Europe’s post-crisis recovery has been disappointing in comparison with the USA. But lower rates of inequality are staving off populism and bolstering support for globalisation. With the USA
The legacy of the financial crisis has left a different trail in the EU economy by comparison to that of the US. Almost a decade after the start of what was undoubtedly the worst financial crisis in the last 50 years, the US has managed to restore financial stability and deliver a convincing path back to growth. The EU, by contrast, has not achieved a credible return to economic vigour. It is true that Europe has seen some renewed growth recently, but it remains weak and precarious. This is in part due to the EU’s weaker institutional resilience. High unemployment, particularly for the young, an excess of non-performing loans on banks’ balance sheets, and an incomplete banking union, all help explain the precarious nature of the stability and growth that we observe.
Despite these major economic challenges, Europe does have one important strength. Most European countries have always maintained relatively low levels of income inequality, certainly in comparison with the US. As the benefits of opening
Nevertheless, there is no doubt that on both sides of the Atlantic the political trail of this last 10 years has been a rise in populism, inwardness and ultimately even protectionism. However, the way the two sides have dealt with such tendencies has been quite different.
In the US, the unexpected election of Trump has accelerated an earlier US trend, bringing its role as an anchor of the global system into question. And it is not just about withdrawing from a leadership position. Trump’s ‘America first’ rhetoric openly challenges a core tenet of multilateralism. This new philosophy was manifested in the recent withdrawal from the Paris agreement and the TPP, and also inspires the threat to impose indiscriminately high tariffs.
There are parallels in the UK, which voted in July 2016 to withdraw from the EU in order to craft its own trade agreements and find different ways of engaging with the rest of the world. The rhetoric of ‘taking back control’ is in line with this tendency to look inwards, protect one’s turf and adopt an antagonistic rather than cooperative position with others. Naturally, there are
From the European perspective, the US election outcome and Brexit have changed geopolitical dynamics and challenged what the European Union considers its ‘natural alliances’. At the same time, however, the latest electoral outcomes in the Netherlands and France, along with the expected result in Germany, have shown an ability to contain populism. This
What should be the reinvigorated EU’s response to a more protectionist US? While economic and cultural ties with the US are very close, the EU also has strong relationships with the rest of the world. It
However, though the EU is the largest trading bloc in the world, it cannot sustain a multilateral system on its own. In order to protect its interests, it will have to do more both inside and outside its borders. Externally, it needs to collaborate with partners around the world in defence of World Trade Organisation rules and fight to ensure international compliance. At the same time, the EU needs to foster relations with China and others, increasing diversity in its partnerships. Internally the EU also needs to do more. Implementing important reforms at both the national and EU level will be necessary to redress destabilising imbalances. And it is paramount to build up institutional resilience the lack of which has prevented the EU from taking quick and decisive action during the crisis.
Last, while the US position at the world stage remains uncertain and possibly antagonistic, the EU needs to be prepared for all possible outcomes. On the one hand, Europe must be capable of retaliating with tools that could be deployed bilaterally if the US imposes WTO-incompatible measures; on the other hand, Europe should also try to nurture a trans-Atlantic alliance that has always been the most natural of partnerships.
Maria Demertzis is Deputy Director at Bruegel. She has previously worked at the European Commission and the research department of the Dutch Central Bank. She has also held academic positions at the Harvard Kennedy School of Government in the USA and the University of Strathclyde in the UK, from where she holds a PhD in economics. She has published extensively in international academic journals and contributed regular policy inputs to both the European Commission's and the Dutch Central Bank's policy outlets.
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