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For the first time in 2011-2012, the Global Agenda Council on Europe (the Council) focused solely on Europe, a much-needed evolution in light of the significance and diversity of challenges facing the European Union and its immediate neighbours.

This report proposes a framework to classify, analyse and offer solutions to these challenges: sovereign debt, low growth, internal discord and weak influence in external relations. The Remodelling Europe Initiative provides a platform for inter-generational dialogue around these proposals, bringing to the fore the vision of the Young Global Leaders and Global Shapers for the future of the European project.

Challenge

Since the launch of the European Economic Community in 1957, the process of European integration has overcome the centuries-long divisions between the states of Europe, initially in the West and then, after the end of the Cold War, between Europe’s East and West. The European project also helped its members to grow and compete economically through the creation of the Single Market, which delivered economies of scale, broke up cartels and monopolies, enhanced efficiency and drove innovation across the region.

On the whole, the integration of European countries has been a great success. Wars between European states have become a thing of the past, save a few exceptions in the Balkans. Today, the combined GDP of the 27 EU members is US$ 16.2 trillion, higher than that of the US ($14.6 trillion) and China ($5.9 trillion). Europe is technically sophisticated and its labour productivity, as measured by output per worker, is higher than anywhere else in the world. Combining high levels of economic activity with equity and social inclusion, Europeans may have the best quality of life in the world. Some observers have called Europe the “lifestyle superpower”. The United Nations Development Programme (UNDP) Human Development Index ranks 13 European countries in its list of top 20 performers.

Despite this impressive track record, however, the European Union today is in the throes of an existential crisis, caused by four principal factors:

  •  Sovereign debt: The EU launched its single currency in 1999 without the underpinning of a coordinated fiscal policy framework. This systemic fault allowed less competitive Eurozone countries to take advantage of low interest rates to borrow heavily to feed consumer or property booms. It also allowed most Eurozone members to prop up unsustainable social welfare arrangements. Excessive borrowing has given rise to a sovereign debt crisis in the Eurozone, which is now placing unprecedented pressure on the political, economic and institutional foundations of the European Union.
  • Low growth: As a whole, the EU is now under-performing in terms of growth in relation to other fast-growing parts of the world. Concern is rising that the “European model’ of liberal democracies – market economies but with a high degree of state welfare – may lack the dynamism and decisiveness to compete with emerging economic powers. The increasing divergence in competitiveness between different regions within Europe compounds the challenge: while Western and Northern Europe have positive productivity levels and high productivity growth, Central and Eastern Europe exhibit high productivity growth despite low productivity levels, and Southern Europe combines low productivity levels with low or negative productivity growth.
  • Internal discord: The sovereign debt crisis and low growth have fostered a growing sense of disharmony and loss of confidence among EU member states and also between the member states and EU institutions. Many speak of a crisis of leadership, as political leaders juggle competing national, European and global agendas, while striving to stay one step ahead of the markets. Europe’s cumbersome decision-making processes have left Europe’s policy-makers struggling to shape their agenda.
  • Weak influence in external political relations: For most of its history the EU has behaved like an economic giant but a political lightweight on the world stage. The danger now is that the EU’s impact as the world’s largest trading bloc may also decline, as member states compete for influence with emerging economies. Nearer to home, the EU faces the unprecedented challenge of deciding on appropriate action in the context of the radical change and turmoil in the Arab countries.

Response

The Council focused its work in 2011-2012 on developing proposals for European leaders and their societies to address these challenges. Separated into three streams, the work involved: (1) new models for re-energizing growth across the EU, to provide a sustainable basis for escaping the sovereign debt crisis; (2) adapting the EU’s political institutions, to overcome the growing political discord which may prevent EU member states from developing the necessary collective solutions to their common challenges; and (3) responding to the Arab uprisings, to ensure that the EU does not face a double crisis of internal disharmony and a southern neighbourhood descending into conflict.

Drawing on the extensive expertise within it, the Council prepared position papers on these three streams before the Summit on the Global Agenda in Abu Dhabi in October 2011. They served as the basis for Council discussions at the Summit and in conference calls thereafter, including in the lead-up to the World Economic Forum on the Middle East, North Africa and Eurasia in Istanbul in June 2012. As noted in the impact statement below, the Council’s work also contributed to the launch of the Forum’s Remodelling Europe Initiative (REI).

1. New Models for Re-energizing Growth Across the European Union

Without near-term, viable prospects for sustainable economic growth across the EU, financial markets may yet force an abrupt recalibration of Europe’s relative wealth, and the crisis within the Eurozone could evolve into a chronic, lengthy period of economic instability. The fact that some of the most competitive economies in the world are in Northern Europe may bear little weight if these are locked into a market and institutions alongside countries that demonstrate deficiencies and variations in economic competitiveness.

The Council considered, therefore, where EU initiatives could help to drive growth within EU member states and where national reforms could help drive EU-wide competitiveness, in line with the EU’s Europe 2020 strategy for growth. The main conclusions were as follows:

(a) It is imperative that the European Commission propose to open up the EU market to services, including digital services, which collectively comprise 70% of total EU GDP, but which are largely excluded from provisions of the Single Market, according to the Monti Report (2010). Proposals to move this forward include:

  • creating more European-level regulatory authorities to assist in opening the market to services
  • ensuring that the mandate for competition policy decisions in the services sector devolves to the EU
  • ensuring that the Services Directive is successfully implemented at member state level, including a campaign informing companies and consumers of their rights

(b) Develop an EU-wide, coordinated labour policy to enhance mobility and overcome the fragmentation of the labour market in the EU. This would include:

  • developing mutual recognition of accreditation and diplomas
  • improving transmissibility of social security benefits
  • increasing freedom for enterprises to make hiring and firing decisions
  • allowing greater use of temporary migrant work visas for third country workers
  • aligning and restructuring pension systems with a higher retirement age

(c) Universities across Europe need to be placed on sounder financial footing that will make them competitive with the best in the world. This would involve providing universities with the following incentives:

  • greater autonomy to raise funds in the private sector
  • the capacity to increase tuition fees substantially, accompanied by the introduction of appropriate grant and scholarship schemes
  • the flexibility to attract and reward the best teachers and researchers

(d) Make the EU more open to economic, social and technological innovation through a coherent innovation policy, in particular promoting private R&D (EU governments already match their main competitors in the United States and Japan on official R&D spending). This would include:

  • strengthening the link between academic research and commercial exploitation of the results
  • prioritizing EU spending on innovation and research in the next Multiannual Financial Framework (MFF) and providing tax and other incentives for private-led R&D
  • developing a broader notion of innovation based on performance and output indicators rather than strictly on input indicators (level of R&D spending)
  • easing access to funding for SMEs, through venture capital, public-private partnerships and new innovative financing instruments such as the Risk Sharing Facility proposed by the European Commission

2. Adapting the European Union’s Political Institutions

Relations among EU member states, between member states and EU institutions and among EU institutions have all entered a period of unprecedented turmoil. There are many reasons for this, among them: disagreement over how to manage the Euro crisis and the fear that solutions may upset the existing balance between member states and EU institutions; different national perspectives on the shape of future European integration among an enlarged EU; overlaps in institutional responsibilities following the ratification of the Lisbon Treaty; and the rise of more populist politics in many EU member states as electorates respond to the prospect of recession by seeking solace in protectionism and xenophobia.

The Council focused first on the way in which efforts to combat the Euro crisis were potentially undermining EU institutions. It was noted that dealing with the Euro crisis was a sui generis exercise and should not serve as a model for future forms of EU institutional integration. In particular:

  • The Commission does not play a leading executive role in the Euro crisis. This has been taken up by the European Council under the leadership of President Herman von Rompuy.
  • Funding to resolve the crisis is coming principally from a small number of member states inside the Eurozone.
  • As a result of both of these factors, it appears that resolving the Euro crisis has involved creating a “dictatorship of the creditors”, which, while perhaps necessary in this instance, must not be replicated.
  • Resolving the Euro crisis would require technical agreements and legislation that should not stray into treaty change (instruments such as creating a European Monetary Fund; a European deposit insurance scheme; and proper risk-weighting of government debt in EU banks).

Second, the Council considered the principles upon which efforts to strengthen intra-EU cooperation and integration should be built:

  •  States of similar levels of development and capacity to commit should integrate more deeply if they wish, operating within the structure offered by the Lisbon Treaty.
  • Such initiatives would benefit from a light central supervisory structure.
  • Rules should be implemented at the national level, but legal accountability at the EU level.
  • It is essential that integration that does not involve all EU member states not result in a two-tiered EU, with its attendant risks to the Single Market. Consequently, the European Commission should always have a strong central role in whatever arrangements emerge. Also, space should always be made for countries that “opted out” to meet with the more deeply integrated core of countries in decision-shaping meetings.

3. Responding to the Arab Uprisings

The European Union’s capacity to think about and act strategically towards its neighbours has always been limited, both by the differing interests and priorities of its various member states and by the fact that, without the leverage of EU membership, its neighbours are less open to EU influence. However, EU members cannot permit these considerations to lead to a sense of fatalism or complacency, especially given the serious implications of the Arab uprisings for their own future prosperity and security. Moreover, the EU can have a real impact on its neighbours, far more than on East Asia or Latin America, so it would do well to adopt a pro-active approach to the Arab uprisings.

The Council discussed the EU’s response to the Arab uprisings, including the joint document prepared by the European Commission and External Action Service in May 2011 which laid out the principles on which this response would be based. Council members concluded that the EU’s emphasis on the conditional nature of its future support to new Arab regimes (under the principle of “more for more”) is understandable. Imposing conditions in terms of democratic norms, human rights or open markets in return for closer economic and political relations is necessary for credible EU policies that will carry the necessary parliamentary and public support in the long run. In addition, experience with the EU’s Eastern Partnership confirms that conditionality is often necessary to ensure market reforms, such as greater transparency, rule of law and tax regime consistency.

However, it is important to recognize the limits of conditional support in the absence of a real offer from the EU that makes the conditionality credible. In this context, Council members argued that the EU should “increase the offer” to its Arab neighbours or risk that vested EU interests, particularly in the southern EU member states – representing the most defensive position on migration and market access towards the EU’s Arab neighbours – will dominate the relationship. Specific ideas to “increase the offer” included:

  • offer states in North Africa that meet the necessary conditions a full customs union, as enjoyed by Turkey
  • give Arab neighbours observer/contributor status to some of the decision-shaping discussions of EU Council of Ministers and occasional summit meetings
  • make a concerted effort to involve certain Arab neighbours in trans-European energy and transport infrastructure networks
  • ensure that the European Bank for Reconstruction and Development (EBRD) has the mandate and resources to promote the development of small and medium-sized businesses in North Africa and the Levant
  • ensure that these and other government-led political initiatives help to leverage private sector engagement and leadership in providing economic opportunity in the EU’s neighbourhood.

The Council also recognized the need for closer collaboration between the EU and other relevant external partners in promoting stability and economic growth in the Arab world. Turkey has now established significant influence in the Middle East, as demonstrated by its active role during the Libya and Syria conflicts. To achieve real impact in this region, the EU will have to work closely with Ankara and other regional partners. Beyond immediate diplomatic efforts and crisis management, this would include coordination of aid packages to enhance their effectiveness, and seeking joint opportunities to invest in infrastructure projects.

 Impact

The Council made a significant contribution to the launch of the World Economic Forum’s REI and has played a central role in developing the agenda of the World Economic Forum on the Middle East, North Africa and Eurasia meeting held in Istanbul in June 2012. These contributions have been instrumental in raising the impact of the World Economic Forum on European issues.

The REI will explore the future of the European project as well as analyse new growth strategies for the European Union. The Council forms the core of the REI Steering Board. In addition to providing thought leadership on the substantive focus of the REI, it has been directly involved in designing and delivering REI-related activities, including a baseline poll to reflect the opinion of the Young Global Leaders and Global Shapers on European issues; the preparation of scenarios on the future of the international monetary system; and the publication of the EU2020 review which tracks the progress of member states towards achieving the goals set by the EU2020 strategy. The results of these various projects were shared with key European decision-makers during a series of workshops in European capitals and private events at the World Economic Forum on the Middle East, North Africa and Eurasia in June 2012, and will be shared again at the Forum’s Annual Meeting in 2013.

Disclaimer

The opinions expressed here are those of the individual members of the Council and not of the World Economic Forum or any institutions to which they are affiliated.