There must be some bureaucrats in Brussels and many dyed-in-the-wool Europhiles engaging in schadenfreude following the political chaos that has engulfed the UK in recent weeks. There is good reason to blame the false promises made by some UK politicians for promoting Brexit some years ago. Still, Europe’s long-term economic prospects are in no better shape than the UK’s.
It has become customary for almost all European political leaders to blame COVID and the war in Ukraine for the lacklustre economic performance characterised by slow growth and high inflation. Most governments have rightly prioritised support for industry and households to protect the economy from a depression. But Europe’s dream of economic revival is disappearing, and the reasons for this predate the recent geo-political developments.
The UK political scene has undoubtedly been the most chaotic in the last few weeks. With elections to be held within the next two years, the Conservative Party in government first dumped its prime minister and appointed a new one.
Liz Truss sacked her loyal chancellor after her mantra of challenging orthodox economic strategy failed to impress financial markets.
The trickle-down economic theory adopted by Truss will not lead to ‘growth, growth, growth’ as the Prime Minister shrieked at the Conservative Party conference. It will leave Britain with growing social inequality, falling public service standards and sluggish economic growth. One of the reasons behind the UK’s current depressing economic scenario is that its government has failed to deliver on the Brexit promises, especially in creating a Global Britain that traded more with countries like Australia, India and the US after losing access to the EU common market.
But other long-term structural issues afflicting the UK and the EU’s economies exist. Dismissing the sorry developments in UK politics as another example of British eccentricity is tempting. But Britain’s problems are part of a broader set of political and economic problems that afflict Europe.
The Ukraine war has affected Europe more adversely because of its dependence on Russian gas. The UK, like the US, has more diversified energy sources. So, the prospects of a quick economic recovery in Europe are less encouraging.
But what the UK and the rest of Europe need to focus on are the structural reforms to help deliver sustainable productivity growth. The supply-side reforms for product, labour and financial markets, as well as investment in skills, infrastructure and innovation, have remained on the back burner of European politicians for too long.
It has become customary for almost all European political leaders to blame COVID and the war in Ukraine for the lacklustre economic performance characterised by slow growth and high inflation
Truss is correct in believing that economic growth is the solution to today’s stagflation problems. The EU is equally right in investing €807 billion in a post-COVID recovery fund to invest in digitalising government services, investing in clean energy and funding scientific research. This investment should improve productivity, promote healthy economic growth and create well-paid jobs.
The problem with not making this European dream a reality is mainly political. Put simply, many voters and politicians do not seem to want to accept the need for such reforms. When Italian Prime Minister Mario Draghi proposed such structural reforms the populist factions of Italian politics decided to sack him. Opinion polls showed that there was no appetite for the inevitable pains of reforms among the Italian electorate.
Today’s politics is more about image than substance. Political parties give more importance to their communication strategy than explaining to ordinary people why reforms are needed. Spin doctors are given more priority than down-to-earth social scientists who should act as the voice of conscience of all political parties.
Instead, inward-looking populism is increasing in many European countries at a time when there are hardly any statesmen of calibre. This will slow down and even reverse the falling costs of doing business across the EU. The EU has the biggest single market in the world, but some of the benefits are being squandered by populist parties that want to build barriers to the movement of people, goods and services. This lesson is already being learned in the UK, which has so far failed to find significant alternative markets to replace the EU.
In most European countries, education levels are high and inequality lower than in the US, with much better access to healthcare at reasonable prices. Europe is also tackling climate change more effectively than the US. But the economic performance of the US is better because Europe has a rapidly ageing population that makes it unattractive to non-European investors.
The European political culture must change fast before the dream of economic growth vanishes.
Note: This article was written before British PM Liz Truss announced her resignation last Thursday.