I am on a two-week European tour at a time that could make
one either very pessimistic or constructively optimistic about Europe’s
prospects.
First the bad news: Paris is sombre, if not depressed, after
the appalling terrorist attacks earlier last month. France’s economic growth
remains anaemic, the unemployed and many Muslims are disaffected, and Marine Le
Pen’s far-right National Front is likely to do well in the upcoming regional
elections. In Brussels, which was semi-deserted and in lockdown, owing to the
risk of terrorist attacks, the European Union (EU) institutions have yet to
devise a unified strategy to manage the influx of migrants and refugees, much
less address the instability and violence in the EU’s immediate neighbourhood.
Outside the euro zone, in London, there is concern about
negative financial and economic spillover effects from the monetary union. And
the migration crisis and recent terrorist attacks mean that a referendum on
continued EU membership—likely to be held next year—could lead the United
Kingdom to withdraw. This would probably be followed by the break-up of the UK
itself, as ‘Brexit’ would lead the Scots to declare independence.
In Berlin, meanwhile, German Chancellor Angela Merkel’s
leadership is coming under growing pressure. Her decision to keep Greece in the
euro zone, her courageous but unpopular choice to allow in a million refugees,
the Volkswagen scandal, and flagging economic growth (owing to the slowdown of
China and emerging markets) have exposed her to criticism even from her own
party.
In this environment, the full economic, banking, fiscal and
political union that a stable monetary union eventually requires is not viable:
The euro zone core opposes more risk sharing, solidarity and faster
integration. And populist parties of the right and left—anti-EU, anti-euro,
anti-migrant, anti-trade and anti-market—are becoming stronger throughout
Europe.
But of all the problems Europe faces, it is the migration
crisis that could become existential. In West Asia, North Africa and the region
stretching from the Sahel to the Horn of Africa, there are about 20 million
displaced people; civil wars, widespread violence and failed states are
becoming the norm. If Europe has trouble absorbing a million refugees, how will
it eventually handle 20 million? Unless Europe can defend its external borders,
the Schengen agreement will collapse and internal borders will return, ending
freedom of movement—a key principle of European integration—within most of the
EU. But the solution proposed by some—close the gates to refugees—would merely
worsen the problem, by destabilizing countries like Turkey, Lebanon and Jordan,
which have already absorbed millions. And paying off Turkey and others to keep
the refugees would be both costly and unsustainable.
And the problems of the greater West Asia (including
Afghanistan and Pakistan) and Africa cannot be resolved by military and
diplomatic means alone. The economic factors driving these (and other)
conflicts will worsen: global climate change is accelerating desertification
and depleting water resources, with disastrous effects on agriculture and other
economic activity that then trigger violence across ethnic, religious, social
and other cleavages.
If economic solutions aren’t found, eventually these
regions’ conflicts will destabilize Europe, as millions more desperate and
hopeless people eventually become radicalized and blame the West for their
misery.
But Europe is not doomed to collapse. The crises that it now
confronts could lead to greater solidarity, more risk sharing and further
institutional integration. Germany could absorb more refugees (though not at
the rate of a million per year). France and Germany could provide and pay for
military intervention against the Islamic State. All of Europe and the rest of
the world—the US, the rich Gulf states—could provide massive amounts of money
for refugee support and eventually funds to rebuild failed states and provide
economic opportunity to hundreds of millions of Muslims and Africans.
This would be expensive fiscally for Europe and the world.
But the alternative is global chaos, if not, as Pope Francis has warned, the
beginning of World War III.
And there is light at the end of the tunnel for the euro
zone. A cyclical recovery is underway, supported by monetary easing for years
to come and increasingly flexible fiscal rules. More risk sharing will start in
the banking sector (with EU-wide deposit insurance up next), and eventually
more ambitious proposals for a fiscal union will be adopted. Structural
reforms—however slowly—will continue and gradually increase potential and
actual growth.
The pattern in Europe has been that crises lead—however
slowly—to more integration and risk sharing. Today, with risks to the survival
of both the euro zone (starting with Greece) and the EU itself (starting with
‘Brexit’), it will take enlightened European leaders to sustain the trend
towards deeper unification. In a world of existing and rising great powers (the
US, China and India) and weaker revisionist powers (such as Russia and Iran), a
divided Europe is a geopolitical dwarf.
Fortunately, enlightened leaders in Berlin—and there are
more than a few of them, despite perceptions to the contrary—know that
Germany’s future depends on a strong and more integrated Europe. They, together
with wiser European leaders elsewhere, understand that this will require the
appropriate forms of solidarity, including a unified foreign policy that can
address the problems in Europe’s neighbourhood.
But solidarity begins at home. And that means
beating back the populists and nationalist barbarians within by supporting
aggregate demand and pro-growth reforms that ensure a more resilient recovery of
jobs and incomes.
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