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Note for the Cercle des Economistes  conference, Aix-en-Provence, 6-8 July 2012

A striking feature of international discussions in recent times is how much they have focused on Europe and especially on the euro crisis. The last two G20 summits and the latest IMF meetings were largely devoted to it. Most international economic conferences recently held worldwide have discussed its fate. Furthermore, contrary to paranoid conspiracy theories en vogue here and there, the world’s attitude towards Europe has been overwhelmingly positive. Its partners genuinely hope it that it will succeed in rescuing itself and rescuing its currency – and to this end they are willing to offer support and advice, if not always money. 

One may wonder why. The euro area accounts for only 14 percent of world GDP, as conventionally measured (in purchasing power parities terms). A two percent drop in its growth rate – roughly what is being observed as a consequence of the euro crisis – translates into a modest 0.3 percent drop in the global growth rate, which was 4 percent in 2011. Even a more catastrophic outcome – say, a 5 percent drop in euro-area GDP – would seem to be manageable. There is a paradox in saying, at one and the same time, that Europe has become marginal and yet that the future of the world economy hinges on the fate of the euro.

Beyond numbers, the broader question is, why should the world care if Europe fails? The unification that is being attempted in a small corner of the Eurasian continent may seem of minor importance. The US, China, India, Brazil, and several others are already continent-size economies equipped with unified regulation, a single currency, and a federal budget. Whether or not the European nations succeed in building a monetary union or a federation of nation states may appear to be a relevant issue for a few smaller economies, but not for the giants of this world nor for relations between them.

Against this background, the purpose of this note is to explore and discuss whether and why Europe matters to the world. I discuss quantities in section 1 and qualities in section 2, before concluding in section 3. 

1.   Quantities

Why can a region whose weight in world GDP is small and whose growth perspectives are mediocre matter so much? A first answer is that now-standard measures of GDP underestimate the importance of Europe. Rather than using PPP-based GDP we should perhaps use nominal GDP, which is a better measure of a country’s weight as a market. This lifts the euro-area share to 17.5 percent of the global total. Rather than focusing on the euro area we should perhaps include the rest of the EU, Switzerland and Norway, because mayhem in the euro area would inevitably engulf neighbouring partners. This increases the weight of Europe to 25 percent. Finally, we should also take into account that output is not all that matters, because someone has to buy the products. The share of household consumption in EU GDP is 65 percent, whereas it is only 35 percent in China. In the years before the crisis, from 2001 to 2007, household consumption in the EU contributed 0.4 percent to world growth annually, against a mere 0.1 percent for China. We may have become second-rate producers, but we remain first-class consumers.[1]       

A second answer is that Europe still matters a lot financially. According to a recent McKinsey survey, financial depth (the stock of financial claims over GDP) varies from 400-500 percent in advanced economies to 200-300 percent in China and India and 100-200 percent in Latin America and non-China Asia.[2] For all their failings, advanced countries remain prime suppliers of financial assets. Western Europe in 2010 accounted for 30 percent of total financial stocks worldwide (roughly at par with US, whose share is 32 percent).

Furthermore Europe is more open financially than the rest of the world, including the US. This makes its weight in the world stock of financial assets held internationally even higher: 21 percent in 2010 for the euro area and 38 percent for Europe as a whole, against 20 percent for the US and 8 percent for the BRICs (including Hong Kong).[3] Even discounting intra-European asset holdings, Europe must be regarded as an international financial superpower. Investigations into the role played by financial centres confirm that it includes a number of significant financial hubs. In fact the comparison of international production networks and international financial networks is indicative of the gradual marginalisation of Europe in the former and its enduring centrality in the latter.[4]

True, Europe is on the retreat. Its disappointing economic performance in recent years is making it shrink faster than implied by the mere demographic and economic trends. Its share of global stock-market capitalisation is dwindling. Its financial woes imply a significant retreat of European banks from Asia and other places where they were playing a major role in the financing of projects and trade. Yet for the time being, it is still big enough for the rest of the world to feel threatened by its crisis.

2.   Qualities

In his recent book, The World America Made, Robert Kagan warns against teleological reading of history and argues forcefully that the world as we know it is not the natural outcome of irresistible progress towards democracy and openness but rather the result of a particular shaping by a particularly benevolent sort of superpower – the United States.

Europe shaped the world of the last century rather than the current one, and it did not do it in an indisputably benevolent way, to say the least. It is nevertheless interesting to reflect on what the EU has brought to international relations since it took a turn to post-nationalism in the second half of the twentieth century and to assess on this basis what its fading might imply.      

To start with, Europe has consistently played the role of an Institute for Advanced Studies in international relations (or as a ‘laboratory’, as WTO chief Pascal Lamy likes to put it). Most modern forms of post-national economic governance have been introduced in, and experimented in, Europe before being transposed internationally. This is true of supranational legislation and economic law courts; extensive delegation of competence to international executive bodies; supranational parliamentary democracy; and mutual economic policy surveillance, including through the eventual imposition of sanctions; and of course supranational currency. Not all these attempts have been successful, but this is precisely what is of interest to the partners, who have been able to learn from EU experience.     

Second and consistent with its internal principles, the EU has over the years been a staunch advocate of rules-based multilateralism. The US may have been an early and forceful promoter of global trade liberalisation, but it behaves in this way only as long as the US political system perceives it as coherent with US national interest. When Congress sees things otherwise (as a large part of it currently does), the US generally turns to different, not necessarily protectionist but at least less multilateral, attitudes. This is not the case in the EU, at least as long as its treaty-based internal governance, that gives trade policy authority to the European Commission, remains untouched. Beyond the specifics of internal decision-making, the EU feels comfortable with rules-based multilateral governance because that is the way it runs itself internally. This stance can be found in trade as well as in many other fields such as financial regulation and climate policy.   

Third, Europe serves as a regulator and as a regulation enforcer for the world in fields where global regulation is absent or impotent. Competition policy is an interesting example, where the European Commission has repeatedly been able to block mergers between non-EU companies on the grounds that they would have created dominant positions in some market segments and would have hurt domestic consumers. Since then-EU competition commissioner Mario Monti famously blocked the GE-Honeywell merger this extraordinary power has not gone unnoticed – the EU was dubbed ‘the world’s regulator’[5] – but it has thus far remained unchallenged. It seems to be tacitly admitted that, in protecting the European consumer, EU competition decisions may hurt foreign producers (as well as domestic ones), but also protect foreign consumers.

This is not to say that Europe has proved effective in its dialogue with international partners. Its awkward external representation and its propensity to insist that the rest of the world adjust to its own governance failings are not only hindrances to international influence but also, and understandably, matters for irritation and irony worldwide.

This is not to say either that Europe does not have its own interests in mind and that it only acts in the name of the global good. To pretend so would be naive and wrong. In trade and regulation it has sometimes behaved as a tough advocate of particular interests – as farmers in the rest of the world undoubtedly remember. It is not immune of selfishness. But arguably this happens less systematically than for countries where the domestic political system is in direct control of foreign economic policy. In the EU, wide diversity of preferences among the constituent states, the primacy of law and mediation through a transnational body generally combine to soften the outright expression of specific interests.     

No other country or group of countries is today in a position to contribute in a similar way to the shaping of global governance. The US largely retains policy leadership and it has undisputed intellectual firepower, but the combination of inexorably diminishing international weight and domestic political parochialism risk producing erratic behaviour. Emerging powers such as China, India and Brazil may have a vested interest in the preservation of the multilateral regime but their domestic political systems are inward-looking and they remain reluctant to allow encroachments on national sovereignty. And, as to regional groupings such as the ASEAN, they are simply too feeble at this stage to exercise influence. So it is fair to argue that Europe in recent decades has brought to the world something unique.

3.   Conclusions         

I have argued in this note that Europe still matters more than often thought, both quantitatively and qualitatively. Looking ahead, its quantitative importance is bound to diminish further, but it could either collapse – if the euro crisis results in eventual fragmentation – or remain significant for some time – if all the travails of recent times end up producing a more integrated and resilient currency union. Qualitatively it is natural to wonder whether Europe can still be regarded as a laboratory, to argue about what remains of the international influence it once enjoyed and whether it still has the will to define itself as the proponent of the common global good.

It is too early to answer these questions. Even if satisfactorily resolved, the euro crisis will certainly leave a long shadow and Europe may never be able to recoup the credibility and prestige it once had. By the same token, however, it is premature to write it off. What is clear is that, should its influence diminish greatly, the rest of the world would probably miss what a continent with the particular history Europe has can bring to the international table. Maybe this is a dimension partners are somehow conscious of when participating in one of the too-many meetings in which they have been forced to discuss the never-ending euro crisis.

[1] See details in Jean Pisani-Ferry (2010), « China and the World Economy : A European Perspective Â», Bruegel Policy Contribution No 2010-03, March.

[2] See MGI, Mapping Capital Markets Worldwide, August 2011.

[3] Source : External Wealth of Nation Dataset compiled by Philipp Lane and Gian Maria Milesi Ferretti. I am grateful to them for having granted me access to their yet unpublished 2010 data.

[4] See Chris Kubelec and Filippa Sa (2012), “The Geographical Composition of National External Balance Sheets, 1989-2005, international Journal of Central Banking, June. 

[5] See the Wall Street Journal editorial of 31 March 2006.