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Decline and fall of Europe

These days we all talk about the rise of Asia and the challenge to America, but it might well turn out that the most consequential trend of the next decade will be the economic decline of Europe.

It’s often noted that the European Union has a combined gross domestic product that is approximately the same as that of the United States. But the EU has 170 million more people. Its per capita GDP is 25 per cent lower than that of the US and, most important, that gap has been widening for 15 years. If present trends continue, the chief economist at the OECD argues, in 20 years the average US citizen will be twice as rich as the average Frenchman or German. (Britain is an exception on most of these measures, lying somewhere between Continental Europe and the U.S.)

People have argued that Europeans simply value leisure more and, as a result, are poorer but have a better quality of life. That’s fine if you’re taking a 10 per cent pay cut and choosing to have longer lunches and vacations. But if you’re only half as well off as the US, that will translate into poorer health care and education, diminished access to all kinds of goods and services, and a lower quality of life. Two Swedish researchers, Frederik Bergstrom and Robert Gidehag, note in a monograph published last year that "40 per cent of Swedish households would rank as low-income households in the US." In many European countries, the percentage would be even greater.

In March 2000, the EU’s heads of state agreed to make the EU "the most competitive and dynamic knowledge-driven economy by 2010." Today this looks like a joke. The OECD report goes through the status of reforms country by country, and all the major continental economies get a B-minus. Whenever some politician makes tiny, halting efforts at reform, strikes and protests paralyse the country.

In recent months, reformers like Nicolas Sarkozy in France, Jose Manuel Barroso in Brussels and Angela Merkel in Germany have been backtracking on their proposals and instead mouthing pious rhetoric about the need to "manage" globalisation. EU Trade Commissioner Peter Mandelson’s efforts to liberalise trade have been consistently undercut. As a result of the EU’s unwillingness to reduce its massive farm subsidies, the Doha trade-expansion round is dead.

Talk to top-level scientists and educators about the future of scientific research, and they will rarely even mention Europe. There are areas in which it is world-class, but they are fewer than they once were. In the biomedical sciences, for example, Europe is not on the map, and it might well be surpassed by much poorer Asian countries. The CEO of a large pharmaceutical company told me that in 10 years, the three most important countries for his industry would be the United States, China and India.

And I haven’t even gotten to the demographics. In 25 years, the number of working-age Europeans will decline by 7 per cent, while those over 65 will increase by 50 per cent. One solution: let older people work. But Europe’s employment rate for people over 60 is low: 7 per cent in France and 12 per cent in Germany (compared with 27 per cent in the US). Modest efforts to allow people to retire later have been met with the usual avalanche of protests. And while economists and the European Commission keep proposing that Europe take in more immigrants to expand its labour force, it won’t. The cartoon controversy has powerfully highlighted the difficulties Europe is having with its existing immigrants.

What does all this add up to? Less European influence in the world. Europe’s position in institutions like the World Bank and the IMF relates to its share of world GDP. Its dwindling defence spending weakens its ability to be a military partner of the US, or to project military power abroad even for peacekeeping purposes. Its cramped, increasingly protectionist outlook will further sap its vitality.

The decline of Europe means a world with a greater diffusion of power and a lessened ability to create international norms and rules of the road. It also means that America’s superpower status will linger. Think of the dollar. For years people have argued that it is due for a massive drop as countries around the world diversify their savings. But as people looked at the alternatives, they decided that the chief rivals, the euro and the yen, represented economies that were structurally weak. So they have reluctantly stuck with the dollar. It’s a similar dynamic in other arenas. You can’t beat something with nothing.

Fareed Zakaria is the editor of Newsweek International. Write to him at comments@fareedzakaria.com