Monday 24 June 2019

Brendan Keenan: EU ship is not sinking but it needs repairs to weld stronger bonds in choppy waters

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ONE of the many undercurrents which led to the Brexit vote, and the significant support it still commands, is the idea that the European Union is an economic failure. It may not be the main current, but it is more amenable to analysis than most of the others.

The long shadow of Donald Trump in particular, and the American right in general, comes into play here. Last week's sensation was that the US economy was growing at 4pc, the fastest clip since the peak of the post-crash recovery in 2014.

The second-quarter figures were driven by higher personal consumption and business investment; both of them responding to the Trump tax cuts. The conventional view among economists is that such a spurt will peter out. Consumers will have spent their extra income, although business investment may continue to grow in anticipation of fresh business friendly policies.

But in the USA at least, it is just as conventional to say that this is a shift to higher long-term growth. Keep lowering taxes and cutting regulation, a Trumpian analyst explained, and the economy will keep powering ahead.

There is no doubt that the US economy has grown faster than that of the EU for many years. Ergo, America is doing something right and Europe something wrong, but one has to be careful about such simple comparisons.

Different economies have different potential growth rates. Sometimes the reasons are intrinsic, such as an expanding or declining labour force, and are no cause for concern. In other cases, policies are to blame and something should be done.

It would not have been possible for the EU as a whole to grow as fast as Ireland did over the past 40 years, or for it grow as fast as Ireland is doing now (or for Ireland to grow fast as this for much longer).

The British should know this better than most. A good deal of national trauma, leading to its membership of what became the EU, was based on the UK's poor growth rate in the 1950s and 1960s as compared with the likes of Germany and France.

Nowadays, there would be general agreement that Britain could not have achieved those growth rates precisely because it did not suffer the same physical, monetary and financial collapse as the countries of the continent during the war.

Yet the sense that Britain was a passenger on the EU train rather than a leading member of the crew explains a lot about its lack of engagement with the project. It joined a European system which seemed to be faring better than itself and is leaving on the basis that it can do better than the EU.

The argument is unconvincing, not least because, the freer the free trade agreements the UK signs with other countries, the more access it will lose to the European market which accounts for half its present exports. That still leaves the question as to whether the EU is a drag on its members' performance.

We have just had the annual IMF survey of the eurozone - which in this context is a good substitute for the wider EU (although Denmark and Sweden improve the statistics) and it does show a low-growth zone. Although the euro area is enjoying post-crash recovery, however delayed, the IMF thinks it will return to its inherent growth rate of 1.5pc a year by 2021.

Much of this is due to depressed demographics, with German and Italian populations ageing particularly fast. The refugee crisis may have terminally damaged the immigration of young, educated foreigners needed to prevent those economies shrinking rapidly over the coming decades.

To cope with this, Germany has built up savings in the form of surpluses, and may achieve the productivity require for smaller numbers of workers to support larger numbers of dependents. Italy has a mountain of debt and stagnant productivity.

That is the problem in making comparisons with the eurozone, or even the EU. The economic disparities between the members of these entities is greater than in any federal nation state. The European institutions are semi-political entities. Not only that, recent events have proved that, once in, it is more or less impossible to leave them.

Many years ago I wrote that at least the EU had no Ulysses S Grant to enforce membership. Turns out, there is no need. No one else is likely to attempt to leave voluntarily, but that does not mean the eurozone can hold together.

The data certainly gives cause for concern. The measure of productivity of all the factors of production (TPF) has fallen 5pc in Italy since 2000. It is 2pc higher in crash-hit Spain and Portugal, 4pc greater in France, but up 10pc in Germany.

As the IMF says, in its usual careful way, such gaps remain a fundamental threat to euro area cohesion. The consequences include stalled incomes, high unemployment and financial deficits in the less productive states. What it does not say - but many others do - is that without more cohesion the system may eventually break apart.

France is the great conundrum. If any country represents the failure of the EU to Brits and Yanks, it is the land of air-traffic control strikes and short working weeks. The figures tell a more complex story. French demographics are far better (as are British) than Italian or German. French TPF is high (higher than Britain's) but it has been growing more slowly than Germany's . The same picture emerges in a statistic most of us are more familiar with - labour costs.

French costs remained relatively stable during the credit bubble, while they soared in Ireland, Italy and Spain. They have since been forced down to pre-bubble levels in those countries by wage restraint and unemployment.

The problem is that unit labour costs in Germany fell during the bubble while they were stable or rising elsewhere, and are more than 10pc lower than their level in 1999. The gap is smaller than it was in 2009, but greater than 10 years before that.

The real European failure, from which Ireland cannot be entirely excluded, is the inability of the less productive economies to form a political consensus on the changes needed to improve performance. In view of its population projections, relatively modest changes in France could give it a higher potential growth rate than Germany, providing that population with a wider level of skills and better opportunities in more open markets. The Mediterranean countries need more radical change and without them, may slip into a destructive downward spiral.

They have the obvious examples of the northern states to show that efficiency and social cohesion can go together. Yet if anything, their politics are moving further away from difficult but promising choices, in favour of attractive fantasies. It is not just the Brexiteers who are barking up wrong trees. The IMF says such gaps are a threat to euro area cohesion.

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