The EU must stop punching below its weight

    Tuesday, 30 June 2020
    This is an opinion article by an external contributor. The views belong to the writer.

    The turmoil that Covid-19 has brought us into has also shed some light on the many flaws of our current political and economical system.

    Amongst all of them, one of the most crucial ones is perhaps the fact there is no leader to help the world navigate the storm. And as The Economist’s cartoonist “KAL” recently drew, Covid-19 is just the training bout. The real heavyweight fight is against global warming. In one of the most critical moments in history, the world finds itself leaderless.

    The incumbent is in chaos. It is a nation currently fighting its own demons. Demons bred by an unrestrained free market capitalist model that created an economical and educational cleavage that will take a generation or two to close.

    Even if the next president is a Democrat, the US can’t be counted on to lead the world for at least the next decade. It will take no less than that to repair. As the largest economy and military power it will certainly continue to have an important place, but it can’t play main character anymore. It is not suited for it. Needless to say, for the good of all forms of life on the planet, a democratic president will make things much easier than a second period of Trump.

    China, the main challenger, is more than happy to fill whatever part it can of the void the incumbent leaves. Although there are many lessons to learn from it, especially in economic policy, it is still a middle income country and its disregard for some of the most basic human rights like “the freedom of thoughts and of opinion” disqualifies it for the job.

    But there is another superpower of which no one talks about, mainly because it has been in the making. It is Europe. The European Union (post Brexit) is the second largest economy in the world (18% of the world’s GDP), standing in between the US (23%) and China (15%). There is no question it could now be playing a much larger role in the international stage

    The European Moment

    Eighty years ago it was the Americans that saved the world from Nazism. Today, it is the Europeans turn to save the world from the monsters created by US led small state capitalism. The EU must leave its comfort zone and rise up to the challenge. Geopolitical influence is more about building consensus (no one has more experience than EU members), and about finance and trade than about fighter jets.

    It has unfortunately been held back for three reasons. Firstly, the complexity of the integration process, worsened by its own utopian rules such as decisions that require unanimity (amongst 27). Secondly, the entanglement of its economic architecture with a monetary but not fiscal union. Finally, playing a secondary character has also been a conscious decision, out of complacency of being under US protection and because its economic motor, largest economy and most populated country (Germany), has avoided a larger part due to its troublesome past.

    Europe also suffers from an economic divide like the one in the US that breeds extreme nationalism. However, its much more generous safety net reduces the sense of grief and thus, the political support of the parties that defend such isolationist ideas. The main fracture that impedes integration today is economical, but instead of educational it is geographical. The south is less thriving, has higher levels of corruption and is overall worse administered. The north is more productive, offers better public services and has therefore higher standards of living. This North-South divide, heightened by the way the 2008–9 Financial Crisis was managed is today the main obstacle for a more profound integration.

    The world can not afford anymore that the only adult in the room remains in a secondary role. The stakes are too high. To grasp the magnitude of the climate change challenge, we need at least a COVID-19 effect over CO2 emissions every year from now to 2030 to avert temperature increases above 1,5C.

    Simultaneously, the pandemic has unleashed the prevailing economic forces making us lose ground in the fight against poverty and inequality. If these two issues are not rapidly solved, we will soon find ourselves in a planet with more extreme weather conditions together with more nationalist and/or authoritarian regimes that are less willing to cooperate in the much needed multilateral initiatives.

    World Order 2.0 and the EU example

    COVID-19 can have a silver lining if it accelerates the change of course and the redirection of investment towards greening the economy and alleviating poverty. The market was not going to correct itself on time to avert climate catastrophe nor tackle inequality and poverty at the speed we ought to. Despite the fact the collective consciousness is evolving in the right direction, this is also a very slow process. The mandatory changes can’t be left neither in the hands of the market nor of our better self. The world order 2.0 has to become policy.

    This is exactly what the EU is already doing. With its approval of the Green Deal, it has committed to reach 55% the CO2 emissions of 1990 by 2030 and of being 100% carbon neutral by 2050. Europe, responsible today for close to 10% of total emissions has set itself the most ambitious objectives towards greening. Such a decision should trigger other major polluters like China (27% of total global emissions) or the US (15%) to follow suit.

    The EU is also home to the least unequal societies and has for the most part eradicated extreme poverty. The common denominator seems to be higher government revenue as a percentage of GDP supported by systems of high taxation.


    Source: OECD Data

    Although Europe could be doing much more for the environment and improving inequality, it is currently faring better than any other major power.

    What must Europe do?

    Before lashing out against the status quo, we have to recognise that it served a purpose. Global poverty levels decreased in the past 30 years like never before in history. The free market hyper-globalised system gave opportunities to countries that played their cards well, like China, which accomplished the fastest, largest escape from poverty ever recorded. In addition to this, while pulling itself up, China hauled the global economy, decreasing poverty levels in most of the developing world.

    However, there is no discussion over the fact that today the free market hyper globalised model has reached exhaustion. Not only can the environment not take it anymore but the income and wealth distribution it creates is a social time bomb.

    For Europe’s voice to be heard louder, it needs to act more as a Union than as a club of independent states. This is why the final acceptance of Merkel to mutualise some debt as part of the crisis relief policy is a historical move towards a more integrated Europe, one where each member is more responsible for the fate of the other. Ironically now, for the consolidation of the block, Brexit appears more as an opportunity than as a threat.

    Unarguably Southerners can do more to hamper corruption or restrain the mafia, but Northerners must not forget the advantage that belonging to the single currency has given their export oriented economies in terms of their “national” currencies not appreciating.

    Perhaps the most cynical position is that of the Netherlands, which is one of the most outspoken countries against debt mutualisation but is at the same time one of the world’s top 5 tax havens, making its fellow members of the Union loose billions of Euros in tax revenue every year.

    The to do list is extensive. To tackle inequality, a lot could be done if only tax avoidance and profit shifting to tax havens were controlled. To fight climate change, a carbon tax on goods and services is long overdue so that the environmental impact of our consumption habits carries a cost. Europe is today our best hope for pushing these much needed reforms forward.

    The EU must stop punching below its weight. It holds three seats at the G7 and four in the G20. As a Union, its Government debt to GDP is lower than that of the US or Japan, and has a much higher tax revenue as a percentage of GDP – tax revenue being the most reliable source of debt repayment. There is thus more than enough room for the Euro to weigh heavier in global finance and for European leaders to speak more loudly.

    Quoting economist Mariana Mazzucato, Covid 19 has laid bare the “big failure of small government”A stronger more empowered EU can make the difference between a global future of climate (and social) catastrophe, or a more green and egalitarian destiny.

    By David Abuchar Luna