Monday, April 22, 2019

Europe: The Gathering Storm

There are three distinct trends in the European economy, society and politics that, when taken together, spell doom for the continent. The process of decline is irreversible, and its consequences for the United States are serious yet inevitable.

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Human society is a complex system, with millions of moving parts that are somehow supposed to interact in tolerable harmony. We who take a libertarian approach to politics and policy argue that this harmony is best achieved and preserved if government stays out of people's economic and social relations.

History continues to prove us right. So do current events, although the complexity of our political and economic affairs can obscure the picture. However, there are moments when even our present time can deliver an image of clarity and insight - and of evidence that libertarianism, done right, always prevails.

The latest example is from Europe, my continent of birth and the place where my ancestors have lived for as long as we can trace them (at least 600 years back in time). Europe was the cradle of modern civilization, of the philosophical thinking that gave birth to the American constitutional republic, and of inventions and progress that helped build the most prosperous, most advanced human societies in history.

Americans have always taken Europe for granted. Foreign policy, defense strategy, business, tourism... all of it has been based - implicitly or explicitly - on the idea that Europe is a politically stable, comparatively prosperous and highly advanced continent.

That is all going to change. In fact, it is changing already, but as with all transformations that are not caused by a war or a revolution, the changes happen slowly and in separate trends that do not coalesce but converge and reinforce each other.

As a political economist, it is my job to analyze such trends (where they exist) and to evaluate their possible implications and consequences. Having studied Europe's economic decline for several years, I have seen the continent drifting in a direction that should worry a lot more people than me. On top of this, I have also studied their political trends and other, more complex socio-economic phenomena that rise to the same relevance as the course of their economy.

I have been reluctant to draw conclusions based on the convergence of these trends, but given recent events and the pending European Parliament election on May 23-26, I have to formulate my conclusions as concisely and coherently as I can, without resorting to academic prose.

Plainly: here is my diagnosis for Europe, its future and what that means for the United States of America. Take it for what it is.


The economy


I recently called Europe an irredeemable mess of industrial poverty where stagnation and decline will dictate the future. I will not go into the details of this verdict on the European economy - see the end of this article for a list of further readings - but let me stress that the long-term effects of Europe's economic decline go far beyond what American politicians are aware of.

To begin with, the economic stagnation has already cost two generations of Europeans a prosperous future. The continent began entering a state of stagnation already in the 1970s, but its full impact on people's lives was not felt until about 20-25 years ago. My generation, born in the 1960s, had to work notably harder to climb the standard-of-living ladder than our parents had to do, and our generation's children were born right into systemic economic stagnation. Very few of them will live a better life than their parents; most of them won't even reach that level.

In my book Industrial Poverty I defined a set of criteria for evaluating whether or not a modern, industrialized economy has reached a state of long-term economic stagnation:

1) Private consumption is stagnant, growing at less than two percent per year. Through the application of Okun's Law to private consumption, we can conclude that consumer spending must grow by at least two percent per year in real terms to assure that consumers on average maintain their standard of living.
2) Private consumption is becoming insignificant. The growth in a healthy economy, such as the American, comes predominantly from private consumption and business investments. In an industrially stagnant economy, though, exports is the dominant driver of growth, and consumption accounts for less than 50 percent of GDP. This is now the norm in Europe.
3) Youth unemployment above 20 percent. The euro zone has been above that mark in eight of the past ten years. As of 2018 they saw it decline to 16.9 percent, although seven countries do have a rate above 20 percent (with Greece, Italy and Spain above 30). For comparison, the U.S. youth unemployment was at 8.6 percent in 2018.
4) Excessive government spending. There is compelling statistical evidence that when government consumes more than 40 percent of GDP, that economy slides into a permanently lower growth path.

For an economy to be in a state of industrial poverty, it needs to meet these criteria over a sustained period of time, for example ten years. Europe mostly qualifies, and it is not because of a slow recovery from the Great Recession. As I explained in my book from 2014, the European economy has been on the verge of, or in a state of, industrial poverty since the 1990s. This means, again, that the standard of living is not progressing, that young people are having great difficulties even getting a foothold on the labor market, and that private earnings are increasingly used to fund government.

Speaking of government, it is important to note that the taxes Europeans pay do not go toward gradually improving services in health care, more generous income-security or retirement benefits, or a steadily better education system. On the contrary, Europe's governments are having a hard time just keeping their services afloat - under the highest taxes in the free world. The reason, of course, is an economy barely able to reach even two percent GDP growth.

Stagnant growth continues to erode government finances, which - given Europe's affinity for balancing their budgets at all times - means perpetual pressure on the private sector. It is impossible to see how Europe can break out of a vicious cycle of a big welfare state, high taxes suppressing growth, persistent deficits leading to continuous rounds of austerity, and - by consequence - yet more stagnation in GDP. This stagnation in turn increases the population dependent on government, as people find it increasingly difficult to earn more money and become independent of government handouts.

Eventually, industrial poverty alone - notwithstanding other socio-economic and political trends - leads to social unrest. The yellow-vest movement in France is a good example. However, economic stagnation becomes a flammable component when put in the context of other trends.


Politics and government


This is an area where Europe is in more trouble than is widely known. There are two parts to this trouble: constitutional and ideological.

The constitutional part has to do with the construction of the EU itself. Contrary to conventional wisdom, the European Union is not structured as a federation. It is structured as a nation state elevated to the European level. As is the case with nation-state governments (unlike the American constitutional republic) there is no clear distinction between the legislative and executive branches. The European Parliament is often mistaken for the legislative body of the EU; in reality, it cannot initiate legislative bills, but can only vote on them. The actual power of proposing legislative bills lies with the EU Commission. 

Once the Commission has proposed a bill, the Parliament is not the only body to approve it. The Council, a body consisting of representatives from the member-state governments, must also approve bills before they can become laws. In some instances, the Parliament is even reduced to a strictly advisory role on legislation.

Since the Commission consists of Commissioners from the member states, and since those Commissioners are appointed by member-state governments, in reality the EU is set up to run as a traditional European government with strictly limited direct popular influence. As a result, there is very little accountability in the EU government; popular will is filtered away and with it, much of the checks and balances that define American government. 

The ideological part of Europe's political problems is related to, but not caused by the constitutional structure. Since popular will is kept at bay, negative effects of EU policies only rarely make their way into the chambers of legislative power. The parliamentary election in May could be an exception - more on that later - but the normal state of affairs is that the ideological characters of national governments influence EU legislation more than the direct will of voters. 

National governments, in turn, are typically based on standard principles of parliamentary democracy: the executive branch - normally a prime minister and his cabinet - is elected by the legislative branch, i.e., the parliament. Furthermore, the typical parliament consists of several different parties that form coalitions. By their own structure, those coalitions filter out some swings in public opinion. 

All in all, this means that the will of the people is watered down in national parliamentary elections, in the formation of coalitions in those parliaments, in the election of prime ministers, in the appointment of EU Commissioners (which are normally appointed by the incumbent prime minister and his cabinet), and then in the legislative process in the EU. If there is a shift in voter sentiment due to, e.g., the harsh effects of austerity policies, that shift will have little to no effect on how the EU is governed. 

Back when I was a candidate for the European Parliament in 1995, we EU critics used to call this a trend of "democratic deficit". This trend continues to this day.

Lack of popular influence, accountability and direct representation all conspire to form a government that is insensitive to - even isolated from - the actual consequences of their policies. Among the consequences filtered out is the economic stagnation that has come to define the European economy in the past two decades. Since the onset of industrial poverty has not made itself heard in Brussels, and since the legislative process is characterized by a democratic deficit, there will be no change in the policies that cause this stagnation and slow economic decline.


Socio-political fracturing


While the economy and the politics of the EU are conspiring in an erosion of socio-economic stability, a third trend is adding insult to injury for Europe. There is a demographic shift under way, with many European countries receiving large numbers of non-European immigrants. A majority of those immigrants have an education below European average, putting them at the bottom of the skills ladder on a labor market that already has trouble producing gainful employment, especially for the young. As a result, the ranks of welfare-state dependents are swelling, adding to the weight on  taxpayer shoulders. 

Due to the muslim background of most migrants, they tend to gravitate toward existing muslim populations in Europe. Those populations, in turn, have in many cases formed enclaves; it can be debated if that is their choice, as they prefer to live among like-minded, or if it is the work of blatant and unmitigated racism among the indigenous population. Regardless, it is a fact that there is an enclavization under way across Europe, and that it has not slowed down with the recent waves of migration. 

With separate cultures segregating themselves into their own sub-societies, political ideologies tend to follow. As history painfully tells us, segregation of all kinds can easily foment political extremism. Therefore, it is not surprising that Europe experiences a fracturing of its politics:

  • On the one hand there is a rise of radical islamism within European politics; even if it has not yet led to major upheaval of Europe's political party system, it is already influencing legislation in countries like Sweden and Britain; blasphemy-like speech-ban laws are coupled with islamist curricular and staffing influence in public schools (Britain) and new regulations of government-run activities, from halal-compliant school lunch menus to the introduction of gender segregation at public pools (Sweden);
  • On the other hand the reaction from non-muslims has become increasingly extreme in the nationalist direction; this has led to the rise of parties critical of immigration in, e.g., the Nordic countries, Holland and Italy, as well as to strong reinforcement of nationalism in Eastern Europe.

These two trends reinforce the radicalization - in all directions - of European politics that was visible already in the 2014 EU election, as well as subsequent national elections. This shift away from the political center has only continued, and while it is difficult to see any rise of islamist political influence at the EU level there is no doubt that nationalist parties are well positioned to gain parliamentary seats in the upcoming elections in May. 

When politics is radicalized and meets with a rigid political apparatus, it usually does not end well. Recent events, primarily the fire at the Notre Dame in Paris, could unduly influence the election. Evidence is emerging that the fire was the result of a crime - not an accident as was originally reported - which raises the question of who would have an interest in burning down such a prominent place of Christian worship.  

I do not mean to speculate, but if this were the result of an islamist plot - not inconceivable given the attacks on hundreds of churches in France in the past year alone - and if the French government were perceived as trying to cover up, downplay or distort the truth, it could lead to very dangerous radical swings in the political mood of European voters. Radical nationalists would stand ready to receive large swaths of new voters at the ballot boxes in May. 

If on the other hand it turns out to be an islamist, and this is handled properly and honestly by the French government, it can mitigate, even reverse the trend of voter flight to radical nationalist movements. Regardless, it is of monumental importance that the French government conduct the investigation without political prejudice. The truth is needed regardless of its content. I fear, though, that the French government - driven by the warped belief that truth can be toxic - will act as is common in Europe, namely serve the public what it thinks the public needs to know and keep the rest of the truth to themselves. 

A rise of nationalist radicals in the elections in May will give them a common European platform. More importantly, however, it could lead to a more pronounced process of fracturing of the EU itself. It is commonly the case that Europe's political majorities and elites take a derogatory, isolationist attitude toward nationalists. This in turn reinforces the nationalist mindset and deepens ideological fault lines. 

Brexit was the result of the EU elite treating British UKIP as political pariah. If the same happens after the May elections, Brexit can in fact become an example for others to follow, rather than the discouraging experience it is now meant to be. Today, Hungary, Poland, the Czech Republic and Italy are inconceivable candidates for exiting the EU - but so was Britain even a few years ago.


A New Europe


Where will Europe be in ten years? I have been forced by evidence and analysis to conclude that wherever she will be, she won't be in a good place. 

An increasingly fractured EU, even without more secessionist candidates, will double down on the power it holds. There will be no "Donald Trump" moment in European politics. Instead, political inertia in Brussels, rising political extremism of all kinds and perennial economic stagnation point to a gathering storm of problems for Europe.

These are problems that the political leaders are unable to see, let alone comprehend and address. For this reason, I have reluctantly concluded that Europe is in a state of irreversible decline. There is no saving her anymore. Europe's political elite will not concede to reforms that would break their hold on power and money; the large populations of welfare-state dependents will not vote away their benefits; young Europeans, having been humiliated into complacency by political rigidity and industrial poverty, have no vision of a bright future. Swelling ranks of unemployed, of welfare dependents and of socially, religiously and politically Balkanized populations constitute a powder keg for economic, political, social, even institutional instability. 

A Europe in steady, even accelerating decline presents a formidable threat to the rest of the world. An economy with 500 million people is a great resource for global trading partners, but if it fractures and falls into a macroeconomic tailspin, it is also a great loss to the world. A stable, functioning industrialized economy is a great military and security partner to America; a continent in increasingly ungovernable decline is an even stronger military and security threat to us. 

In imagining Europe in ten years, all bets are off. All conventional wisdom must go. Everything, anything is now possible - except the prosperous future that the people of Europe, and the world, were promised when in 1992 the European Communities became the European Union. What was said back then about a future in world-leading prosperity and peace, has turned out to be one of the most conspicuous inaccuracies - lies - perpetrated on the world in modern times.


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For more articles on the European economy, see:

https://polecon.thewyomingprosperityproject.com/2019/04/europe-case-study-of-industrial-poverty.html 
https://polecon.thewyomingprosperityproject.com/2018/08/how-does-europe-pay-for-its-welfare.html
https://polecon.thewyomingprosperityproject.com/2018/08/sweden-escalating-crisis.html
https://polecon.thewyomingprosperityproject.com/2019/03/socialism-in-sweden-part-1.html
https://polecon.thewyomingprosperityproject.com/2019/03/do-not-invest-in-greek-debt.html

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