The Challenges Facing Europe

The questions hanging over the E.U.-U.S. relationship are made all the more daunting by Europe’s own difficulties—economic stagnation and a demographic crisis.


There’s a sense of fin d’époque in the air this year. Changeover time at the U.S. mission to the European Union has stoked uncertainty over the future direction of the trans-Atlantic relationship.

And that’s not all. A succession of surprise political shifts in Europe has prompted American analysts to rethink once-immutable policy positions.

Not far from Belgium’s royal palace in central Brussels, Tony Gardner bade farewell to the team he headed for three years as America’s ambassador to the European Union. It was an emotional moment, made all the more poignant by the stark bareness of his office walls, where the familiar pictures and memorabilia have been replaced by faded patches and metal hooks.

A few miles away on the city’s outskirts, Truman Hall, the imposing residence of U.S. ambassadors to NATO, also stands empty. The moving vans have long since taken away the personal effects of Doug Lute, the knowledgeable former army general who since 2013 had represented the United States on the North Atlantic Council.

The world’s eyes have not been on Brussels but on Washington, D.C., where Donald J. Trump has become the 45th president of the United States. But the mood in Brussels, as in all of Europe’s national capitals, is anxious and even apprehensive. What, ask the E.U.’s “Eurocrats”—officials of the European Commission and other institutions—will happen to trans-Atlantic relations now?

The questions hanging over the E.U.-U.S. relationship are made larger and all the more daunting by Europe’s own difficulties. The looming departure of the United Kingdom from the E.U.’s ranks following last summer’s “Brexit” vote has deepened a climate of doubt. Europeans are no longer confident that their 60-year project of progressive economic and political integration still has a rosy future.

Fears over immigration and resentment against the job-shifting effects of globalization have seen the rise of anti-establishment populists on both the extreme left and the extreme right ends of the political spectrum. From Greece to Italy to Spain, and even in level-headed Scandinavian countries, the apple carts of the old order are being upset by newcomers who challenge the European Union and its values.

The answer to the continent’s rapid aging and growing labor shortages is to increase immigration—a visceral issue that has seen populist parties across Europe garner millions of votes.

This year will see scheduled elections in France, the Netherlands and Germany, and quite possibly elsewhere if the political temperature in Europe rises. More volatile developments are overtaking the relatively manageable details of trade agreements and “level playing fields” for business rivals handled by policymakers and diplomats.

Europe’s difficulties may well be compounded during the coming months by significant changes in longstanding U.S. policies. But the important point is that Europe has serious structural difficulties of its own making to deal with. It is beginning to suffer the first effects of a huge demographic deficit, and it has at the same time failed to address the poor productivity that has been gnawing away at its competitiveness in the global marketplace.

Cause for Alarm

Alarm bells on both these issues have been ringing for some time, but were widely ignored by vote-seeking politicians. The answer to the continent’s rapid aging and growing labor shortages is to increase immigration—a visceral issue that has seen populist parties across Europe garner millions of votes. Even in prosperous Germany, the arrival in 2015 of about a million refugees and economic migrants from conflict zones in the Middle East triggered a surge of support for the anti-E.U. Alternative für Deutschland (AfD) Party, which has come almost from nowhere to gain support from 16 percent of voters.

Just as alarming are Europe’s productivity problem and its economic stagnation. Sluggish growth as the continent slowly recovers from the global financial crisis of 2007-2008 has seen Europe slip downward in the international economic league tables. Ten years ago, 17 of the world’s 50 largest corporations were European; today, they number only seven, compared with China’s eight.

In the closing quarter of the 20th century, annual improvement in Europe’s productivity outstripped that of the United States. Average productivity growth was 2.7 percent a year, more than double the American figure of 1.3 percent. But at the dawn of the 21st century, most European countries made the wrong business choices; their focus on tried-and-tested sectors like heavy industry and banking led them to neglect the digital revolution.

The result has been a reversal of the trans-Atlantic productivity equation. Since 2000 the United States has been steaming ahead with productivity gains of more than 2 percent a year, while Europe is floundering at barely half that rate. The profits of Europe’s top 500 companies are consequently much reduced and now run at roughly half those chalked up by their American competitors.

Over the same period, the E.U. has also lost a good deal of political momentum, and its project of ever-closer political and economic union lies becalmed. The question that many policy analysts are asking themselves is whether the waning of Europe’s ambitions has acted as a brake on the tough reforms and industrial policies needed to stimulate growth, or whether it’s the decline in Europe’s wealth creation that has discouraged far-sighted political strategies.

Since 2000 the United States has been steaming ahead with productivity gains of more than 2 percent a year, while Europe is floundering at barely half that rate.

In fact, the two trends feed on each other. The disruptive effects of the economic crisis that began to bite hard in 2008 very quickly eclipsed the E.U.’s grandiose plans for centralizing more powers in Brussels. Those plans were replaced by far more urgent priorities, such as saving the Eurozone. The European single currency, launched to much fanfare in 1999, enjoyed a trouble-free decade; but by 2012 debt crises in Portugal, Italy, Ireland and Spain—and in Greece, most of all—threatened the euro’s very survival.

For a time, Brussels was at least able to point to a huge growth in E.U. membership. In 2013, the arrival of Croatia as the 13th new member-state since 2004 was greeted as a sign that the European project still exerts its old magnetism. But the E.U.’s enlargement from 15 to 28 countries also created major strains. The mantra that Europe could widen as well as deepen gave way to a realization that the E.U. has become an unwieldy body often riven by divergent interests.

The formerly communist countries of Eastern and Central Europe have, on the whole, thrived economically after overcoming the hardships of adapting to free-market conditions. Less positive has been their political relationship with the rest of Europe. Relations with Brussels and the E.U.’s policymaking machinery, in particular, are increasingly combative—perhaps a legacy of their resistance to the Soviet yoke, or a symptom of the E.U.’s much-criticized “democratic deficit.”

Also troubling for the E.U. is the North-South divide separating its Western European members. The fiscal austerity forced on southern debtor countries by Germany and other northern Eurozone states has accentuated economic disparities between them. Youth unemployment and backward industries with little high-tech innovation have become hallmarks of the so-called “Club Med” Mediterranean economies.

Developments in France will be crucial to the continent’s future. Although geographically a “Club Med” country, France has been one of the E.U.’s economic powerhouses. In recent years, though, the wasting of its industrial sinews has become cause for concern. The populist siren calls, notably anti-immigrant rhetoric and demands for trade barriers to protect French jobs, have produced a steady rise in support for the far-right National Front Party. Elsewhere, extremists on both the left and right, offering simplistic solutions to complex problems, have become prominent figures in national politics, and pose very real threats to Europe’s continued integration.

The Demographic Dilemma

The deceptively straightforward nostrums offered by these populist politicians fly in the face of a single, overwhelming reality: Europe is aging at an alarming speed, and its workforce is shrinking while social security costs are soaring. As a rough average, there are at present four working-age people to support each pensioner. But by mid-century, that ratio will have shrunk to just 2:1.

That’s clearly unsustainable, yet this grim demographic outlook is scarcely discussed in national debates. Nor is there much focus on the more immediate consequences of labor shortages on the overall European economy. The reality of a dwindling working-age population is being eclipsed in the public mind by the headline figures of joblessness among young people.

In the ever-tougher conditions of the globalizing world economy, Europeans know that not even the continent’s largest countries can expect to make their voices heard and advance their own interests.

There’s no question that school-leavers and even university graduates in many parts of Europe have a tougher time finding work than did earlier generations. The years since 2008 have seen unemployment in the E.U. rise by 10 million people to 26 million, contrasting sharply with the previous decade during which 25 million new jobs were created. This roller-coaster is, though, of much less importance than the size of the labor force.

It is generally accepted by economic analysts that a growing labor force is key to growth in a country’s overall economy. Even if tighter immigration controls lead to a slowdown in America’s forecast demographic growth from 320 million to around 400 million by mid-century, the U.S. economy is on a steady upward trend. That of Europe is not.

The present population of the European Union, including the United Kingdom, is 510 million—and looks likely to fall to around 450 million by 2050. Raw numbers like these are less significant, though, than the ratio between workers and dependents. How far and how fast Europe’s workforce will shrink is going to be determined by the flow of immigrants.

By mid-century, the E.U.’s workforce of around 240 million people today will be down to about 207 million, assuming that immigration into Europe continues at its present rate. That is worrying enough, but there’s a growing risk that immigration will be stifled. The surge in 2015 and 2016 that saw some 1.5 million refugees and economic migrants from conflict zones like Syria and across Africa undertaking perilous journeys to reach Europe provoked much sympathy, but also a strong anti-immigration backlash.

Voters are increasingly anti-immigrant. It’s a mood that did much to determine the outcome of the Brexit referendum in the United Kingdom, and it is shaping election outcomes across the continent. Yet the economic effects of halting or severely curtailing immigration are potentially catastrophic. Without new blood from beyond Europe’s borders, the present workforce could number only 169 million in 2050, taking a huge chunk out of the European economy and limiting its maximum attainable growth rate in gross domestic product to barely 1 percent a year.

No one is more worried about this trend than Germany’s hugely successful export industries. Daimler, the Stuttgart-based producer of luxury Mercedes automobiles, has warned that, come 2020, more than half its skilled workers will be more than 50 years old—and it is struggling to find enough young apprentices to replace them. Meanwhile, Volkswagen has revealed that a third of its vehicles are already being produced by factories in Asia.

The TTIP-ing Point?

Where, then, do Europe’s difficulties leave the trans-Atlantic relationship? The short answer is largely unaffected for the time being, but vulnerable to substantial change in the longer term.

Ostrich-like, Europe has for many years refused to face up to its structural weaknesses.

More than half a century of trade and investment across the Atlantic has created an extraordinarily robust joint economy. American-owned assets in Europe are worth $14 trillion, says the U.S. Bureau of Economic Analysis, accounting for 60 percent of all U.S. foreign investment around the world. For their part, European investors account for two-thirds of all foreign-owned holdings in the United States. The fairly recent U.S. “pivot” to Asia still has a long way to go before it makes a dent in the trans-Atlantic relationship.

Trade in goods across the Atlantic is, at about half a trillion dollars yearly, rather less buoyant. That’s a reflection of the competing local attractions of the European and American domestic markets, but also of protectionist tendencies in both. It is also why, in recent years, Brussels and Washington invested a good deal of political capital in the unsuccessful effort to conclude a Trans-Atlantic Trade and Investment Partnership.

The idea has been to overcome regulatory differences, and also to fashion a common U.S.-E.U. front against the inroads that Asian competitors—China today, India tomorrow—are making in global markets. “The TTIP is not a free trade agreement; it’s a hell of a lot more than that!” says Christian Leffler, the former Swedish diplomat in charge of economic and global affairs at the European External Action Service, the E.U.’s increasingly powerful foreign policy arm. “Its importance lies in a shared approach to regulations and standards.”

Elements of the agreement may survive the protectionist sentiments of Pres. Trump and some members of his Cabinet, but much of it looks set to share the fate of the cancelled Trans-Pacific Partnership. The closing months of 2016 saw TTIP increasingly bogged down, both on key questions like disputes settlement arrangements and also over abstruse and unimportant details. “There seemed irreconcilable differences, for instance, between American experts who insisted that the purity of, say, oysters and clams depended on the water they’re grown in,” recalls former U.S. Ambassador Tony Gardner, “and Europeans whose testing methods concern their freshness.”

Still, the immediate outlook for trans-Atlantic trade should not be cause for concern. The bureaucratic hurdles erected by European or American officialdom are not insuperable, if there’s enough goodwill. It’s also unlikely that the flows of goods and services across the Atlantic will be quickly disrupted, even by ugly spats between political leaders.

More worrying is the longer-term risk that the European Union and the United States may be embarking on divergent geopolitical paths. Their shared concerns during the post-World War II years are fading. The certainties of the Cold War are a quarter-century out of date, and have anyway been eroded by disagreements over policy toward the Middle East, with Syria following Iraq and Iran, and by increasing differences of approach toward militant Islam and Russian assertiveness. Although these disagreements arise within Europe as well as across the Atlantic, the overall trend seems to be away from the common threat assessments that have been such a strong feature of U.S.-E.U. relations. Differences over security are creating sharper frictions than competing economic interests have ever done.

Some began to question the value of the North Atlantic alliance after the 1989 fall of the Berlin Wall and the subsequent collapse of the Soviet Union. Since then, Russia’s military resurgence and more assertive foreign policy have given NATO a new lease on life, but that has been somewhat negated by the failure of its European members even to maintain their modest defense budgets. Their “freeloading” has long provoked irritation in the United States, and Pres. Trump’s apparent hostility to the alliance may even spur European governments into plowing funds into defense.

Without Washington’s encouragement, the E.U. risks stagnating, robbing America of its most powerful ally.

For Europe to take greater responsibility for its own defense seems highly desirable, even if the consequences are unpredictable. It could be that the result will be a more muscular E.U. “defense union” that initially parallels NATO, but then diverges once Europe has the means to concentrate on its own priorities, notably in unstable and overpopulated Africa.

The E.U.—Down But Not Out

Where does that leave the European Union? It is assailed by a lengthening list of challenges. Some are new and others have long been unresolved. Ostrich-like, Europe has for many years refused to face up to its structural weaknesses. As well as its demographic shrinkage and comparative decline in terms of the global economy, attitudes within European society spell serious trouble ahead. Unlike America’s “melting pot” culture of absorbing immigrants, people across Europe resent and resist newcomers. Whether speaking of longstanding Turkish communities in Germany or North Africans in France and Belgium, the record on successful integration is poor and the political signposts suggest worse to come.

None of this means the European Union is going to collapse. Although the Eurosceptic tide has been running strongly in recent years, as opportunists heading the new breed of populist parties have played on widespread resentment of the austerity policies that followed the last decade’s economic downturn, it’s far too soon to herald the E.U.’s disintegration.

Brexit is frequently seen as the domino that will topple other countries into leaving. Instead, the E.U.’s message that Britain will derive no profit from going has convinced public opinion in the remaining 27 countries of the compelling advantages of membership. In the ever-tougher conditions of the globalizing world economy, Europeans know that not even the continent’s largest countries can expect to make their voices heard and advance their own interests.

This is not to say that the next few years will be smooth sailing for Europe. The need for concerted intergovernmental action to protect the euro and recover the E.U.’s popularity is plain to see, but hard to achieve. Ranged against a more dynamic approach are the electoral costs of supporting more bonds with Europe when so many voters want fewer. Successive European Union member governments have habitually blamed Brussels for unwelcome developments, thus devaluing the whole notion of closer integration. The continent’s prized solidarity has been the casualty, and may prove to be mortally wounded.

America’s support for Europe’s great experiment of voluntarily relinquishing national sovereignty has been crucial. It was, of course, also in America’s own interest and remains so to this day. Washington will continue to exert a major influence on the E.U.’s future, and the European Union will doubtless continue as a bloc.

Without Washington’s encouragement, the E.U. risks stagnating, robbing America of its most powerful political and economic ally; but with renewed and sustained U.S. backing Europe will be far better placed to survive and thrive. Just as no single E.U. country can go it alone in the 21st century, nor should America envisage a future of splendid isolation.

Giles Merritt reported for the Financial Times as a foreign correspondent for 15 years, five of them from Brussels, and subsequently was an International Herald Tribune op-ed columnist on European Union affairs for 20 years. He is the founder and chairman of the Friends of Europe think tank based in Brussels and the author of Slippery Slope: Europe’s Troubled Future (Oxford University Press, 2016).