Growth, jobs and more

Lecture at the
Center for Transatlantic Relations at John’s Hopkins University,
Washington DC, May 28th, 2014.
Full version with introduction in PDF.

Some people compare Europe to a bicycle. In order to maintain its balance, a bicycle has to keep moving. And in order to be stable, Europe has to keep moving. At least this is what we are led to believe. No other country or continent so often contemplates is future as Europe. The Future of Europe is a subject of visions, reflections, and strategies as well as political maneuvering among its institutions.

Civil servants in Brussels can either be occupied with day-to-day execution of policies, deepening the common market, distributing structural funds, passing directives, regulating anything from vegetable sizes to Google … or with a grander task of building “an ever closer Union”.

Trumping peace, prosperity and democracy

It is not easy to find a sequel to the success the Union had – with bringing peace, prosperity and democracy to the continent. But creating a United States of Europe is such a task. So is saving the planet from climate change, and Brussels is always interested in taking the lead there.

The 21st century started successfully. In 2005 most of the Eastern European countries became members. The Iron Curtain fell already in 1989, the continent looked united again. Soon after its introduction, the common currency, the euro, seemed like a success. The Union was searching for a next grand project, the next narrative.

This was the atmosphere in Brussels in 2008 when the European Council set up the Reflection Group on the Future of Europe. It was led by former Spanish Prime Minister Felipe Gonzalez and included the legendary Polish freedom fighter Lech Walesa, former EU commissioner and future Italian Prime Minister Mario Monti, several academics, and other former heads of states. I had the privilege to be the secretary general of the group. The title of its report was “Project Europe 2030.”

And while we were thinking on how to maintain the fantastic success the European civilization has been since the Renaissance, how to ensure that the West continues to lead in front of the rest in science, culture, wealth, military and political power … the financial and economic crisis happened.

The Group’s report was handed out to the president of the European Council in May 2010, on one of these “hard night’s days” during which, so they said, Greece was saved. Many such nights followed when either Greece, the euro, or the EU were saved.

Only recently we are seeing the crisis receding, Portugal and Ireland exiting the assistance program and economic growth anemically picking up. However, another kind of crisis emerged on European eastern borders, the Ukraine crisis.

If the first decade of the 21st century looked like a success for Europe, the beginning of the second confirmed that neither peace, nor prosperity, nor democracy are as certain and lasting as we believed.

It is not Project Europe per-se that is to be worked on; the effort should be to maintain these three elements – peace, prosperity, and democracy.

Peace

The historic achievement of the European Union is that it brought lasting peace to a continent whose nations waged wars with each other for centuries.

In essence the European Union put an end to a thousand year old problem on how to divide the Lorraine part of Charlemagne’s legacy for which France and Germany have been fighting ever after. At Waterloo, Napoleon was stopped from entering Brussels. And Brussels is now the capital of the European Union.

But not all of Europe enjoyed the peace and not all the European nations are enjoying the end of history. The peace in the Balkans, particularly in Bosnia, looks fragile, but with a clear European perspective for all major players in the region, the situation appears defused. Instead of waging wars on the Balkans they will soon be discussing common agricultural policy in Brussels.

But there was another area in Europe where conflict was permanent and where borders were shifting in the East/West direction. Where occasionally a small country would emerge between two strong powers or get swallowed by one or the other. It is the area east of Germany and west of Russia.

Europeans discovered Russia through the writings of a Slovenian diplomat of the Holy Roman Empire – Sigismund Herberstein. He was surprised how absolute the power of the Muscovy Tsar was, how wretched condition of the peasantry were and how he was, as a diplomat, closely monitored on one hand and kept undiplomatically waiting for meetings on the other. Since then, some of this changed and some did not.

At least since Peter the Great, Russia’s attention was towards Europe and played an increasingly important role there, first by waging wars with Sweden, Poland, and Turkey for the lands on its western borders, then increasingly, as a major pan-European force.

It played a decisive role in the defeat of Napoleon and was then a pillar of the Holy Alliance that brought peace to Europe in the first half of the 19th century. It had to leave the 1st world war to stage a communist coup-d-etat. It took the majority of the war effort in fighting the Nazi Germany in the Second World War and won – at a great price in human lives and devastation of the country.

Not only militarily, also culturally, Russia became increasingly European. Tchaikovsky, Rimsky-Korsakov, Stravinsky, Pushkin, Gogol, Dostoyevsky, Tolstoy, and Solzhenitsyn are as much titans of European culture as are Beethoven, Verdi, Balzac, or Dickens.

In spite of vast lands in the east, Russia was always looking west, but never quite sure if it is a part of it or not. And the western part of Europe was never quite sure if Russia is a part of it or not. The communist revolution and the Iron Curtain made the question entirely irrelevant.

Even today, Russia is faced with the question, if it is a European or Asian power. And it is not only on the Russians to answer that. If they are a European power then they should probably sit around the same table as Germany, France, Poland and others. If they are not a European power, they are in fact no match to united Europe. The EU creates 23% of global GDP (the U.S. as well), and Russian economy is the size of Italy’s at about 12% of that of the EU and 40% the size of Germany. But in terms of population Russia is almost twice the size of Germany.

What we see in Ukraine is Russia’s answer to this problem of identity – to create a regional bloc that would be of at least a similar order of magnitude as the EU to its west and the Muslim countries to its south; “too big to be swallowed” by mighty China on its eastern border. Without Ukraine, Russia’s capacity to build a reasonably strong bloc is not possible.

In a sense the situation around Russia after its defeat in the cold war is similar to the situation around Germany after its defeat in the 1st world war. A still powerful country surrounded by new and weak countries that emerged as a result of Russia’s weakness. Germany, when recovered in 1930s, got an appetite for them. Russia, as it is recovering, has a similar kind of appetite.

With Germany, the mistake was not repeated after the Second World War. The EU was created. On the one hand, the West should be very determined not to repeat mistakes like Munich and should take a firm stand against Russian expansionism. On the other hand, the Russian people, particularly the intellectuals and the political elite, should be given strong signals that there are European perspectives for Russia, as there are for Ukraine.

Russia should be encouraged to comply with EU membership criteria, with the principles of democracy, market economy, and human rights on which the European Union is built. Since Peter the Great, Russia has had European ambitions. The European Union should make it clear that these ambitions are realistic and that potentially the true limits of what can be called Europe could be on the Russian Pacific coast.

Not tomorrow. Another former superpower, Great Britain, became EU member half a century after it lost its superpower status. It still is not sure whether it was a good thing or not, but many of us are quite happy that the EU has such members as well.

Prosperity

Someone said that both the American and the French revolution were fought along the same keywords: liberte, egalite, fraternite, however, that the French revolution put the “egalite”, equality, before “liberte”, liberty, and the American vice versa.

The obsession with inequality in Thomas Pikkety’s book Capital in the 21st Century is the latest indicator of that. Envy seems to dominate political debate and will continue to do so, particularly if some prognoses are correct – that we will be looking at decades of no or slow growth.

In the period of strong economic growth after the Second World, War everybody was better off. Indeed, some more than others, but children were expecting to live better than the parents. This is not the case anymore. According to Eurostat most Europeans believe that their children will live worse than the parents.

In a no growth world some can be better off only if others are worse off. And this is the situation we are looking at in Europe. Through the glasses of envy.

Germany and some northern European countries are more productive than countries in the south and there are no politically easy fixes for that. In a European unionized labor market and opportunistic political system it is very hard to reduce labor costs or do structural reforms. A sympathetic central bank, on the other hand, can improve competitiveness easily by devaluation.

This tool is not available to the Eurozone members. Significant debt reduction and investment financing through bond issues and inflation cannot be expected from the ECB. It will take time and money (in the form of debt) before national policies can adapt to the Euro and before the structures around the common currency are completed in such a way that crisis can be resolved in a faster way.

Money markets did not learn enough from the Greek, Spanish, Portuguese and Irish crises. Too much of the bailout money was bailing out banks that gave credit to sovereigns which turned out not to be as safe as thought. Latest developments in the money markets show an increased confidence in lending to the European periphery. Financial markets have learned in the crisis that sovereign European countries indeed are too big to fail.

Both crises, the financial and the Ukrainian did not only question the peace and prosperity of Europe, they rised doubt if Europe can be managed politically. Which leads us to the third element …

Democracy

On May 25th the EU held parliamentary elections. Europeans voted for over 750 members of the European Parliament – a body that creates a notion that although there might not be a pan-European democracy, Europe is demoicracy – plural for democracy. The results demonstrate the retreat of traditional center-left and center-right parties and the rise of parties on the extremes. Populist right, populist left, Pirate party, Greens, Eurosceptics, etc.

The retreat of the traditional center parties was bigger in the EU elections than it was in typical national elections. One reason for this is surely low turnout and bigger motivation of opinionated voters to attend. The other may be structural.

Voters seem to feel that the role of the European parliament is to an extent symbolic. EU redistributes only about 1% of the EU’s GDP. When voting they could afford to send a signal to their own national politicians about their dissolusenment and anger without risking that, in the end, real power would be with rather populist, perhaps irresponsible and unreasonable extreme parties.

The vote demonstrates a crisis of European continental democracies. In fact democracy everywhere is in crisis because much has changed since the principles of democratic rule were set up hundred or, as is the case with the USA, more than two hundred years ago. Three elements changed since that time:

(1) ways through which elements of society are connected and collaborate together via communication technology and media

(2) different distribution of knowledge with a much smaller share of the knowledge concentrated in the government offices or church hierarchies

(3) increased share of GDP that the government is distributing creating different incentives for the population to take an interest in democracy

The crisis of democracy deserves special attention, but I will only focus on the problems of Europe in general, and of the former communist countries in particular.

In continental Europe the matters are made worse by a proportional electoral system and the relatively highest share of GDP that government is redistributing. When democracies were set up in Europe about a hundred or more years ago, governments were redistributing 5 or 10% of the GDP. Voters chose whom they would trust to maintain law and order, take a country to war and who talked their language in terms of ethics and values.

Today European governments redistribute a half of the national GDP. About 2/5 of the population is employed in the EU and between a quarter and a third of all employed work in the public sector. The majority of voters are on the receiving end of government spending. And their vote is not only influenced by the broader policy ideas but increasingly by expectations which political party may put more money into their pocket, provide them with more free government services or ensure better salaries for public sector in which they work.

Proportional election systems typical for continental Europe make possible that rather small political parties are organized to respond to the expectations of, for example, pensioners, civil servants, peasants, small businessmen, the young etc. And when in power, the government is buying their vote. With the money it borrows from the next generation (that does not vote) and the money from taxes.

Jean Baptiste Colber said that “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” In his latest book Piketty actually says that democracy is a tool to reduce the hissing:

“If we are to regain control of capitalism, we must bet everything on democracy—and in Europe, democracy on a European scale.”

“If necessary, the tax can be quite steeply progressive on very large fortunes, but this is a matter for democratic debate under a government of laws.”

It seems that the voters in the recent European elections rejected Pikkety’s first suggestion – democracy on a European scale (success of the Eurosceptic and Eurohostile parties) but seem to be in favor of the second (rise of extreme left, retreat of center right and European liberals).

Democracy in the East

In some former communist countries matters are even more serious. All these countries have a system which they call capitalism. The flavor of capitalism and democracy that we see at close-up does not compare very well to our view of the western democracies and market economy. But perhaps this view is idealized.

Before 1989 these countries were ruled by communists. They preached solidarity and equality, however they enjoyed privileges and luxuries not available to the working class. While at the edges of communist movements there were many people, particularly the intelligentsia, who sincerely advocated equality and solidarity, the clique that had the power used these (actually noble) instincts as a tool through which they could hold on to power. Communism was an attractive narrative that allowed some to gain and keep absolute power and economic privileges.

When the system changed in 1989, the interests remained the same: wealth and power. Some countries succeeded in establishing new political and economic elites. Others failed. The elites stayed more or less the same, except that they are now in power, apparently through democratic means.

The first president of one of such countries, for example, was a former secretary general of the local communist party, the second was the president of the country even before the democratic change, the third was very young when he became a member of the inner circle of undemocratic ruling elite and was later a diplomat of a socialist country. The current one started his political career in the Union of the Socialist Youth, then rising through the ranks of the renamed communist party.

It seems the careers of these people would not be much different even if there was no change of system in 1989. The situation is very similar in law enforcement, the judiciary, civil service, economy, and business. The idea here is not at all to condemn them for their past activities. The problem is, however, that there was apparently no significant mobility of the elites and that the country largely remained under the control of a single elite that ruled it even before the Berlin Wall fell.

To be honest, power and wealth are quite often a motive of politicians in the western democracies. The major difference lies in the way economic and political power is distributed in old democracies and how it remained concentrated in some new eastern European democracies. Is there a fair competition, a balance, or is there almost a monopoly?

What happened for example in Slovenia, Russia, Belarus, to some extent in Ukraine, and elsewhere was that the people who were entrusted with the management of (then) state owned enterprises during socialism became, one way or the other, owners and capitalists in this so called capitalism. The government remains a significant owner, attempts to privatize are blocked.

These companies are big advertisers in the media, so the media is in fact influenced by the same group. To get advertising, the media has to be friendly to certain kind of politics. Biased media can never support an honest political discourse.

The only school that teaches journalism perhaps evolved from a school for communist party cadres. No teacher was fired in 1989. And no judge or public prosecutor – including those who took part in violations of human rights — was fired. So even if the democratic opposition at some point wins the elections, all other branches of power, including the media, are firmly in the hands of the so called left.

This left is accepted, in the European scale, as an ally of the Western European Social Democratic parties. As Tony Judt once wrote, the Social Democrats in the West were envious of their communist comrades in the East, because the latter could do so much more, with so many fewer democratic checks and balances.

They are true allies now, shifting whole Europe to the left, questioning capitalism, questioning the Atlantic partnership, questioning TTIP, opposing NATO — while taking advantage of the legacy of communist regimes.

A recent example: the winner of the European elections was supposed to become the president of the European Commission. This is what the voters were lead to belive. Now that the center-right candidate Juncker has won, and the Socialist candidate lost, the latter has already announced that he will be trying to form a majority – obviously looking for votes in the extreme and former-communist left.

European peace, prosperity and democracy are in crisis. Changes are needed. But the results of the EU elections are such, that not much – reform wise – can be expected in Europe, Because Europe will, most likey, be run by a bi-partisan coalition of People’s Party and Social Democrats.

This coalition will be faced with difficult questions, large and small.

Dilemmas

The great philosopher Woody Allen once wrote: “We’re all faced throughout our lives with agonizing decisions, moral choices. Some are on a grand scale, most of these choices are on lesser points. But we define ourselves by the choices we have made. We are, in fact, the sum total of our choices.”

Europe too is faced with agonizing dilemmas on a great scale: about peace on its eastern borders; about enlargement; about its internal democracy; about more or less Europe; whether Europe is a project or a done product. These are “agonizing dilemmas” but also “moral choices.”

In the past, Europe must have made some good choices. European civilization reached a global monopoly on economy, military power, science, technology and art in the 20th century. European wars were world wars. The cold war was the last European war that was a global war.

Europe has to make the right moral choices and stand firm by the values that made it great in the first place: liberty as the basis for human rights and allowed the individuals to be empowered by technology and innovation; property rights secured the fruits of that liberty. Prosperity spread.

And Europe has to stand firm by the values it got it united and peaceful. True borders of Europe are the borders of European values. We Europeans and Americans together should do more to promote them in Ukraine, Russia, and in fact within Europe itself. Sometimes we need friends from across the Atlantic to remind us what these values were. Sometimes we need competitors who are beating us, relying on our own principles. Like China. The founding fathers of the EU were correct. Creating a community prevents wars and creates peace.

And finally, we must be reminded again and again that democracy is not a system where the masses make decisions about policies, but a system to establish trust between the rulers and the ruled. This trust in Brussels is breaking apart.

It could be regained if Brussels would stop look at Europe as a project. Europe is not a project. Europe is half billion Europeans that deserve peace, security, jobs, economic opportunities and services from efficient public sector.

This too requires choices, but perhaps not on such a grand scale.

If European center fails, forces exists that will amplify the echoes of the past and offer geopolitical distractions and dangerous populist shortcuts of all colors.

 

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