Bill Emmott - International Author & Adviser

Article

Europe´s difficult year ahead
Ushio - January 2008

Europeans like to compare themselves with Americans. That is perhaps inevitable given our shared history and cultural origins. For the past decade, however, this comparison has produced an odd mixture of feelings for Europe. In 2008, those feelings are likely to change, quite sharply.

Looking at economic performance, Europeans have felt inferior to the United States ever since the fabled "new economy" got under way during the Clinton administration, bringing fast productivity growth which Europe did not manage to match. Especially in the big continental European countries of France, Germany and Italy, unemployment has been much higher than in America, living standards have been lower, at least in financial terms, and our companies have been falling further behind in technological capabilities.

But if you look instead at foreign policy, at diplomatic success and at global reputation, Europeans have in recent years felt rather superior to America. In part, this just continues a long tradition under which French, British and German diplomats and intellectuals have claimed to much more sophisticated, experienced and skilful than their equivalents in America. Many European diplomats consider their American colleagues to be little more than cowboys. Under George Bush, they have been able to extend that view to the presidency too.

Europeans have stood and watched with horror as President Bush has squandered the sympathy for America that the world felt on September 11th 2001. With the exception of Britain’s Tony Blair, who allied himself closely to President Bush, they have tried to keep their distance without actually alienating the Americans. Meanwhile they have argued that their own, more subtle approach to diplomacy is more effective.

This period, of economic inferiority and foreign policy superiority is going to come to an end during 2008. For many European countries, it may even reverse itself completely: they will feel economically superior, but in foreign policy they could start to feel inferior again.

The economic inferiority will come to an end not so much because Europe’s economies will be strong but because America’s will be weak. The effect of the collapsing housing market and the losses for banks from subprime mortgages and other risky financial assets will be either an outright recession or a period of very slow growth. The main European economies will be hurt by America’s slowdown, since they export to the United States, but the effect on them is unlikely to be severe.

Foreign-policy superiority will come to an end not so much because American policy will improve—though it might—but because Europeans are going to be faced with some very tough foreign-policy situations in Kosovo, in Iran and in Russia, which they will find it hard to handle well. In all three cases, they risk finding themselves reliant on support or leadership from the United States.

Europe’s new leadership

Both of these dimensions of performance—economics and foreign policy—will be affected by the nature of leadership in the main European countries. Europeans themselves complained for years that their political leaders were inadequate and even incompetent: almost everywhere except in Britain, where Tony Blair followed Margaret Thatcher’s radical example, European leaders seemed conservative, timid, incapable of changing their countries, and sometimes even corrupt.

In 2005 and 2007, this changed in important ways. The election in late 2005 of Angela Merkel to be the first female chancellor of Germany brought to power someone determined to revive her country and make it respected again. In May 2007, the same thing happened in France, with the election as president of Nicholas Sarkozy, a man who promised to cause a "rupture" with France’s past.

Neither of these leaders is able just to cast a magic spell and transform their countries overnight. Mrs Merkel is having to govern in an awkward coalition with Germany’s other big party, a coalition of the sort that Ichiro Ozawa was tempted by between the LDP and the DJP in Japan. She is being forced to be very careful. Nevertheless, her election and her simple, straightforward style of government have boosted the confidence of German companies, and have coincided with a period of much stronger economic growth.

Nicholas Sarkozy has a much stronger political position in France, as his election victory was quite triumphant. He is trying to bring in radical changes, especially to the country’s labour laws, in the hope of stimulating more investment and reducing unemployment. He faces fierce opposition from the trade unions, which have already been holding long strikes on the French railways during November 2007. That opposition will continue during 2008. It will force him to compromise his plans a little. But he is still likely to prevail, for he holds a huge amount of popular support. In that sense, Mr Sarkozy is France’s equivalent of Junichiro Koizumi.

In Britain, the story is different. During 2007 Britain lost the strong leader who had been its prime minister for ten years since 1997, namely Tony Blair, who was replaced by his finance minister, Gordon Brown. In his first few months in office, Mr Brown has shown himself to be as accident-prone as was Shinzo Abe. In fact, just as Mr Abe’s main weakness in the Upper House election was the scandal over 50 million missing pension records, so Mr Brown’s reputation has been hit by a scandal over the loss of the private, personal data of 25 million people by the British tax authorities, which has led to fears that the data could fall into the hands of criminals.

So Britain is more like Japan than France, having changed from a strong, popular leader to one who is, at least for the moment, a lot less popular. Nevertheless, Mr Brown does not have to face a general election until at least 2009, and may perhaps be able to wait until 2010. So although he currently looks weak, in fact he has time to recover his popularity. And, like Mr Sarkozy and Mrs Merkel, Gordon Brown is a clever, resolute leader. So in Europe’s three most important countries, there are no leaders who do want to change their countries and to restore Europe’s standing in the world.

New economic times

During the past ten years, there have been two basic facts about the European economy. One, as previously stated, is that European growth has been inferior to America’s. The other fact is that within Europe, the countries around the coasts—Britain, Ireland, Spain, Scandinavia—have been growing faster than have the countries in the centre of the continent, namely France, Germany, Italy, Switzerland and Holland.

In 2008, it looks as if both of these facts will no longer be true. Overall European growth will be faster than American growth, with the GDPs of the 27 members of the European Union expanding by probably somewhere between 2% and 3%, while America languishes somewhere between zero and 1.5%. But also the central countries will, in general, grow more rapidly next year than will the coastal ones.

It has nothing to do with the sea. But Britain, Ireland and Spain have all experienced a house-price boom during the past 10 years, which has encouraged consumer spending to grow too. In all three countries, house prices have now steadied or begun to fall. Banks are reducing their lending, having been scared by America’s subprime mortgage crisis. Consumption is likely to drop or grow more slowly in all three countries, forcing the economy to slow.

In France and Germany, however, consumers are spending more, helping growth to accelerate. While Britain’s growth rate could drop to 2% or below, Germany’s could be as high as 2.6% or even 3%, with France somewhere between 2% and 2.5%. Such growth rates are not spectacular. But they are good compared with the past few years. Italy, however, does not look so promising, as it is suffering political paralysis and has had little reform in recent years. Italy’s growth could be as low as 1.5% next year.

Foreign policy dilemmas

While Europe’s smile may be warmer next year for economic reasons, foreign policy promises to bring more frowns than grins. Thanks to the European Union’s agreement in 2007 on a new constitutional treaty, which will be ratified by each country’s parliament during 2008, the EU will soon have an official called a "foreign minister", acting on behalf of all 27 countries. But it is not going to be an enviable job.

Kosovo, a small part of the former country of Yugoslavia, will pose the most direct challenge. It wants to become independent from Serbia, the country of which it forms a province. It has been threatening to declare itself independent if Serbia does not agree; the EU has supported independence, as has the United States, but Russia has opposed it. Finally, during the spring of 2008, this long-developing drama is likely to turn into a crisis. The negotiations between Kosovo, Serbia and the United Nations will fail, and Kosovo will declare independence unilaterally. The European Union will then have to decide whether to recognise Kosovo as an independent country, and whether to intervene if fighting breaks out between Kosovo and Serbia.

The second dilemma concerns Iran. Iran is mainly America’s problem, admittedly, but the Europeans have for the past few years been leading diplomatic negotiations over Iran’s nuclear programme, trying to prevent any military clash between America and Iran. It is quite likely that during 2008, the diplomatic efforts will finally be seen to have failed. President Bush might decide to send in his bombers. Europe will then have to decide how to respond.

Finally, the constant dilemma for Europe is how to deal with Russia. In March 2008 Russia will choose a new president, but Vladimir Putin, the current leader, will stay as the real man in charge. Russia is becoming more like a dictatorship, and acts in an increasingly provocative way, bullying its neighbours such as Latvia and Georgia, and sending its bombers flying even into British air space to test our defences. How can Europe react? That is a tough question, even for leaders as tough as Nicholas Sarkozy, Angela Merkel and Gordon Brown.


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