The Foreign Service Journal - April 2017
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APRIL 2017



lands and Germany, and quite possibly elsewhere if the political

temperature in Europe rises. More volatile developments are

overtaking the relatively manageable details of trade agree-

ments 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 begin-

ning 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


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 short-

ages 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 refu-

gees 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


Just as alarming are

Europe’s productivity problem

and its economic stagnation.

Sluggish growth as the con-

tinent 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 improve-

ment 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


The result has been a reversal of the trans-Atlantic productiv-

ity 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


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.

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 centraliz-

ing 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


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


The formerly communist countries of Eastern and Central

Europe have, on the whole, thrived economically after over-

coming the hardships of adapting to free-market conditions.

Less positive has been their political relationship with the rest

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.