a strong presence of far-right anti-European parties will not assume these powers. Deeper European integration is as necessary as ever. But I believe that the moment for that has passed. This is why decline is the most likely scenario. I don’t expect a formal break-up, though. Gridlock is the path of least resistance. The EU will simply become less important in our lives, very much in contrast to what many of us expected to happen and hoped for in the 1990s and early 2000s. Those who take delight in the EU’s decline should be careful what they wish for. If Europe cannot close the gap with the US and China, its sovereign member states cannot do so either. That, too, is a lesson from Brexit.
[See also: Kamala Harris made Trump look like a loser]
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