Why Europe's post-war growth model is collapsing. Analysis
The head of the European Central Bank (ECB), Christine Lagarde, said that Europe's growth model is collapsing. According to her, the Old World will not develop without global trade, cheap energy resources and security guarantees from the United States. Lagarde noted that none of these three factors will ensure Europe's former development any more. Why this happened and what mistakes Brussels made are in the Izvestia article.
What Lagarde was talking about
• Lagarde made a brief presentation at a meeting of the International Business Council of the World Economic Forum and spoke about the rapid weakening of Europe's growth model, which was formed after the Second World War. The head of the European Central Bank pointed out that Europe's prosperity had previously been determined by three factors: expanding global trade, strong industry with cheap energy, and a world order protected by the United States. Now Europe is losing all three pillars, which is why it will have to abandon the previous model of development.
• In this regard, Lagarde also recalled that Europe largely missed the first digital revolution — this usually means the rapid development of the Internet, personal computers, smartphones, search engines and social networks. The main economic beneficiaries of this revolution turned out to be mainly outside the Old World, in the USA and China. She warned that Europe now risks repeating this experience with the second digital revolution, that is, with the development of artificial intelligence (AI).
• According to Lagarde, Europe has two critical barriers that prevent it from creating conditions for the spread of investments in AI. The first is the fragmentation of the region's single market, in which firms compete too much with each other within national borders and cannot scale. The second barrier is the fragmentation of capital markets. Lagarde noted that European companies receive financing for early growth, but do not raise enough funds after five years, which is why 12% of European fast-growing companies have moved outside the EU.
Global trade
• Europe remains within global trade for the time being, with the European Union's share estimated at about 12.6% of global imports of goods, and about 25% in global trade in services. However, global commerce is no longer working as an automatic engine of European growth. Europe has relied on an export-oriented economy, and this was facilitated by the fact that in the 1990s and 2010s trade barriers were falling and consumer markets were growing around the world. But a number of factors are now preventing Europe from following the same path.
• The first call was made during the financial crisis of 2008-2009. It significantly slowed down the global trade turnover, which grew due to the fragmentation of production between countries and the expansion of supply chains. Before that, Europe could offer technologies that made it possible to open factories anywhere in the world where there is cheap labor and resources. After the crisis, this model became too risky, and it became more difficult to expand production.
• For a long time, Europe also looked to China as its main sales market, which, due to its own growth, increased consumption of European goods and technologies. But by the 2020s, China's position had changed. He mastered the production of increasingly expensive goods that he had previously imported, and turned into a production site competing with Europe. Lagarde herself noted that if in the early 2000s the eurozone countries competed with China in 25% of industries, now this share has grown to 40%.
• The coronavirus pandemic has dealt another blow. The closure of borders and entire industries has hit the very fabric of globalization that Europe relied on. At the time of the lockdowns, demand increased for electronics and consumer goods, whose market was captured by China, while for machine tools, equipment and machinery, which Europe was strong in, was falling. Two years later, Brussels began to impose sanctions against Russia and sharply reduce economic ties, which resulted in a more than threefold reduction in exports to Russia. At the same time, the European Union did not limit itself to formal trade restrictions, but also continued to impose secondary sanctions on countries that resold European goods to Russia.
• Finally, the return of trade barriers, which the world sought to get rid of in the 20th century, also played a role. Brexit in 2016 launched a trend towards the emergence of political forces that advocate deglobalization and economic independence, which should be supported by tariffs and trade restrictions. This process reached its peak with the re-election of US President Donald Trump, who declared tariffs his main foreign economic instrument. Although not all countries in the world want to abandon globalization, Europe now has to keep in mind that any free market agreement is no longer open-ended, and this disrupts Brussels' development plans for decades to come.
Cheap energy
• The loss of access to cheap energy, which made European industry competitive, is usually attributed to sanctions against Russia. In 2022, the European Union announced a course to reduce dependence on Russian energy resources, which was also accompanied by a reduction in pipeline supplies from Russia itself and the destruction of the Nord Stream gas pipelines, which carried natural gas to Germany. In return, Europe began to purchase more expensive and less logistically accessible liquefied natural gas (LNG) from the United States and Qatar.
But even before that, Europe had taken a number of actions that also led to higher energy prices and the loss of the second pillar that Lagarde had mentioned. Back in the 2010s, a course was taken to abandon its own gas production. In this regard, the example of Groningen in the Netherlands, which served as a source of natural gas for Northwestern Europe, is indicative. Prolonged mining led to the fact that earthquakes began to occur around the field, and the country's authorities refused to continue its operation. New sources of natural gas were not developed for environmental reasons. It was supposed to compensate for the loss of its own production through long-term gas supplies from Russia.
• The environmental requirements of the European Union have led to the loss of another source of cheap energy — coal. Europe has embarked on decarbonization since the signing of the Paris Climate Agreement in 2015. Since then, some countries have already announced their complete abandonment of coal, while others have set clear deadlines for when the transition to other energy sources will be completed. Europe has to not only abandon cheap coal, but also pay compensation to accelerate this process and develop renewable energy.
• Another decision that triggered an energy outage in Europe was Germany's abandonment of nuclear energy. Despite the fact that by the time the last power plants were closed, it was already known about the loss of Russian gas, this process was completed. Germany, the industrial backbone of Europe, had to rely on solar and wind energy, as well as urgently invest in the construction of LNG terminals to replace the previous sources that provided the German industry with a leading position.
• Although the abandonment of Russian energy sources was presented in Europe as a restoration of energy independence, it never achieved the desired effect, as in return it began to rely on supplies from other countries that are also subject to geopolitical risks. This manifested itself during the US war with Iran, which led to the temporary blocking of the Strait of Hormuz and the loss of LNG supplies from Qatar. Europe has not got rid of its energy vulnerability, and this continues to undermine its economic potential.
Protection from the United States
• The loss of security guarantees from the United States in the form in which they have operated since the Second World War is indeed a factor affecting the economic development of Europe. For decades, the Americans provided European states with things that were too expensive for them to create on their own: a nuclear umbrella, air and naval forces, strategic intelligence, satellite infrastructure, and missile defense. European states could allocate a much larger share of resources to the social sphere and infrastructure, and this ensured economic returns. They had the opportunity to build supply chains based on the principle of maximum efficiency, without putting a lot of geopolitical risk into each decision.
• This order began to collapse visibly with the beginning of Trump's second term. However, it cannot be argued that it was he who launched the process of deforming transatlantic relations and thus took Europe by surprise. During the Cold War, the United States was indeed extremely interested in keeping a defensive umbrella over Europe, but with its end, this need began to disappear. Sooner or later, American politicians would have come to the conclusion that they were spending an unacceptable amount of money to protect Europe, which it was using to give its economic model geopolitical stability.
• The gap between the contributions of Europe and the United States to transatlantic security began to be noticeable at the beginning of the 21st century. In 2006, NATO defense ministers first agreed to spend 2% of their countries' GDP on security, long before Trump began to voice the same demand, only in a much more stringent form. Secretary of Defense Robert Gates warned back in 2011 that the United States would lose patience sooner or later.
• American politicians first became convinced that Europe was taking unfair advantage of their protection in the same 2011, following the invasion of Libya. NATO took the lead in that operation, but up to half of the alliance's members took part in it, and about a third directly participated in the fighting. The United States was naturally surprised why the allies, demanding equal treatment for themselves, did not provide assistance against a relatively weak opponent.
• The quiet irritation signaled by the American administrations before Trump was overlaid by another extremely important geopolitical process — the increased competition between the United States and China. Washington has gradually shifted its attention from Europe to the Asia-Pacific region (we discussed here how the interests of different countries collide in this region). In this situation, the maintenance of a protective umbrella in the Old World was increasingly perceived by American voters as an anachronism. This is what Trump felt when he began to put pressure on his allies during his first term.
• And although European politicians at the time, such as German Chancellor Angela Merkel and French President Emmanuel Macron, agreed with the fairness of the demand to spend more on defense, no real steps were taken. The Europeans were not sobered by the US withdrawal from Afghanistan in 2021, which showed how security collapses if the Americans are no longer ready to guarantee it. Europe continued to hope that U.S. protection would last forever, as would Chinese demand for its goods and cheap energy from Russia, but it was wrong in each of these three assumptions.
Переведено сервисом «Яндекс Переводчик»
