The economic giant is shrinking

By Roberto Foa

March 2012

Over the past several months, something unprecedented has happened: a consortium of airlines backed by their country governments have defied EU regulators, and refused to comply with the Emissions Trading Scheme. Even ten years ago, this would have been unthinkable. How could this have come about.

Among European diplomats, an oft-used refrain is that Europe is a political dwarf, but an economic giant. Thus whatever the latest bickering among European statesmen or lacuna in European foreign policy, European ambassadors can at least rejoinder that their continent represents a quarter of the global economy, and that their legal institutions, in Brussels, regulate global conduct in matters from online privacy, to consumer protection, to environmental law.

This is a real power that Europeans have – one of the few, indeed, where the EU wields a truly global influence. It is more obvious when seen from a boardroom in Sao Paolo or San Francisco: when a merger is blocked, or a fine imposed, because of the whim of some institution thousands of miles away, this is a sign of real authority.

Yet behind it has always lain the vast promise of the single market. As long as Europe accounts for the lion’s share of the global economy, countries and companies will bend over backwards to have a place within it. Once this share falls, they have a reduced incentive to comply.

Thus behind the insurrection against European carbon levies, lies a more profound story about Europe’s waning economic significance (see chart, below). Until now, Europe’s economic position has been remarkably stable. Over the past five centuries, present EU member states had a share of global output which hovered between 20 and 30 per cent of the total. Alas, the past is no guide to the future, and barring a major catastrophe elsewhere in the world, over the next fifty years Europe’s share will fall back to a level not seen since the Dark Ages. It is difficult to imagine European regulators maintaining global sway once Europe’s economic share reaches the level of 1990s Japan.

Interestingly, a parallel debate has also taking place in recent weeks across the Atlantic, primarily in response to an essay by Robert Kagan, entitled The Myth of America’s Decline. Just as Europe’s legal hegemony has an economic foundation, so too does America’s military might. The country could hardly account for 43 per cent of all defence spending otherwise. Yet Kagan cites US economic resilience as factor for US hegemony to continue a little longer, as while in 1969 the US had “roughly a quarter” of the world’s income, “today”, he writes, “it still produces roughly a quarter”. The implication is that, as in 1969, America may go on to win a new space race, or even a second cold war.

Sadly for the neoconservative fringe, a fuller look at the data shows America’s future to be little better than Europe’s; the last decades of the twentieth century were a temporary plateau on the inexorable path of decline and fall (second chart, below).

Just as sections of the American policy elite, led by Dr. Kagan, are in denial over American decline, European policymakers have not yet taken in their eroding negotiating position. Even ten years ago, it would have been unthinkable for a consortium of global companies operating in European markets to disregard EU regulations. Now, they do so openly. What will happen in future if Europe is unable to set the agenda in other areas such as tax havens, environmental standards, or the use of its citizen’s data?

First, Europe has only a narrow window to exert its influence in areas, such as climate change or financial services reform. Once that window expires, at around 2025 or 2030, the EU will not be able to push its agenda or even exercise complete sovereignty; whatever right the Union may have on its side, it will simply not have might. Second, to a far greater extent than today, Europe will have to learn to negotiate in order to ensure compliance. And third, faced with the growing impotence of European regulation, domestic policymakers will have to give the Union new instruments to enforce its rules. If Europe ‘grows up’ as a political actor, the ‘shrinking giant’ might maintain some regulatory sovereignty. Otherwise, European ambassadors will need to find a new refrain.

Link: http://esharp.eu/oped/roberto-foa/25-the-economic-giant-is-shrinking/