Reference no: EM13841497

The European Union's Challenges

As we noted in this chapter, the members of the EU have made remarkable progress in creating a common market and in promoting peace and prosperity throughout the 28-nation community. The EU, unfortunately, has hit a rough patch subsequent to the Global Recession of 2008-2009, facing some of the most vexing and contentious issues that have arisen in its six decades of existence. Some of its problems are structural in nature, others are political.

The EU faces a demographic challenge. As we noted in Chapter 1's closing case, the population of many EU countries is shrinking and aging, elevating their old-age dependency ratios (the ratio of people of retirement age to people of working age). Because many members also have extensive social safety networks, these demographic changes suggest that taxes need to be raised on younger workers to support retired workers, retired workers need to suffer a contraction of their standards of living, or countries need to encourage immigration. All three of these options are normally politically unpopular, and any officeholder campaigning in support of them has a high probability of becoming an ex-officeholder. As famously stated by Luxembourg's Prime Minister, Jean Claude Juncker, "We all know what to do, we just don't know how to get re-elected after we have done it." A fourth alternative, of course, is to encourage higher birth rates through tax breaks and public subsidies. However, such incentives are usually small relative to the costs of raising a child and have not proven to be successful. Sweden is a notable exception. In Sweden's case, parents of a new child receive generous parental leaves, but the program is structured to encourage both the father and the mother to use the leave. As a result, Sweden's fertility rate is 1.94 children born per woman, in comparison to Germany's 1.41 and Italy's 1.40.

The second set of challenges is ideological in nature. The member states have fundamental disagreements on the role of government in the economy. The United Kingdom, particularly when controlled by Conservative governments, argues for free markets for goods and services and labor markets using employment-at-will principles. Denmark, Ireland, and the Netherlands similarly emphasize the importance of perfecting the EU's internal market, facilitating the free flow of products, capital, and technology throughout the EU. Other countries, such as France, believe governments should actively intervene to promote economic and social justice, and that workers should be given strong job rights and protections. For instance, France's President François Hollande threatened to nationalize automaker PSA Peugeot Citroën if the company proceeded with its plans to lay off 8,000 employees and shutter an assembly plant near Paris. Germany and Austria promote a social market system, which blends market capitalism with extensive social insurance and strong protection of union bargaining rights. Accordingly, the EU is riven by philosophical conflicts over economic policy. Should governments be able to bail out financially threatened firms to protect workersjobs . . . or is that a betrayal of the Treaty of Rome's common market ideals? Should the EU adopt common policies toward maternal and paternal leave and the rights of part-time workers, or is this decision best left to the national governments? Often such issues favor one group of countries but harm the economic interests of other countries. (See, for example, the discussion of the Tobin Tax on page 286; consider the implications for London's or Luxembourg's competitiveness in the global financial market if the tax were adopted.) To complicate matters further, big rifts exist on the appropriate size of the EU's budget, with wealthy countries, such as the United Kingdom, Germany, Sweden, and the Netherlands, trying to curb Brussels' spending, whereas poorer southern, eastern, and central European countries lobby for the EU's regional development expenditures and other subsidy programs to expand.

A third challenge is institutional in nature. The EU lacks EU-wide institutions to deal with economic crises. Consider the Global Recession of 2008-2009. The Bush and Obama administrations created programs such as the Troubled Asset Relief Program and the American Recovery and Reinvestment Act to address the crisis. The Federal Reserve Bank responded with its quantitative easing programs to assure liquidity and stimulate bank lending. Conversely, the EU had no such institutions in place. Financial assistance to governments in distress resulted from a series of contentious ad hoc negotiations among the affected governments and other EU members. The European Central Bank and the Bank of England separately developed policies for restoring liquidity and faith in European banking institutions.

The EU also lacks interregional stabilizers that ease economic conflicts among members. Consider what happens when states or regions of the United States confront different phases of the business cycle. Suppose Texas is booming because of high oil prices, whereas Michigan is suffering because those high oil prices are hurting demand for cars built in Michigan. As a result, unemployment is low in Texas but high in Michigan. What happens? Slowly but surely, some Michiganders will leave their homes and move to the Lone Star State. The result: unemployment falls in Michigan and rises in Texas. Will the two unemployment rates equalize? Not necessarily, but the flow of workers and families between the two states helps push their economies into synch with one another. Can the same thing happen within the EU? If Germany is booming and Greece is suffering, will Greeks move to Germany to seek employment? They can legally do so as a result of the Treaties of Rome and Maastricht, but they are likely to do so at a lesser rate than Michiganders because the cultural and linguistic barriers of moving from Greece to Germany are much higher than the cultural and linguistic barriers of moving from Michigan to Texas. A second interregional stabilizer is the tax system. If Texas is booming and Michigan is suffering, then the federal income taxes paid by Texans will rise and those paid by Michiganders will fall. Moreover, subsidies, tax breaks, unemployment insurance, and similar programs sponsored by the federal government have the effect of transferring monies from Texas to Michigan, again moving the two states to similar phases of the business cycle. Use of tax transfers as an interregional stabilizer will not work in the EU, however. German citizens are unlikely to agree to raise their own taxes to aid their Greek brethren.

The fourth challenge the EU faces revolves around governance issues. As the EU has expanded in size, the governance structure, which was designed for the six-member EEC under the 1957 Treaty of Rome, has become unwieldy. At European Council meetings, it would take more than two hours if every member of the Council spent just five minutes introducing himself or herself and briefly outlining his or her country's position on the issue at hand. Hammering out agreements that can gain a qualified majority often consumes months, even years, of painstaking negotiations. Many proposals to streamline the EU's governance procedures involve weakening the role of the Council of the European Union, which in turn weakens the role of the member states and strengthens the power of the Eurocrats. Many countries, led by the United Kingdom, find that resolution unacceptable.

An ancillary issue is the lack of democracy within EU institutions. The only EU officials that EU citizens directly vote for is a member of the European Parliament (MEP), yet most EU citizens cannot name their MEP or what policies that person supports. Surveys suggest the EU citizens cast their votes for their MEP on the basis of whether they are in favor or against their current home government, not on the policies proposed by MEP candidates. Moreover, EU citizens have no ability to influence the selection of other powerful EU officeholders, such as the President of the European Union, the High Representative of the Union for Foreign Affairs and Security Policy, the President of the European Commission, or even the members of the European Commission.

Case Questions

1.  What are the economic implications of a rising old-age dependency ratio?

2.  Italy's old age dependency ratio in 2012 is 0.28; by 2050, it is expected to rise to 0.68. Would you be willing to build a new factory in Italy in 2050? Will Italian teenagers in 2050 be motivated to study hard in school if they fear that their future earnings will be subject to high income taxes?

3.  In 2012, Peugeot announced that it would shutter its factory in Aulnay-sous-Blois, costing 8,000 workers their jobs. President Hollande immediately denounced the proposed downsizing and pressured the company to change its plans and business strategy. He offered the company's finance subsidiary €7 billion in credit guarantees if Peugeot would rethink its plant closure plans and add representatives of the workers and of the state to its board of directors. Do you agree with his actions? Are his actions consistent with France's obligations under the Treaty of Rome to promote a common market?

4.  Suppose the European Commission is considering an EU-wide policy mandating that workers be entitled to a one-month vacation every year. To promote a common market, is it necessary that all EU members have the same policies toward annual vacations? Or should this decision be left to the member states?

5. Given Greece's recent financial crisis, do you think the EU can survive?  Why or why not?  Consider in your response the issues of currency, culture and a common market without common governance. Should rich countries (Germany) be propping up the economies of poorer countries (Greece)?