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Four scenarios for Europe: A struggling Europe in a changing world

Economic Comment

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To overview page future scenarios for Europe

  • Around the world, support for free trade and economic integration is fading
  • The imminent ‘Brexit’ is the first serious manifestation of European disintegration
  • European cooperation is primarily politically motivated, however economic integration is far advanced
  • There is thus not enough attention to the economic effects of the dismantling of European cooperation, whether this is partial or complete

Support for globalisation, international free trade and economic integration is declining around the world. We are seeing a nationalist reaction in many countries. The British vote to leave the European Union, or ‘Brexit’, and Donald Trump’s victory in the US presidential election are two examples of the power of this reaction. In some Member States of the European Union, political parties with a nationalist agenda have a strong standing in the polls, at a time when elections will be held in many countries in the coming 18 months (De Groot, 2016). All this is putting the European project under pressure.

In the discussions on free trade and globalisation, economic considerations are frequently given a subordinate role. In the British referendum, the desire to take control of policy on immigration was a far more important factor. In the US presidential election campaign, the rejection of free trade, along with immigration, was an important theme. In the Netherlands, the PVV party states in its election manifesto that the country could leave the EU without significant cost.

A proper debate of the advantages and disadvantages of European Union membership must also include consideration of the economic costs and benefits so that the electorate can make its choice on the basis of objective information. This is not a simple matter in practice. The electorate was repeatedly misled by both parties in the fiery debates on Brexit and the US elections. The Brexit supporters for instance said that the UK already had a strong economy before it joined the EU. This is not true: in 1976 the UK had to appeal to the IMF for support because the country was in a deep financial and economic crisis after years of financial problems (Roberts, 2016). Opponents of Brexit, the ‘Bremainers’, on the other hand said that a vote for Brexit would ‘turn the lights out’. This, evidently, was also not true, since not that much has changed in the short term and the economic consequences will only become visible gradually over the course of several years. Many Americans were tempted to vote for Donald Trump because he planned to revoke free trade agreements in order to protect American jobs. This will not turn out to be so simple in practice. It may well be that President Trump will succeed in boosting the US economy and employment through additional spending on infrastructure, but the trade policy that he proposes will not contribute to this. This is because protectionism definitely does not bring back jobs that have disappeared as a result of globalisation (Van den Berg, 2016). If employment in industry returns, this will concern different types of job, with assembly line workers being replaced by robots. Moreover, there is a strong possibility that the jobs in threatened industries that President Trump is trying to protect with trade barriers will become so expensive that many other jobs elsewhere in the US economy will be lost.

European integration involves more than simply financial and economic integration. The original purpose of the European cooperation was above all political: the prevention of war between the European great powers. And indeed, the European continent has enjoyed a long period of peace that is unprecedented. Cooperation in the context of European integration has made a positive contribution to this, but so has the cooperation between the European countries and the United States resulting from NATO.

The fact that economic considerations are not at the forefront does not mean that they can be ignored without painful consequences. Unfortunately, this has often happened in the past. Countries wanted to be part of (and have been admitted to) the eurozone for political reasons (“we want to join because we are not a second-class Member State”), without accepting the unavoidable consequences for policy. This has meant that the euro has not brought these countries what they had hoped (Shambaugh, 2012). However, even in discussions on the future of the European cooperation, the financial and economic consequences are regularly glossed over. This is both misleading and dangerous. Whether one speaks of Brexit, curbing international free trade, or the Netherlands leaving the euro or even the EU, there is always a price to pay. And in some cases that price could be very high.

This is because despite the primary political motivation behind it, European cooperation has largely taken shape along economic lines, which ultimately led to the formation of the Single Market and the Economic and Monetary Union (EMU or the eurozone). As a result, there has been a huge increase in the financial and economic interrelationship between the Member States in the past decades. It is not likely that this interrelationship can be broken simply and quickly without incurring costs in terms of prosperity and employment. How high the costs of European disintegration and/or the benefits of continued European cooperation will be depends ultimately on several factors. The quality of the cooperation between the Member States will be of decisive importance. A chaotic disintegration of European cooperation would be far more expensive than a relatively harmonious reorientation. We give two brief examples to illustrate this point. If the political integration of the EU is deepened further but cooperation between the Member States at the same time deteriorates, Europe on balance will not move forward and there will be a danger of an uncontrolled break-up of the EU which will involve huge costs. If cooperation between the Member States remains intact but people decide they want a controlled process towards ‘less Europe’, the core of European integration can remain intact, also if the European Commission becomes less political and its role is reduced to that of an executive body facilitating the agreements made by the Member States. This is a political choice, and not primarily the consequence of an economic necessity.

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Author(s)
Wim Boonstra
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 62666
Martijn Badir
RaboResearch Netherlands Rabobank KEO
+31 30 21 62666
Elwin de Groot
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 69012
Carlijn Prins
RaboResearch Netherlands Rabobank KEO
+31 30 21 60033
Daniel van Schoot
RaboResearch Netherlands Rabobank KEO
+31 30 21 62666
Maartje Wijffelaars
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 68740
Nic Vrieselaar
RaboResearch Netherlands Rabobank KEO
+31 6 2216 2257

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