28 12 2016

The EU is in trouble - and it is of its own making

The EU is obviously in trouble as confidence in the Union is dropping in many member countries. Of course there are many explanations, some of these related to the life of the politicians in Brussels, disconnected from the people of their home countries. But unfortunately, the problems go much deeper. EU has simply not been up to the job it was supposed to do and has concentrated on the wrong issues. The drive to enlarge the EU with Turkey and Ukraine may be the last straw to break the camel’s back.

Of course the EU is not making it easier for itself by issues as revolving doors between top EU jobs and highly paid private sector jobs, as when ex-Commission president Barroso in mid 2016 joined the infamous US investment bank Goldman Sachs, deeply involved in the US sub-prime crisis. Or the fact that the present Commission president Jean Claude Juncker has made tax deals with Amazon and McDonald's, when he was PM in Luxembourg. But the EU actually shares this type of problems with its member countries, where the golden revolving door is widespread. Even in supposedly super clean Denmark, where Bjarne Corydon, who was finance minister under Helle Thorning-Schmidt's government, in end 2015 joined McKinsey, an international consultant company, which he had awarded several contracts, when he was a minister. Of course, criticising these deals would be populism, but that is another story, which I shall come back to in another article.

Of the problems that the UE has on its hands, and which it apparently does not consider it can do anything about, or, worse, does not consider as problems at all, it is worth mentioning the following:

1.  The failure to develop the poorer countries that the EU has been absorbing in the South and East of Europe, leading to a massive flow of migrants to the more developed EU countries.

2.  The apparently unstoppable enlargement process, independently of the lack of popular backing for it within the Union.

3. The failure to achieve a minimal common approach to taxes within the EU, implying a competition for lower taxes, particularly for hypermobile, big companies and the ultra rich.

Let us first look at the EU legacy regarding economic development in the more backward regions, it has absorbed: Southern and Eastern Europe. They all follow the same pattern: first an apparent jump in economic growth, then followed by sluggish growth or stagnation. This is most apparent for countries that adopted the Euro, but it extends beyond the Euro zone, particularly to the countries trying to peg their currency to the Euro. Instead of the expected economic growth and fast convergence with the “old” EU countires, particularly the Eastern European countries have had a strong emigration towards the “old” EU countries, and have become dependent on remittances from the workers abroad.

In some cases the emigration has reached amazing proportions. As it is stated in a recent IMF report: “The scale of emigration from Central, Eastern, and Southeastern Europe since the early 1990s has been staggering. During the past 25 years, nearly 20 million people (5½% of the population) are estimated to have left the region. By end 2012, Southeastern Europe had experienced the largest outflows, amounting to about 16 percent of the early-1990s population.”

The numbers are indeed staggering: Bulgaria’s population is down from 9 million in 1989 to an estimated 7.1 million in 2016, meaning it has lost one in five of its citizens. The trend in the Baltic countries is very similar, losing 20-25% of the population since the disappearance of the Soviet Union. In the reset of the Balkans, the population loss is around 10% and in Central Europe the fall in population is more moderate (1-10%). Portugal and Greece are now shrinking too, due to emigration, but not in alarming numbers yet.

One thing is the depopulation – if the rate is moderate, it should not be cause for alarm. But, as it is pointed out in the IMF report, the rate is not moderate and the emigrants tend to be younger and better educated than those who are left behind. This does not bother well for the future development.

Why is this? It should actually not be any surprise. The combination of few economic opportunities at home and free movement of labour is bound to create a migration wave.

Anything else would have been a surprise.

But was EU accession not supposed to create rapid economic growth and hence a lot of opportunities in the new member countries? The whole EU philosophy is still based on the old “Washington Consensus” that appeared after the fall of the Soviet Union: free markets, open borders, privatisations, security for foreign investments and balanced public finances are what is needed. Economic growth then comes by itself. Despite that this is not how the “old” EU countries developed historically. And despite that it has not worked anywhere else, either. Take the case of Puerto Rico, a small Caribbean country that has been absorbed into the US. It is a case that looks depressingly like Greece, perhaps a bit worse. So: surprise, surprise. The model did not work. This has not changed anything for the EU: the policy continues as if everything was running smoothly. This inertia is one of the most astonishing characteristics of the EU political machine and bureaucracy. It is immune to facts running against the prevailing thinking.

Then to the second issue: the unstoppable EU enlargement process. This is an EU machine that seems to have taken on its own life. Each year the Commission adopts its "Enlargement package" - a set of documents explaining its policy on EU enlargement and setting out the way forward: “The EU’s enlargement policy is an investment in peace, security and stability in Europe. It provides increased economic and trade opportunities to the mutual benefit of the EU and the aspiring Member States. The prospect of EU membership has a powerful transformative effect on the countries concerned, embedding positive democratic, political, economic and societal change.” This is the EU creed.

There are five recognised candidates for future membership of the European Union: Turkey, Macedonia, Montenegro, Albania and Serbia, plus Bosnia-Herzegovina and Kosovo as potential candidates. Furthermore, in 2014 the EU signed Association Agreements with Georgia, Moldova, and Ukraine, and the European Parliament passed a resolution recognising the "European perspective" of all three post-Soviet countries. There is a whole complicated set-up established with milestones and check lists, leading up to the ultimate goal: EU membership.

This rosy scenario is absolutely immune to the fact that the EU is completely overstretched and can not even make work, what it has already taken on. One of the most pathetic cases is Bosnia, a territory under EU administration after NATO’s successful humanitarian bombing of Yugoslavia and the country’ posterior capitulation in 1999. This, I suppose, should show the potential of the EU: the world’s highest youth unemployment, mass emigration, no economic development and devastating riots in 2014. After failing in Bosnia, EU will now take on the task of solving the problems in Ukraine, Turkey, Georgia, Armenia, Belarus…. You name it.

It is also immune to the fact that the people of the EU member states are not at all enthusiastic about it. Shortly after Brexit, the news was that now EU would reopen the negotiations with Turkey. One of my British colleagues (vehemently against Brexit) exclaimed exasperatedly: “They just don’t get it, do they?” No, unfortunately for the EU, they don’t seem to get it. They are immune to reality.

And then to the third issue: the lack of a minimal common European approach to tax policy. This evidences one of the most important features of the way the globalisation is carried out: it is basically about deregulation. Get rid of barriers between the countries and let free competition rule. It follows that any attempt at taxing or controlling a global company is in vain: they can move around as they want and negotiate with individual countries for better conditions. We can’t stop that. So when Ireland, Latvia and Lichtenstein tax companies at 12.5-15% to attract foreign investors, that is a fact of life. It does not matter that it is within the EU and hence EU jurisdiction. We can’t do anything about it. When, among others, France ad Germany wanted to introduce a tax on financial transactions after the 2009 financial crisis, it couldn’t be done because the UK was against it (with astonishing support from the then Socialdemocratic Danish Government). And then we wonder why people have lost faith in the EU solving real problems for common people? They are too occupied privatising public companies in Greece and Portugal – to the EU politicians and bureaucracy, those are the real issues that they should deal with.

Poor EU.

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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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