You might find this difficult to believe but Westminster is not the centre of the world — and Brexit is not the only topic of conversation. True, observers from afar are wondering why so many Brexiteers are upset now that Parliament may be in the process of taking back control. And we in Britain are wondering whether our earlier stockpiling of baked beans and loo roll was somewhat premature. There is, however, a world beyond our borders. And the nearest part of that world — namely Europe — is in a spot of bother.
Put bluntly, our continental cousins have hit the economic equivalent of a brick wall. Germany, oft regarded as Europe’s economic powerhouse, is heading in the wrong direction. Manufacturing activity, which expanded so quickly in 2017 and the early months of last year, has more recently been shrinking. Having declined for two successive quarters, Italy’s economy is in outright recession.
France has rebounded a bit from earlier losses associated with the gilets jaunes protests but is nevertheless growing more slowly than it was a year or so ago. Of the European “big four” only Spain can reasonably claim to be doing well. Unfortunately, of the four, its economy is the smallest.
It’s easy to blame eurozone weakness on developments elsewhere in the world. China’s economic slowdown hasn’t helped. Nor have the uncertainties stemming from the Sino-US trade war. These developments, however, cannot fully explain what is happening. Compared with forecasts made a year or so ago, European growth has been far more disappointing than growth in either the US or China. To understand Europe’s problems, you have to dig a little deeper.
First, there’s what might be best described as “temporary” factors. In addition to the impact on the French economy of the gilets jaunes , Germany’s diesel emissions scandal has hardly been good news for car manufacturers. Then there are international economic tensions. Only last week Donald Trump declared that “if [the Europeans] don’t talk to us, we’re going to do something that’s going to be pretty severe economically. We’re going to tariff a lot of their products.”
Finally there’s the pain within. As Japan discovered in the Nineties, sustaining economic growth is tricky when your population is ageing and your companies are increasingly choosing to invest in parts of the world where labour is cheaper.
One answer to this challenge is to make the population younger by opening up borders to a larger number of immigrants: on balance, they tend to be of working age and are thus more likely to be productive than the population at large. This, however, is not the direction of travel for European politics. With rising support for anti-immigration parties throughout much of the EU, the challenges associated with population ageing — limited resources increasingly channelled towards those likely to be the least productive economically — are not going away any time soon.
The European Commission believes a key reason behind the rise of populist politics is the impact of economic and industrial decline. Certainly the argument works well for the UK: voters in London, where economic advance has been rapid, voted overwhelmingly to stay in the EU in 2016 whereas those in the North-East of England or Wales, where economic advance has been sporadic, voted to leave. And it works rather well in France too: Marine Le Pen draws much of her support from areas that have struggled economically to keep up with Paris.
"Of our 10 biggest export markets, seven are in the EU: we are, in effect, part of a single economic organism"
Fixing all this, however, is no easy task, particularly within the eurozone. For nation states, the standard approach is to redistribute wealth via the tax system. Within the eurozone, however, there’s an additional problem. Whereas in the US some of the tax dollars collected from the rich denizens of Massachusetts ultimately find their way into the pockets of the marginalised citizens of Mississippi, the same cannot be said of the EU. Germans, for example, have no great desire to support poorer people in southern Europe and Brussels is, federally, not the equivalent of Washington.
The consequence is that the gap between the rich north and the poor south has increased over time — one reason why Italians have rejected their own political traditions and instead elected the populists of the League and the Five Star Movement.
To solve mounting inequality both within and across nations, Europe needs more integration. Yet voters are heading in the opposite direction.
For Brexiteers, Europe’s economic pain is a key reason why the UK should try its luck elsewhere. The opportunities, however, are sparse. To date, Liam Fox, the International Trade Secretary, has signed post-EU continuity agreements with only 11 nations or entities. Together, they account for a mere £25 billion of exports, amounting to less than five per cent of UK exports and around 10 per cent of those heading to the EU. Unfortunately, neither the Faroe Islands nor Madagascar have the economic heft of Germany or France.
Put another way, our economic future is tied to Europe’s whether we like it or not. Of our 10 biggest export markets, seven are in the EU: we are, in effect, part of a single economic organism. Running away might seem attractive but, in reality, it is unworkable. Ultimately, we’d be better served by working more closely with our European partners than pretending we can somehow leap into an entirely different economic universe. Sadly, the chaos prevailing in Westminster suggests that, even if we were to offer wise council, it would increasingly fall on deaf European ears.
- Stephen King is HSBC’s senior economic adviser and author of Grave New World: The End of Globalisation, the Return of History (Yale University Press)