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Can Europe Go Global?

Can Europe find an economic system that allows it to stay competitive without exacerbating divisions?

December 7, 2005

Can Europe find an economic system that allows it to stay competitive without exacerbating divisions?

While the EU’s founders believed that unity alone would be enough to solidify Europe's position in the global economy, intervening circumstances have proved this idea false. In this Globalist Document, British Chancellor of the Exchequer Gordon Brown looks at what Europe must do in the face of economic challenges at home and abroad.

For decades, the assumption has been that Europe’s nations would move from economic integration at a national level to economic integration at a European level.

Instead of national flows of capital, there would be European flows of capital. Instead of national companies, there would be European companies — and instead of national brands, there would be European brands.

Yet today, it is global — not European — flows of capital that we chart everyday. We talk of the global company, rather than just the European company. Ambitious businessmen and women aspire to having global, and not just European, brands.

New technologies, if they are successful, quickly become global. So it is the global and not just European sourcing of goods and services — as well as of capital and, importantly, labor — that is now driving economic change. From the era of a European trade bloc, we are moving to the era of a global Europe.

The issue now is not just how Europe integrates as it grows from 15 to 25, but how all 25 — soon to be 27 — reach out to the rest of the world.

And in a world where all continents quickly gain access to new technology — from the Internet and e-mail to nanotechnology and bio-medical advances — the issue now is how Europe best exploits technological advance, and how its global companies can achieve this.

In the old trade bloc Europe, the emphasis was, understandably, on internal integration: breaking down barriers to the movement of capital, labor, goods and services within Europe. The focus was, understandably, inward-looking — not outward-looking.

The assumption was that a common market would become a single market, and then that single market would engender a single currency and perhaps even a federal fiscal policy with tax harmonization — and then move to a supra-national state.

But the shifting balance of global economic activity — with the rise of China, India and other rapidly growing emerging economies founded on the global sourcing of goods and global flows of capital — now creates challenges that Europe’s founders could never have foreseen.

Although some EU member states are performing relatively well, Europe as a whole is losing ground to competitors in five key areas: growth, labor market performance, skills, innovation and enterprise.

But just as Europe successfully met the challenges of building a post-war prosperity from the ruins and devastation of war, we believe Europe can now develop the policies necessary for prosperity in the new global era.

Because it is global change — not least in Asia — that puts Europe under a new, intense and sustained competitive pressure, it is only through policies for mastering the economic challenge from Asia, the United States and beyond, that Europe can make the most of the opportunities that the new global economy brings.

Europe rejects the argument that technological change and globalization must in themselves bring social fragmentation. Globalization can be managed well or badly, fairly or unfairly. Europe believes that through policies that combine flexibility and fairness, Europe’s long-standing social values can be advanced alongside economic prosperity.

Clearly, the face of developing economies is changing. Competition is no longer simply in mass production manufacturing based on low skills, low technology and low wages — but increasingly right across the value chain.

With four million graduates a year from Chinese and Indian universities, Asia is now competing on high-tech, high-skilled, high value-added goods. In the past two decades, Chinese exports have diversified from low-cost goods such as textiles and toys to electronics goods. For example, more than 50% of EU imports of computer and office equipment now come from China.

So China and Asia are not in a race to the bottom, but in a race to the top — where we must continuously upgrade skills and technology and raise our game.

With these dramatic changes taking place in the global economy, no country or continent, however successful today, can take its long-term prosperity for granted.

History shows how once confident countries can experience rapid decline — and the risks are all the greater with today’s unprecedented pace of change. Is Europe too slow in adapting to change?

Take growth. It may not be surprising that Europe grew half as much as the United States and one-quarter the rate of China and India in the last year. But underperformance has been the reality for the last ten years.

While some EU member states have achieved high growth rates, since 1996 annual average growth in GDP per capita in the euro area has been about 0.5% less than in the United States. And, following a sustained lag in growth, there is now a gap of more than 30% in living standards between the EU-15 and the United States.

It is estimated that Europe’s poor labor market performance accounts for two-thirds of this gap in living standards. Today in the EU, 20 million are unemployed — with almost half of them long-term.

Beyond unemployed, there are 93 million inactive people of working age. The employment rate of older workers, aged 55-64, was 40.2% in 2003 — compared to 60% in the United States and 62% in Japan.

There are some who argue that the only way Europe can retain its unique balance of prosperity and fairness is to retreat from globalization into a new protectionism and act at the EU level to erect new barriers to global trade and investment.

Others look at the rapid pace of change — and argue that nothing can be done in the face of globalization and technological advance. They say that it is impossible in the modern world to sustain prosperity and fairness together and that individuals must be left alone to adapt to far-reaching change.

Europe rejects both views. Protectionism cannot work in a global economy where production processes are increasingly spread across continents, and businesses and consumers depend on international trade and investment links.

In a world of global capital flows, protectionism can only bring about higher unemployment and higher prices. At the same time, a laissez-faire approach leaves people defenseless against change when we should be enabling them to master that change.

Instead, we need a strategy that delivers a full-employment Global Europe. The answer is not to restrict or retreat from global competition, but to meet and master global change through policies that promote openness and opportunity for all.

This calls for greater flexibility in product markets, labor markets and capital markets to ensure that Europe’s businesses and individuals are equipped to take advantage of new opportunities. And it calls for ensuring fairness through policies that expand opportunity and choice, provide security for the vulnerable — and help people adapt to change.

Structural reform that promotes flexibility and fairness together is the key to success in the modern global economy. There can be no security without change.

Adapted from British Chancellor of the Exchequer Gordon Brown’s October 2005 report “Global Europe: Full-Employment Europe.” © Crown copyright 2005. For the full report, click here.