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Europe’s Policy Vacuum Means You Have To Write Off 2015

Business, China, Company Strategy, Economics, Europe
By John Richardson on 03-Dec-2014


By John Richardson

EUROPE  is going nowhere and, so like China, can only be a drag on global growth in 2015  as we enter a new global financial crisis. 

“The legacy of the crisis is affecting [EU] member states to different degrees but spill overs through trade and confidence are large,” said the European Commission early last month as it announced sharp downward revisions in its forecasts for 2015 GDP growth (see the above chart).

Two of the most alarming cuts to growth estimates were for Germany and France. In May, the commission had expected Germany’s GDP to increase by 2% in 2015, but last month it lowered its forecast to just 1.1%.  Its outlook for France was reduced from 1.5% to 0.7%.

This wouldn’t be as depressing if a visionary set of new political leaders had begun to emerge with a policy agenda aimed at addressing Europe’s biggest challenge, which is demographics. I would at least then feel more hopeful about 2016 onwards.

Instead, though, in an effort to win back votes from populist parties, mainstream politicians are still trying to be more populist than the populists – particularly in the case of immigration.

Take my own country, the UK, as a very good example of this.

The UK’s Conservative Party has become more and more strident on immigration, especially from the EU, as it tries to regain ground lost to the populist, anti-immigration UK Independence Party.

But as Martin Wolf points out in this FT article, the evidence that EU immigrants are predominantly “welfare scroungers” isn’t there, as the latest government census data shows that:

  • 80% of immigrants from the EU, who were of working age and who had been present in the UK for between five and 10 years,  were in employment.
  • This compared with 69% of people born in the UK and 61% of those born outside the EU.

Wolf is right when he argues that Britain needs to have a proper and rounded debate on immigration, and on the country’s place in Europe.

At the moment, though, this cannot take place because people are acting on their emotions. This is the result of a complete  lack of meaningful direction from their mainstream politicians.

The same applies to mainland Europe, where you have seen the rise of right wing parties such as France’s National Front and Greece’s Golden Dawn. Left wing parties are also gaining in popularity – most notably of late, Podemos in Spain.

As we all know, the right wingers on the mainland have also honed-in on public concern over immigration.

But they have only been able to do this because people are scared, are angry – and once again feel let down by ruling-party politicians.

These emotions are hardly surprising, given record-high unemployment rates.  29.5% of people  are unemployed in Greece and 24% in Spain. A truly horrifying 53.7% of people under the age of 25 are unemployed in Spain.

In such an atmosphere of fear and anger, mainland Europe is also unable to have a rational debate about immigration.

But this debate has to take place, according to the Organisation for Economic Cooperation and Development (OECD).

“If you close the door [to immigration]) you will pay an economic price,” said Jean-Christophe Dumont, an expert on migration at the OECD

“For now, we can make better use of migrants who are already here, matching their skills better to labour market needs. In the longer term, it will not only be about matching skills, it will also be about numbers,” he added.

We also need a sensible discussion about the need to raise retirement ages across Europe – and the need to re-direct manufacturing and service industries towards the requirements of an ageing population.

Only then will the current policy vacuum be filled with policies that actually make sense.

Of course, though, this is putting the cart before horses, Europe’s politician must, first of all, recognise that demographics drive demand.