Why Europe has bigger problems than the Euro

January 20, 2015, 3:45 PM UTC
ATHENS, GREECE , JANUARY 12: Euro coins with a Greek symbols  on Monday 12. 2015 in Athens.Photo by MIlos Bicanski/Getty Images
Global markets have been shaken by fears that Greece could abandon the Euro if the radical left-wing Syriza party wins the election.
Photograph by Milos Bicanski

Is Europe headed for disaster? The answer is both yes and no. For the past six years, the debt-troubled continent has been in the headlines. Its economy is stagnant; deflation has set in; and the illusory dream of a durable monetary union seems to be slipping away as many in some countries remain jobless.

As the European Central Bank decide whether to launch a controversial stimulus program this week, I do not believe that Europe will collapse anytime soon. It has the resources to overcome its present crisis. The continent has relatively strong institutions, an educated population, modern infrastructure, and scores of competitive companies. While policies to reduce government spending and deficits may cause extreme and often unnecessary pain in the short run, European economies will eventually grow again after the deleveraging takes place.

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However, by the time the economy is ready to recover, other problems will strike Europe. Prominent among them is the graying of the population. In about 15 or 20 years, Europe will have more grandparents than grandchildren. This situation will be hard to deal with because retirees not only collect pensions and require healthcare, but they also consume less, especially durable goods. Thus, if this happens, the economy could be burdened by slower consumption and higher taxes to pay for social benefits.

After years of government cutbacks and corporate restructuring, Europe’s strengths in the area of science and technology will be severely diminished, as more than half of R&D investments comes from the government in most European countries. This second problem will make it harder for Europe to keep pace with not just the United States but also the emerging Asian giants, which are investing increasing amounts on research and development.

The third problem will be of a political nature. Europe is increasingly divided along East-West and North-South lines. Distrust and resentment is building up, as problems go unresolved and social tensions mount. As a result, both left-wing and right-wing extremist parties are gathering increasing proportions of the popular vote. These political forces are not only populist in orientation but also anti-Europeanist.

One of the key drivers of political discontent across Europe has to do with trends perceived as external threats, including immigration and energy dependency. Western Europe successfully incorporated millions of guest and other foreign workers during the 1960s and early 1970s at a time when the economy was growing exceptionally fast. Nowadays, many people have a largely misplaced sense of competition with immigrants over jobs. Economic insecurity is also compounded by physical vulnerability, especially in the wake of terrorist attacks, such as those in Paris. The combination of economic and physical insecurity is an explosive mix, one that may well tilt upcoming elections in a dangerous direction.

The problem of energy dependency has been largely created by the policies pursued by several countries, which have tended to make them dependent on one or a few sources of supply while neglecting alternative options that might give them more freedom of action. Germany’s decisions to rely on Russia for gas and to phase out all of its nuclear power stations are two cases in point.

Taken together, these problems will be hard to manage simultaneously. Western Europe enjoyed three centuries of global hegemony, which came to an end with World War II. Under the umbrella of American benevolence, the continent grew rapidly in the postwar period. Today, it is a small peninsula increasingly at the mercy of demographic, political, and economic forces beyond its control, including those coming from North Africa, the Middle East, and Russia.

While Europe can no longer aspire to be a global power, it can certainly focus its attention on being a positive force in the world and on delivering a high standard of living for its population. Overcoming the present crisis in no way guarantees a bright future for Europeans. The foundations for prosperity over the long run must be laid today by investing in its people, updating its regulatory and governance structures, and, yes, coming to terms with the need to rejuvenate its population by attracting and nurturing immigrants. Without those, Europe will enter one final phase of decline.

Mauro F. Guillén is director of the Lauder Institute at The Wharton School of the University of Pennsylvania.

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