Speech: The state of the European Union

8 November 2018
Herman Van Rompuy (EPC President)

I will speak about the state of the European Union and of the world. I apologise beforehand for also mentioning some positive aspects of the current situation, alongside more worrisome developments. I often have the impression that hope and optimism have become taboo. Let me, for a while at least, be non-conformist!

We have created 12 million jobs in the Union since 2014. Our economic growth rate hovers around 2% on average and our recovery has continued uninterrupted for 21 quarters. Those figures are satisfactory for a mature economy. It is absolutely normal that emerging economies are growing faster. One also has to look at the evolution per capita. Taking into account the, on average, very slow population growth in Europe - in Germany, it is already negative – our economic performance per capita has been better than in the US in recent years. Our growth rate is less credit-fuelled than the Chinese one and thus more sustainable.

But economic growth is not enough. We have to look at its distribution as well. Growth is more evenly distributed in Europe than on other continents due to the ‘welfare state’.

The unequal distribution of income and wealth that has been building up in the last few decades, especially in the US, has created huge tensions in societies. Wages have been stagnating for 40 years. Adjusted for inflation, the median male worker earns less now than he did in 1979.

The euro has been a stable and strong currency in the last six years since the existential crisis of 2010-2012. Greece once again has access to the financial markets, while other countries that were in deep trouble a few years ago are strong growers now. Our budgetary deficit is, on average, less than 1%, compared to almost 5% in the US. Our current account on the balance of payments shows a surplus.

I would also like to highlight two non-economic figures. The objective of stemming illegal migration following another existential crisis -the refugee crisis of 2015-2016, during which we saw 1,3 million people entering the EU in a few months’ time - has been achieved. Flows of irregular migrants and asylum-seekers have been reduced by 97% in the Eastern Mediterranean compared to 2016, and by 80% in the Central Mediterranean compared to 2017.

Europe’s early focus on decarbonisation has enabled it to take the much- coveted lead on the clean economy transition. The EU will decrease its GHG-emissions with 23% by 2020 whilst the economy will be 53% bigger than in 1990. We are as ambitious for 2030 and 2050. We must further develop an energy policy that is focused on renewables, whose share in the energy mix of the EU has almost doubled in ten years’ time.

However, our European economies remain vulnerable due to:

  • the ongoing ‘trade war’ with the US, even though the EU is currently negotiating a deal with the Trump administration. I have to admit that we don’t know what will come of this. I often say to our Chinese counterparts that the EU was also affected by increased tariffs on steel and aluminium. Geopolitical rivalry is thus not the only explanation for this trade war. The conflict with China will become even more a subject of internal politics in the US after the midterm elections.  The ‘trade war’ will certainly continue. The EU also has trade and investment complaints vis-à-vis China. The difference is in the method. Dialogue instead of war. The IMF Chief Economist says that the eurozone would be one of the least-affected regions, losing no more than 0.4% of GDP in the worst-case scenario, while the US, China and emerging economies stand to lose the most. The message is that, even after new measures, protectionism is likely to seriously dent, but not derail world economic growth. But still, in a trade conflict everybody loses.
  • the high level of global private and public debt (225 % of global GDP) is a long-term threat to financial stability worldwide. A financial crisis is bound to happen again.  The level of both private and public debt worldwide is even higher now than it was ten years ago.
  • The ageing of the population, and with that, the growing strain on our social security systems and on our labour markets, and the lack of a risk-taking mentality.
  • The steep demographic decline in Europe – with an estimated population gap of 50 million people in 2060, 10 % of the current number of inhabitants - will force us to accept a lot more legal migration, even though the digital revolution will be much more labour-saving than generally assumed. The societal support for legal migration is stronger if illegal migration is under control, which is a work in progress. But we are facing a demographic and potentially migratory explosion, especially in Africa (4 bn inhabitants by 2100, almost as many as in Asia).
  • Another vulnerability in this context is the tough competition with China and the US in new technologies, especially with regards to the digital sector, renewable energy, batteries, etc. The EU is excellent in research but not so excellent in transforming the results of that research into business success. On top of this, we miss at the level of companies European champions instead of national ones. 

All that reminds me of the famous book of J.J Servan Schreiber published 50 years ago ‘The American challenge’. A few years later he wrote ‘The global challenge’, focusing on Japan.  ‘The Chinese challenge’ would be a bestseller today! 

The main sources of concern for our economic future are political. The rise of nationalism and protectionism -two sides of the same coin- is politically represented by populist governments and populist vocal oppositions all over the globe. There are consequences beyond the economy.

The rhetoric of confrontation and enemy-bashing can divide and paralyse societies and economies.

Populists on both sides of the Atlantic undermine or try to undermine the multilateral order and supranational institutions such as the EU, in the name of national sovereignty. This is paradoxical because in recent years it has become increasingly obvious that all the major challenges mankind is facing, make European and international cooperation unavoidable. The list of those problems is long: climate change, terrorism, illegal migration, trade, monetary policy, competitiveness etc. In the euro zone, member states are confronted with the consequences of the transfer of sovereignty over their currencies to the European monetary authorities. The inevitable convergence of budgetary and economic policies necessitates discipline. 

Populism doesn’t rime with rigour. After all, populists want to remain popular! The price of this fight against discipline f.i. in Italy is higher interest rates, weaker banks, less lending, slower economic growth and higher fiscal deficits even recession, exactly the opposite of what the nationalists promise to deliver. One has to realise that we are living in a time of unprecedented global and European interdependency. A stand alone doesn’t exist any more, certainly not in a monetary union. In the euro area, there is a clash going on between national democracies. First Greece and now Italy has been confronted with the unanimous will of the other democracies to stick to the convened rules. It’s not Italy against Europe but That country against the other euro countries. Europe is also the sum of the member states. The pressure of the financial markets can even be more conclusive than that of the EU institutions.

The most dangerous evolution of the past few years is that member states refuse to implement legal decisions taken in the framework of EU democracy. It is problematic that some reject the rules of stability enshrined in the EU Treaties. Some countries are even hesitating to implement judgments taken by the ECJ. These are not just political decisions but violations of the rule of law, which no club can tolerate. Another even more serious threat is the lack of respect for fundamental freedoms and the independence of the judiciary. One of the three founding reasons for the very existence of the Union, besides peace and prosperity for all, is the safeguarding of democracy. If the European Council, after a possible failed dialogue, cannot decide unanimously on sanctions based on art. 7 of the Treaty and is blocked, the Union cannot simply take note and return to the order of the day. Too much is at stake. The Union must then envisage taking non-standard measures. Some countries are opposed to a multispeed Europe today, but at the same time, they actively pursue a new form of ‘multispeed Europe’ with democratic countries on the one hand and illiberal democracies -a contradiction in terms- on the other.

Another worrisome evolution is the near closing of the ‘window of opportunity’ for a stronger Europe that was created after the French presidential elections. The level of ambition for strengthening and deepening the euro area and the Schengen zone has been reduced. Let’s hope that we can make progress on the completion of the Banking Union. In the name of national sovereignty and the limits of solidarity, modest proposals have already been rejected by a group of nations. By the way, groups of countries within the EU are mostly created in opposition to something. We badly need a club of pro-Europeans. I still hope that the Franco-German tandem can play that role. Europe is built on gradualism and compromise. But the steps shouldn’t be too small.

One of the negative aspects of the rise of populists is not that they will get their countries to leave the Union or the eurozone - they just can’t- but that they block progress in deepening the Union and the eurozone. We know that we aren’t ready to face a new financial crisis or a new massive inflow of illegal migrants but populists are doing or saying the opposite of what political courage requires. Mainstream political parties fear populism too much and they are reluctant to strengthen our Union.

I’m fully aware that fighting extremism is more than a purely political battle. Pro European forces will not be able to beat extremists if they cannot better protect people against real or perceived threats in our societies such as unemployment, insecure jobs, climate change, illegal migration, all kinds of dumping incl. tax dumping, terrorism, huge inequalities, and military aggression. ‘A Europe that protects’ as François Mitterrand once said. If we do not succeed in protecting people better fail, they will reject our open societies, democracies and economies.

Brexit is the biggest political setback for the Union of the last decades. We are negotiating two separate treaties, a withdrawal agreement and a framework for our future relationship. It is a difficult exercise. Even if the British government clinch a deal with the EU, it is not certain the Parliament will approve. 

Britain underestimated the degree of its integration in the EU after forty years of marriage, its weak bargaining position due to its high dependency on exports to the EU (45%) much bigger than the EU dependency on exports to Britain (8%),  the united negotiating position of the 27 during the two years of negotiations. On top of this, Brexit is not high on the agenda of 27 leaders and their public opinion, with the exception of Ireland. In Britain it dominates the political debate.

In any case, the European caravan continues its way and if unavoidable, without the UK. In any case, there are no exit candidates. Because people don’t want to add instability to an already unstable world.

World politics is a new source of concern for many ordinary people in Western Europe. After the end of the Cold War, we lived in an exceptionally stable period. We got used to it and forgot the tensions of the past. The situation on the Korean peninsula, the ongoing cruel war in Syria and the current trade ‘war’ create a feeling of disorientation. Where are we heading to?

Nationalism is on the rise in all parts of the world. It is not yet the kind of nationalism that will lead to war but we are treading a dangerous path. The global multilateral order is built on compromise. In today’s world compromise is replaced by confrontation, even between some of the major players. I repeat: in times of high interdependency and global challenges we badly need conversation and moderation. Unfortunately, some Western democracies are becoming as aggressive as authoritarian regimes.

People are also noticing a shift in the balance of power in the world, in particular, the rise of China and its economy. Where will this geopolitical rivalry lead to? Rivalry as such does not necessarily pose a threat to world peace. Look at the Cold War. It didn’t end in a global war. I’m not impressed by the old comparison between Sparta and Athens and the Peloponnesian war even if Sparta, the old power, waged war against the newcomer Athens. Competition between countries and political systems can be positive.

If the famous quote ‘it’s the economy stupid’ is right, China is in pole position. In terms of purchasing power parities, China represents 18,3% of world GDP, the US 15,3% and the euro area 11,6%. Just to compare: Japan represents 4,3%, the UK 2,3% and Russia 3,2%. 

We are no longer living in a bipolar world, nor are we living in a unipolar world, or even in a multipolar world — but in an apolar world. Nobody rules the world.

The EU-27 is not nostalgic. Nobody is saying ‘Make Europe great again’! Yes, European nation-states were once world powers. But those times are over. Representing 7% of the world population and 15% of global GDP, we know our limits. But we are also fully aware of our untapped potential. We could play an even bigger role if we were more united. It would also be in the interest of the world community because global challenges require global governance. 

But let us also look at the bright side of things! The structural handicaps of our Union haven’t prevented it from speaking with one voice on the world stage or delivering a unified message on free and fair, rule-based trade (The Commission president recently negotiated with the US president on behalf of the 28; the EU agreed on FTA’s with Japan and many others in the midst of rising protectionism; the EU is negotiating an investment agreement with China). These  structural handicaps haven’t prevented the EU from having a common monetary policy (the euro is the currency of 350 million people), from agreeing on climate change and from speaking with one voice as we did in Paris in December 2015, and from agreeing on large parts of foreign policy (Iran, sanctions on Russia, North Korea, deal with Turkey on migration, Brexit). On all those issues we have a common approach and they are at the core of global policies.

Frictions in the Union are normal because there are 27/28 sovereign states. The main disagreements today are about migration. But in countries such as the US and the UK, migration is a very divisive topic as well.

Europe still matters. In the midst of euro negativism and after Brexit, it is striking that a recent Eurobarometer survey shows that public approval of the EU has reached an all-time high, with 62% of people believing EU membership is a positive thing and 68% believing that their country benefited from being a member. In the age group of 18 to 29, 73% say they have positive feelings about Europe. Euro negativism does not represent a majority. Not at all. That’s why I remain a man of hope.