Is Europe Losing?

Is Europe Losing?

Dr. Kui-Wai Li

The Kui-Wai Consultancy for Economic Development, Inc. Toronto.

October 28, 2017

I           Introduction

Although Europe was the battleground for the two World Wars in the last century, post-World War II development in key European countries had been rapid, especially in the “big four” of United Kingdom, Germany, France and Italy. Technologically, these European countries were global leaders in such high-tech areas as aircraft, motor vehicles, nuclear, electronics and machinery productions. Economic development in key European countries since the early 1950s blossomed, generating a series of consumption demand, resulting in a rise in standard of living. The supply of technological products to the rest of the world and the demand for consumer products had given rise to trade.

The formation of the European Common Market that eventually led to the emergence of the European Union (EU) was thought of as a giant step in the unification of the European market. However, the enlargement of the EU did incorporate other economically weaker European countries. Although the intention was to aid the weaker EU members and the enlarged EU market was thought to provide them with an economic advantage, it turned out that some EU countries remained weak economically and needed to seek assistance from other member countries, thereby burdening the overall economic strength of EU.

Hence, given its continued leadership in technology, a large home market for trade, and key financial markets in several European capital cities, there were periods when Europe’s economic capacity and capability were expanding and benefitted their citizens. However, economic wellness was disrupted often by political opportunists. EU countries have been faced with economic and political challenges that could erode their economic competitiveness easily, turning EU into a weaker economic region. One can examine the economic strength of EU from two arms of analyses. The “absolute performances” shall examine how EU member countries themselves had adopted policies that would constrain their economic capability. The “relative performances” shall examine how EU performed when compared with other world regions. Together, one can have a clearer picture on the economic strength EU has, and how it could compete in the global economy against other rising regions, typically China.

Most importantly would be the lessons of political economy one can learn from the EU experience, and similarly, how EU’s performances could shed lights on other economies in their path of economic development. The ultimate question is whether the weakness in EU would be reversed or revised, which depended much on their political intention and will and the kind of economic policies adopted. Or EU would be replaced by another world region and EU retained a lower global status. And if so, what would be the consequences and new world economic order and what would the global economy be like if EU has sunk?

II         Absolute Performances

The competitive advantages of the key EU member countries are the high-technology in manufacturing and the matured financial market. While high-technology products were sold as final consumer or investment products to foreign governments and enterprises. Similarly, the supply of financial capital facilitated investment among EU and overseas countries. Over the decades, the standard of living in key EU countries rose. The increase in industrial expansion led obviously to a rise in income and employment. The demand for a better human capital led to increase in post-secondary education and the need for professional training and qualifications. In short, there was expansion in economic capacity and a bigger “economic pie” was generated to benefit all.

However, the economic rewards differed among different employment and jobs. In absolute terms, any single individual might be enjoying the rise in earnings over the years as the individual is gathering more working experience. In relative terms, unfortunately, it has been exploited politically and socially in the form of “income inequality”. Attention on economic growth and expansion of economic capability through promotion in productivity was soon given way to analysis on how income and earnings could be made equal, politically if not economically. Democracy in political elections has given rise to the “class debate”, as if people with low endowments were the social victims. Economically, it is the individual endowment or ability that counts in modern day economics, but political opportunists complained about unequal outcomes in economics. Welfare and socialist oriented politicians used the instrument of “income redistribution” through higher taxation and strong welfare support. Left-wing political parties introduced more welfare policies. The immediate consequence is the increase in the size of the government bureaucracy, the rise in fiscal spending, and often ended up in the accumulation of fiscal deficits especially in economical weak times. Such deficits meant that the current generation had overspent, and the accumulated debt would have to be repaid by the future generation.

Pro-socialist political parties tended to favor the workers and such popular policies of minimum wage legislation and unionization of workers were introduced. However, these policies tended to become rigid because once introduced, they were unlikely to be removed. On the contrary, economic development and the growth trend is not rigid but fluctuated on its own as well as in comparison with other countries. Hence, even though the economy was in a decent shape when minimum wage and strong unionization of workers were implemented, they would face challenges and difficulties once the economy recessed. Minimum wage is usually set above the market wage and unionization tended to push up wages and cost of production and protect only those affected. The unintended consequences included the rise in the cost of production, discouraged businesses and investment, and further expansion in economic capability and capacity were restricted. Hence, while the unionized workers were protected, such protection came with a probable discouragement in investment and business activities, and the fall in employment led to a loss in job opportunities. Domestic economic competitiveness would suffer, leading to a “negative sum” game of higher wage and unionization at the expense of a discouragement in investment and business and an overall reduction in economic capacity, thereby providing less opportunities for the future generation of workers.

This shall become more severe should the economy experienced recession and the unfavorable and noncompetitive economic conditions could not provide sufficient incentive to new investment that could create jobs and promote the economic multiplier. Economic recessions could provide an “golden” opportunity to socialist governments because they need to “rescue” the economy by imposing more tax on the able group of tax payers and spend more on welfare to aid the needy. Such political popularity had negative economic consequences, as the rise in government welfare and a larger fiscal debt would further discourage businesses. And a reduction in businesses would mean more workers being unemployed and economic hardship accumulated.

The result: more political noise, less economic progress, drop in economic competitiveness, lower economic capability and capacity. A shrinking economy, despite the earlier advantage in technology, advancement in human capital and a better educated workforce, and the financial ability. And the higher the level of national debt, the lower the chance for the future generation as the debt in the form of overspending in this generation would be passed to the next generation in the form of debt payment. Hence, the future generation will be made worse off.

Think of some examples of competitiveness originated in some European counties but it had been eroded and now such high-technology of vehicle production had been moved to India, or sold to a Chinese state enterprise. One can discuss the need for economic restructuring, but the displaced workers, including those unionized workers, would become unemployed. The rise in financial and other service businesses might not benefit industrial workers. Expansion of economic capacity would mean an expansion in all direction, and not a replacement of one by another, though some replacement is better than closing down or bankruptcy.

III        Relative Performances

The global economy is a mobile one, as activity in one corner of the globe would affect another economy in a different part of the world. One key aspect of globalization is foreign investment. As the rise in the cost of production coupled with a rising demand for light manufactured goods, such as textile, clothing, toys and electronics, key European countries have been investment beginning from the 1950s abroad, typically in East Asia economies of Singapore, Hong Kong, Taiwan and South Korea. In the three decades of 1960s-1990s, most of the East Asian economies have become matured, developed and reached an advance stage of economic development, and that in turn served as headquarters for foreign investment in the region. East Asian economies are smaller than the major European countries, and investment in light manufacturing did not carry much technology. Hence the loss of jobs in Europe due to rising labor cost was matched with low cost import of light manufactured consumer goods from East Asia.

The investment that left an European country would mean investment in an East Asian economy. The subsequent loss of jobs in parent economy would mean the rise in employment in the host economy. The rise in income in East Asian economies would in turn benefit Europe as imports from Europe would increase. Many East Asian economies are relatively small and are politically in alignment with key European countries. The economic rise in East Asia did not have any political spillovers, and Europe still held on to their high technology and global leadership.

Things were different when communist China opened since the early 1980s. By declaring a poor developing country, China received a lot of economic and political sympathy from many European countries, especially those pro-socialist European governments and investors. Their investment poured to China in the three decades of 1980s-2010s, comprising light manufacturing at the beginning, but high-technology investments had increasingly gone to China. The huge China market and the low cost of production became the factors that lured European investments. Communist China is definitely not the same as East Asian economies. By absorbing foreign investment, China first saved its own financial resources for its own domestic activities, and foreign investment provided China with handsome foreign exchange, which when accumulated could be used to influence the global economy, beginning with China’s friendly developing countries. And foreign investment in high-technology industries and production provided China with the technology, which would be used to facilitate its own industries and production.

In short, unlike investment in East Asia where jobs were lost but was compensated by exports of high-technology goods, European investment in China resulted not only in the loss of jobs in Europe, but technology, financial capital, and the quick imitation ability by Chinese enterprises would soon produce comparable products which would then be exported back to the European market, at a much lower price, thereby competing successfully with European counterparts. Such high-technology industries as aircraft production and motor vehicle manufacturing had now been invested in China or having bought up by Chinese state enterprises. What would Europe’s industrial capacity be like when China is exporting the same high-technology products to Europe? Could production in Europe compete with Chinese exports?

By the end of the first decade in this century, China was the largest recipient of foreign investment and held the largest world reserve. Its economic might enabled Chinese leaders and state enterprises to influence the global economy financially and politically. With its world reserve, Chinese enterprises could buy up anything which Europe and the rest of the industrial world is ready to sell, in energy-related, resource-related and technology-related products. China’s economic rise comes with a political and ideological agenda. Since the communist regime in 1949, China had aimed to expand and “conquer” the world, economically and politically, including those ideology-friendly neighbors and countries. By continued investment in China, especially in high-technology industries thinking that China would provide a big market to European businesses, Europe is losing not only economically and politically, but world status. Would the attraction of the “China market” really be that beneficial to European investors? Yes, in terms of luxurious consumer items as Chinese consumers looked to western brand names. China still practices political absolutism and the state is the ultimate decision maker, which could allow certain things to open to the rest of the world, but equally could stop certain activities, such as the repatriation of profits by foreign enterprises and the use of the internet. There could still be a high degree of market protectionism, and China’s geographical remoteness would be inaccessible to foreign businesses.

Indeed, Europe’s economic competitiveness is losing quickly because of the economic and political rise in China. Economic competitiveness is not the result of a “one-day” affair, it took decades to build up and once it was lost, the economy would suffer as the lack of competitiveness would mean the loss in various follow up activities. The loss in economic competitiveness could be permanent. A major difference when compared China with India, for example, is ideological. Many pro-socialist political European leaders thought the rise of China was considered as an alternative form of economic development. However, there could be difference between a rising China and a risen China.

Although some key European countries are aiding economic growth in China, relatively speaking the aid to China could also produce a “zero-sum” game, as the benefits China enjoyed would mean the price Europe paid in letting China to possess similar high-technology products, letting China to gain ability in financial capital and its accumulated huge foreign reserve would mean China through it “cheque book diplomacy” could economically influence various activities in the global world. The political cost to Europe would go beyond any measurable criterion.

IV        The Total Effect

The total effect on the loss of economic competitiveness could be summarized as follows. Domestically, the expansion of EU would mean the incorporation of weaker economies which imposed additional economic burden on other stronger EU countries. Internal political and economic policies had not been favorable even though there was the presence of high-technology and abundance of financial capital. Pro-socialist and welfare economic policies became rigid and would not be adjusted as economy fluctuated. Financial investment is always mobile, and could be moved within hours to the investment-friendly destinations, should economic competitiveness of the parent country have declined.

Relatively, the departure of investment from the parent country would mean the arrival of foreign investment in the host country. The loss of jobs, capital and technology would benefit the recipient country, especially the recipient country was keen to imitate and had the ambition to export back the product to the parent country. Hence, the parent country would have greater imports, leading to a fall in trade surplus, a weaker foreign exchange and international reserve.

There is a third dimension in the challenge facing key European countries. Being a more developed region and economic security had become a social norm, but Europe’s surrounding countries were still faced with difficulties and insecurities. Illegal immigrants received by many European countries was thought to add to their labor force, but they were imposing much “social cost” in the host countries. Consequently, more fiscal spending would be needed, and a bigger fiscal burden would be imposed on the tax payers. Numerous newspaper reports pointed to the social insecurity generated. Hence, embracing the huge social cost might produce a sign of good humanity, but it would have economic consequences relatively to other countries. One could ask how much EU could hold up to the need to rescue the economic difficulties of its own member countries and at the same time shoulder the “social cost” imposed by its neighboring countries.

V         Reversal Signs and Directions

One may be too pessimistic about the economic future of Europe. But looking at the economic, financial and political performances of EU, there would be a real concern as to its continued global role. A weaker Europe in absolute terms would mean a relatively stronger China and Russia. By comparison, the economic and political strength of post-World War II Europe in the decades of 1950-2000 would be different from the economic and political strength of a risen China in the following decades, due obviously to ideological differences. European countries should end their “kowtow” strategy to China, but must regain its global status in aiding development elsewhere. With a weak economy and inappropriate political regimes, European policies could only respond to other global trends but could not lead through the creation of new directions in the global economy.

While it would be difficult to influence other countries, European countries should start making reversals in their own domestic policies. Relevant questions include should domestic economic capability be given top priority? Should aiding other countries through foreign investment be screened more severely in terms of potential loss of high-technology that eventually erode Europe’s competitiveness? Should pro-socialist economic policies be revised to benefit the whole economy or just the active voters? Should the policy of helping others be reconsidered to ensure provision of equal protection to indigenous citizens and not impose addition burden on taxpayers? Should elected politicians put economic calculations and results above political ambitions? Should EU member countries prefer to trade with China, instead of wholly investing in China, especially given that China holds the largest international reserve and its currency has gained recognition? It is time for EU leaders and voters to give a serious thought on their own path of development, survivability and economic competitiveness.

The analysis on international political economy is that a declining country would always benefit a rising country because resources would simply flow from the former to the latter, thereby impoverishing the former and enriching the latter. What would be worst is that once investment was gone, it would be unlikely to return. Hence, the parent country turned to become weak, while the host country gain strength. This is how economic competitiveness is lost, or passed from one country or region to another country or region.

VI        Lessons for Canada

The question Canadians should ask is whether the Canadian economy has improved its capacity and competitiveness in the last decades, especially when seeing the rapid advancement in the China economy. The EU lesson to Canada is that economic competitiveness holds the key to success, and the enlargement of economic capacity and capability is virtual for not only survival but provide ample employment opportunities and individual progress for the future generation.

There could be political elections, but voters should see to the fact that the economic trend must continue to ensure domestic growth and stay competitive when compared to others in the global economy. One should understand that unequal outcomes would be generated in economic activities, but such differences should be improved by providing more opportunities for individuals to progress rather limiting the able group of individuals through disincentive instruments. The presence of the government is to ensure the survival of all individuals, and aid the needy but not to the extent of penalizing the able. Indeed, government policies should be able to promote more able individuals. Thus, politicizing economic differences should be carefully framed to ensure that competitiveness would not be hurt. Different outcomes in economic activities is a “law in economics”. If equal outcomes in economic activities could be achieved, it should have been achieved.

The country of Canada reached 150 years in 2017, it is still a relative “young” country. Leaders should look to the resources advantages that Canada has. For example, Canada should develop land-intensive businesses and industries. Mechanization should be applied to agriculture and farming. Such high-technology industries as electrical motor vehicles could be developed and advanced. Being geographically large, land transport should be developed through the construction of high-speed trains to connect more cities and extend to remote regions. Having the United States as its neighbor should be more a blessing as the US could provide Canada with a largest world market and at the same time attract US investments. Nonetheless, there is a need to develop indigenous businesses and industries to expand Canada’s economic capability and not become too dependent on foreign investment and import. In short, although some political regimes tended to follow the worldly trend of politicizing income differences, it is never too late for the leaders in Canada to start engaging more in economic expansion, spending more thoughts and constructing appropriate policies to ensure increase in economic opportunities. A good political leader should work to ensure more of its citizens would be able to stand on their own economic feet, and not make more citizens to rely on welfare assistance.

The Canadian economy has a lot to learn from the experience of Europe in the relationship between political divisiveness and economic competitiveness.

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