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THE AUGUR PROJECT

Europe in the World, 2030 Executive summary – AUGUR final report

04/01/2013

The AUGUR project assessing the “Challenges for Europe in the World of 2030” is an international collaborative research project conducted between 2009 and 2012 by a Consortium of seven European institutions and financed by the European Commission’s Seventh Framework Programme.

The AUGUR Project – Executive summary

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Europe in the World, 2030

Introduction .............................................................................................................................. 3

Global and European governance .......................................................................................... 4

Global governance trends ...................................................................................................... 5

Governance in Europe............................................................................................................ 9

Policy issues and politics ........................................................................................................ 14 Budgets and government debt .............................................................................................. 15 Financial regulation and macro-economic stability ............................................................. 16

Trade and technology on an unequal playing field .............................................................. 18 Energy needs, climate change and sustainable development ............................................... 19 Demography, employment and migration ........................................................................... 20 Health, education, social inclusion and income inequality .................................................. 21

The quality of democracy - policy making and European integration ................................. 22 Political pathways to EU break-up and federal Europe ....................................................... 24

Conclusions ............................................................................................................................. 25


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Introduction This report has a policy focus and the main questions addressed are what should be

the content of policies domestically, regionally and internationally, and what

agencies might carry the policies out.

The principal novelty of the study is that it attempts an integrated assessment

covering a wide range of policy areas under alternative assumptions about trends in

global and European governance with findings in each area confronted in a macro-

model of world regions where complementarities and trade-offs are made explicit.1

Having been written in 2012 the report is in danger of being dominated by the

circumstances of the financial crisis that began in 2007. How the crisis will end and

what will be the shape of European institutions at the end are impossible to predict

with any confidence. Yet lessons learned from the crisis and the two or three

decades of globalisation of markets which preceded it are important components in

the assessment of future possibilities. Perhaps the two major lessons are, first, the

need to take into account the enhanced interconnectedness and complexity of the

world economy today, in part functions of the changing balance of economic power

between west and east, and, second, the resultant weakness of a national polity (as

compared to earlier decades). The significance of these factors is evident in the

persistent difficulty the authorities encounter today in formulating coherent policies

to address medium- to long-term factors that are destabilising the world economy.

In the Eurozone, with cost inflation not aligned, the lack of either an internal

exchange rate with independent monetary policies or substantial budget transfers

has exacerbated tendencies toward persistent surpluses and deficits. Less

competitive countries were confronted with an excessively strong euro whilst more

competitive countries, notably Germany, benefitted from a relatively weak euro. This

enabled Germany to maintain an export-led growth strategy at least until the

imposition of austerity in other countries curtailed demand for German goods.

The important challenge confronting the EU (and indeed other major economies) in

the coming decades is how to create new modes of cooperation to ensure sufficient

growth in demand in the world economy as a whole, and at the same time adjust

competitive advantages to achieve an acceptable division of employment and

income between countries with different specialisations, social institutions and levels

of development. The lead in rebalancing economies to improve growth and

distribution has to be taken by governments acting in a coordinated manner.

Identifying what such coordination might consist of, and its consequences for

productivity growth, employment and other related long-term problems in economy

and society, are the prime objectives of this report.

1 The model distinguishes 5 sub-regions of Europe (North, South, East, West and the UK), 4 large countries

(USA, Japan, China, India) and 10 other country groups in the rest of the world. Projections are illustrative of what might or could happen and should not be regarded as predictions. See Chapter 2 for more information.


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Global and European governance The changing structure and operation of the European and world economies

consequent upon globalisation of product and financial markets since the 1970s

have limited the ability of nation states to manage the many challenges with which

they are faced. The development of international mechanisms, whether the Bretton

Woods institutions or the Basel Committees or the WTO or institutions of the EU, has

not proved up to the task of providing an adequate framework within which

constructive policies might be developed. Indeed, despite a succession of financial

and other market failures prior to 2007, all these institutions stand accused of

excessive confidence in their own abilities and policy recommendations in the years

before 2007, failures that were finally exposed by the financial crisis. A fundamental

rethink might be expected. Yet there is little or no agreement as to what that rethink

might consist of.

An influential body of opinion, particularly amongst economists, suggests that the

solution to most of these problems can be left almost entirely to the market. The

popularity of this view belies the fact that it has little or no theoretical foundation. In

the face of major externalities such as systemic financial risk, climate change or

investment in transformational technologies, economic theory concedes that

markets are socially inefficient and risks are mis-priced. The increased

“financialisation” of economic activity has enhanced risks, and hence externalities, in

food, commodity and energy markets. Moreover, the market solution to some types

of distortion, such as the proposition that flexible exchange rates might solve the

problem of imbalances in international trade, has the potential to generate further

destabilisation.2

In recent years there have been attempts to go “beyond GDP” and create new

metrics that better capture the benefits of economic activity, particularly in a world

of finite non-renewable resources that is also threatened by climate change.

However, the financial crisis has brought the focus back to GDP and less attention

was paid to the negative impacts of growth of the environment. Growth of GDP has

remained a precondition for higher employment and healthy budgets. Yet many

countries are failing to achieve growth rates that would allow them to meet policy

goals such as low unemployment, investments in infrastructure and improved

technologies and the provision of social services because of constraints imposed by

inflation, deficits, debt and financial market pressures. Low growth, low investment

and unemployment can become endemic and mutually reinforcing.

2 It was the privatisation of foreign exchange risk following the abandonment of fixed exchange rates in the

early 1970s that created the need for mechanisms by means of which currencies could be hedged, and hence the necessity of the abandonment of international controls on capital flows giving birth to the global financial market. The succession of bank-based financial crises since the 1970s testifies to the instability of the new global financial environment.


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This brings us back to the question of what should be the content of economic policy

in a globalised world and which agencies might carry it out.

Global governance trends

The answer to the question, “Who might carry it out?” is less obvious today than it

would have been in the 1950s and 1960s. The answer then was the nation state and

international organisations created by nation states such as Bretton Woods

institutions, various divisions of the UN and, for signatories of the Treaty of Rome,

the European Commission. Today liberalisation and integration of the world economy

and finance have reduced the powers of the nation state. Yet global risks to which

the national state is subject - financial, technological, environmental and even

biological - have clearly increased and changed. To traditional market risks (tied

with price volatility) are increasingly added product risks (tied to safety threats of

products or production processes). The lessening power of the state has not been

associated generally with an increase in power of treaty organisations. Even the

obvious counter-example of the European Union has seen its collective authority

reduced by an upsurge of nationalism responding to the Eurozone crisis. The

vacuum has been partially filled by informal international organisations such as G10

committees and industry associations3. In addition, multinational companies and

asset managers play a major role in the determination of the international flow of

funds, trade and fiscal revenues. Governments and companies are also subject to

pressures exerted by civil society organisations campaigning, often at a

sophisticated level, on issues ranging from international development to climate

change and water resources.

This rich mixture of actors: international institutions, nation states, companies,

national and multinational, trades unions and other civil society organisations make

up a structure of governance that reacts to and acts upon the major economic and

financial trends, shaping them and being shaped by them. Which policies, i.e. what

actions, will emerge from the interaction over the next decades is difficult to predict.

This is particularly true with respect to military conflicts which can be fuelled by

economic factors and disputes over resources.4

The analysis of prospects to 2030 in this study has been constructed within a

framework of differentiated scenarios that seek to capture the challenges and

possibilities for financial, economic and social policies under defined governance

hypotheses.

Reduced government refers to a global environment in which the pressures of recent

years, most notably the accumulation of debt, result in shrinkage of the role of

government in the economy and a retreat from any effective participation in, or

reliance on, international economic institutions. The FSB and the Basel committees

3 For example, the judgment of whether Greece was in default when Greek debt was restructured was made

by the International Swaps and Derivatives Association, ISDA. See ISDA, The ISDA Credit Derivatives Determinations Committees, AGM 2012, DC anniversary, http://dc.isda.org/ 4 The implications of military conflicts have not been considered in this study.

http://dc.isda.org/


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propagate financial regulatory initiatives but the G20 fails to deliver the fundamental

global regulatory reform that might provide a degree of stability. Agricultural

protectionism persists even if budget constraints and flexible trade networks reduce

its effects. There are some initiatives dictated by growing environmental risks but

generally the retreat from multilateralism that has been evident since the 1970s

continues. European governments struggle on with no major change in EU

institutions.

Long-term real GDP growth (% p.a.)

1990-2010 2010-2030 Change

Historical “Reduced government”

World 3.3 3.5 +0.2

Africa 3.6 5.4 +1.8

Other Asia 4.2 5.0 +0.8

East Asia 5.3 4.0 -1.3

America 2.7 3.2 +0.5

Europe 1.8 0.8 -1.0

If the global trend to reduced government persists over the next two decades, likely

outcomes include

world GDP growth averaging 3.5% p.a., similar to the past

high and possibly rising raw material and energy costs

slower growth of trade as reductions in costs and trade barriers come to an end

reduced GDP growth in East Asia and Europe and higher growth in other regions

ongoing risks of periodic financial crises as cross-border investments continue to

grow faster than the underlying economy

long-term problems of debt management and pressure on government budgets

lock-in of carbon-based energy systems and increasing risks of climate change

little progress in resolving problems of income inequality and under-employment

alienation of voters and reduction of politics to local or ethnic ideology.

If reduced government is one trend, another is the major role of China and the USA

as the two global super-powers. Considering the degree of mutual dependence

between the two, some accommodation is necessary but the main pressure on each

side remains the pursuit of policies in their own interest to secure expansion of their

economies, access to energy and other resources, protection of the local

environment and well-being of domestic populations. Other countries, particularly

their neighbours, may have to accept the parameters of the US-China

accommodation, a factor that may divide Europe even if there are few gains to be

had from cooperation with the super-powers.


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Long-term real GDP growth, 2010-2030 (% p.a.)

Hypotheses* “Reduced

government”

“US-China

accommodation”

Difference

China 5.5 7.1 +1.6

Japan 0.8 1.0 +0.2

East Asia High Income 2.0 2.2 +0.2

Other East Asia 3.2 3.2 -

USA 2.2 2.9 +0.7

Central America and

Caribbean

4.1 4.0 -0.1

South America 5.5 5.2 -0.3

Other Developed 2.5 2.3 -0.2

Other Asia 5.0 4.8 -0.2

Africa 5.4 5.4 -

Europe 0.8 0.9 +0.1

World 3.5 3.9 +0.4 * both columns make the same ‘struggling on’ assumption with no major changes in Europe.

With more interventionist policies the USA and China could resist some of the

adverse pressures arising from reduced government globally and improve their own

economic growth performance. The US could make headway by adopting less

restrictive budget policies accompanied by a degree of protectionism or dollar

devaluation to strengthen its trade balance. China could stimulate domestic demand

through reduced saving. Both China and the US are likely to emphasise investment

in energy saving and development of new sources of supply within and outside their

borders to improve their security and minimise energy deficits.

China’s North Asian neighbours and to a lesser extent the USA and Europe could

realise minor gains from faster growth in China’s domestic market. Other parts of

the world may experience some negative effects from US protectionism and

devaluation.

The development of regionalism at the world level is a broader trend providing relief

from the unfettered globalisation that has been a source of major instability.

Regional institutions and policies adopted by neighbouring groups of countries in

each part of the world supplement attempts at universality by UN and other global

bodies and foster internal cohesion as a basis for improved security and economic

opportunities in member states. In North America, Europe and East Asia regionalism

as a political aim has been matched by relatively high levels of trade, cross-border

investment and financial cooperation. In other parts of the world including South

America, Africa, West, Central and South Asia where political divisions and economic

realities are less favourable, regional integration remains a longer-term goal and the

main avenues for international cooperation today are relationships with the three

leading regions mentioned above.


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Hypotheses* “Reduced government” “Regionalisation” Difference

World 3.5 3.9 +0.4

Africa 5.4 5.1 -0.3

Other Asia 5.0 5.6 +0.6

East Asia 4.0 4.1 +0.1

America 3.2 3.8 +0.6

Europe 0.8 2.0 +1.2 * results for reduced government assume ‘struggling on’ in Europe; the “regionalisation” column

assumes major changes in European institutions and policies of member states establishing a “multi-

speed” Europe. Similar results would be obtained under the “towards Federal Europe” assumption. Both

European variants are discussed further below.

In principle effective regional cooperation in the areas of trade and investment,

exchange rates, monetary policy and government finance has the capability of

strengthening economic growth within each region. If Europe can recover its ability

to promote internal growth and convergence of productive potential in lagging

regions a substantial improvement in growth performance will be possible. The same

goes for North America and to a lesser extent East Asia.

Other parts of the world could benefit from higher world commodity prices but risk

loss of markets to the extent that regionalism replaces multilateralism and leading

regions give preference to internal trade and investment. The projection in the table

suggests that such tendencies could be particularly negative for Africa. As far as

other parts of the world are concerned, regional cooperation may reduce economic

risks but will not necessarily contribute to the resolution of long-term issues such as

climate change and carbon lock-in or development problems in low income

countries.

Multipolar co-operation on a more universal basis, bridging gaps between high-

income regions, emerging markets and low-income countries has long been a

widely-desired but elusive aspiration. Global challenges of climate change,

environmental sustainability and energy and food security provide stimuli for

concerted action. Beyond this it is arguable that constraints on economic and social

policy arising from imbalances and instability in global markets have ultimately to be

tackled at a multilateral, global level. Therefore the political conditions and

institutional reforms necessary to achieve more effective global governance remain

an important agenda.


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Hypotheses* “Reduced

government”

“Regionalisation” “Multi-polar

collaboration”

Gain from

collaboration

World 3.5 4.0 4.4 +0.4

Africa 5.4 5.0 6.1 +1.1

Other Asia 5.0 5.6 6.1 +0.5

East Asia 4.0 4.1 4.6 +0.5

America 3.2 3.8 4.1 +0.3

Europe 0.8 2.2 2.5 +0.3 * as in the preceding table, results for reduced government assume ‘struggling on’ in Europe while the

“regionalisation” and “multi-polar collaboration” columns assume major changes in European institutions

and policies of member states establishing a “multi-speed” Europe. Similar results would be obtained in

these columns under the “towards Federal Europe” assumption.

To generate sustainable long-term improvements in the world economy,

environmental, social, developmental and financial challenges have to be addressed

simultaneously, recognising the diverse priorities of countries with different resource

endowments, social institutions, infrastructure and income levels. It is not so difficult

in principle to outline the principal objectives and requirements of each group of

countries and develop mutually beneficial policies underpinned by multilateral

commitment to support countries in difficulty. But to put such policies into practice it

is necessary to tame the two tigers - global financial markets and nationalistic

politics - that make multi-polar collaboration hazardous.

Governance in Europe

The current trend in Europe may be described variously as struggling on or muddling

through – both titles conveying the flavour of damage-limitation which characterises

efforts to deal with fiscal and financial problems that beset the Eurozone. Time and

again the response to a potentially mortal crisis has been the application of sticking

plaster at the last moment. Since the end is not yet clearly in sight it appears

possible that the current style of political plays and institutional adjustment could

persist for many years to come. Yet although the European Union and Eurozone

remain intact underlying problems of government debt, financial instability, regional

depression, unemployment and ageing populations remain unresolved. Fiscal

austerity erodes public services, diminishing solidarity hitherto sustained by the

state. Voters look for national solutions but national governments are unable to

deliver.

In this context GDP growth in Europe can be expected to remain low in the long

term and employment rates which had been rising gradually prior to the crisis with

increased participation of women and elderly people may fall. At the same time

ongoing financial integration within Europe and between Europe and the rest of the

world is likely to imply increasing cross-border liabilities of European countries even

if levels of government debt are eventually brought down relative to GDP.5 Fiscal

5 Increases up to 2020 and 2030 shown in the table are speculative as limits to portfolio diversification and

financial intermediation are highly dependent on tax systems and regulatory rules.


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austerity may have to be maintained in the long run with government services

making a negative contribution to growth of aggregate demand and in the context of

very low growth this is unlikely to be offset by an upsurge of investment spending.

Economic performance of Europe as a whole, 1990-2030

1990 2000 2010 2020 2030

GDP growth (10 year average) 2.2 2.1 1.5 0.9 0.8

Cross-border liabilities (% of GDP) 73 176 283 383 467

Government debt (% of GDP) 48 58 71 62 58

Government deficit (% of GDP) 2.9 -0.3 6.5 2.9 1.8

Government services (% of GDP) 22 22 25 23 22

Fixed investment (% of GDP) 20 19 16 14 15

The main implication for Europe is that economic convergence will be put on hold for

a long time and political cohesion will be very difficult to maintain. Over the next 20

years living standards could improve gradually in North, West and East Europe but

hardly at all in most parts of the UK and South Europe.6 Employment rates may

decline further in many regions and government services will remain under-funded,

particularly in the depressed regions.

Economic performance in different parts of Europe, 2012 and 2030

North

Europe

West

Europe

UK South

Europe

East Europe

Income per capita ($2005 per year)

2012 37,800 33,300 32,100 24,600 14,800

2030 44,900 38,400 35,500 26,800 19,900

Employment rate (% of population 15+)

2012 58.0 53.8 55.7 45.5 45.9

2030 55.4 52.2 53.9 44.9 45.7

Inflation (% p.a.)

2012 2.9 2.3 2.6 1.0 2.4

2030 1.0 0.0 1.6 -0.2 0.7

Government services (% of GDP)

2012 29 25 26 25 25

2030 29 23 21 20 21

If crisis management fails to satisfy financial investors or national electorates lose

confidence in EU membership the consequence may be Eurozone break-up with the

reintroduction of national currencies by some member states while others revise

6 North Europe includes Denmark, Norway, Sweden and Finland, West Europe includes France, Belgium,

Luxemburg, Netherlands, Germany, Switzerland and Austria, Ireland is grouped with South Europe which includes Portugal, Spain, Italy and Greece. East Europe includes Poland, Hungary, the Czech Republic, Slovakia, Romania, Bulgaria, Albania and successors of the former Yugoslavia.


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their commitments to adopt the euro. Break-up of the Eurozone would likely be

accompanied by weakening or sidelining of other European Union institutions and

policies. Whether precipitate or gradual, break-up of the Eurozone will trigger

financial instability and undermine business confidence with negative effects on

trade and investment that can be expected to overwhelm any beneficial effects that

might derive from a partial release from existing constraints on national government

policies.

The European economy could experience a 15-30% reduction in investment and 10-

20% reduction in imports and internal trade resulting in a sharp and immediate

recession whose after-effects could persist for one or two decades. Illustrative

calculations reported in the table below assume a major break-up in 2014. Stock

markets worldwide would most likely be severely shaken in the short run but

impacts on real GDP in other parts of the world are estimated to be relatively small,

the most exposed regions being the Far East and America.

GDP impact of “EU break-up” by world region

Change in GDP compared with “struggling on” scenario* (%)

2015 2020 2030

Europe -5 -9 -16

Africa -1 -1 -2

Other Asia -2 -2 -2

East Asia -3 -4 -5

America -2 -4 -5

World -3 -4 -5 * comparisons in this table assume responses by China and the US (US-China accommodation

hypothesis) in both cases.

More positive scenarios for Europe may vary in the degree to which member states

and their citizens accept big government at the supranational level but necessarily

have many features in common such as the need to preserve the single market,

strengthen economic relationships with neighbouring regions, cooperate with other

parts of the world to improve global governance and most importantly, stabilise the

financial system in Europe and ensure that member states can finance government

programs on reasonable terms. The ultimate test of political and institutional

developments will be the achievement of permanent and sustainable recovery from

recession with convergence of living standards and reinforcement of shared

institutional norms, social standards and culture.

Two specific scenarios have been considered in this project. The first is the

construction of a multi-speed Europe supporting and facilitating economic and social

policies at the national level. More specifically greater flexibility is provided to

national policy-makers by underwriting the debt of member governments while

dividing the Eurozone into multiple currency areas with exchange rates “adjustable”

within relatively small bands7 to reduce the likelihood of destabilising financial flows.

7 So-called crawling pegs


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While fiscal and monetary institutions and policies are supportive of domestic growth

initiatives at the national level, financial regulation is implemented and effective at

an all-EU level and the EU continues to play a central role in infrastructure, energy

and trade, policies to stimulate convergence and promotion of closer integration with

the CIS, Middle East and North Africa. This scenario allows the EU to escape from

constraints imposed by the adoption of a single currency and strict budget and

financial rules adopted at the time of creation of the Eurozone. In the best case

Europe will remain a large and cohesive free trade area with highly-developed

mechanisms for cooperation and coordination covering a sufficient range of policies

without subordinating member states to a substantial federal layer of government.

The most important common objectives within Europe are employment and

investment both of which link closely to GDP growth and together with responsible

budgeting have the capacity to reduce government debt gradually relative to GDP. If

exchange rates are progressively adjusted with the aim of reducing long-term

imbalances in production and trade it may be expected that investment patterns will

respond favourably and economic growth in South and East Europe will recover

momentum. Trade preferences and investment incentives promoting economic

integration with countries around Europe’s borders would provide an additional boost

to regions in South and East Europe.

Illustrative scenario for multi-speed Europe

Hypothesis “Struggling

on”

“Multi-speed

Europe”

Difference


Europe 0.8 2.0 +1.2

North 1.3 2.0 +0.7

West 0.9 1.7 +0.8

UK 1.0 1.5 +0.5

South 0.2 2.1 +1.9

East 1.3 2.8 +1.5

Employment rate, 2030 (% of 15+ population)

Europe 49.3 55.5 +6.2

North 55.4 59.7 +4.3

West 52.2 59.1 +6.9

UK 53.9 57.7 +3.8

South 45.7 52.8 +7.1

East 44.9 51.0 +6.1

Government debt, 2030 (% of GDP)

Europe 58 68 +10

North 60 54 -6

West 60 65 +5

UK 60 73 +13

South 61 93 +32

East 46 37 -9


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The illustrative scenario in the table above generates a recovery of GDP growth with

progressive convergence of South and East Europe in terms of GDP growth,

productivity and employment rates. One crucial assumption is the ability of

governments in South Europe to finance a high debt to GDP ratio on a long-term

basis. To what extent this would be facilitated by reintroduction of national

currencies and the level and type of collective support required to ensure stability of

foreign exchange and bond markets within Europe requires further study. In a

context of growth stimulus and job creation across Europe as a whole, rapid

exchange rate adjustment may not be necessary in which case modest spreads on

government bonds could be sufficient to compensate investors.

The final scenario named towards federal Europe sketches a big-government

solution to unequal development in the euro zone. To meet the challenge of

maintaining a single common currency while taking due account of differences in

income levels and competitiveness of member states the EU requires not only a

powerful central bank and effective financial regulation but also a substantial central

budget that redistributes income between different parts of the Union and a

European Treasury managing bond issuance to fund federal deficits and the debts of

member states.

A federal budget has two important macro-economic impacts. On the one hand,

federal deficits and debt can contribute to aggregate demand and credit creation.

Whether these functions augment or replace equivalent functions of member states,

and to what extent, is a delicate issue. To the extent that centralisation of powers of

economic and financial management is one of the main objectives of a federal

system, member states may have to surrender most or all of their autonomy in this

area. A second feature of a federal budget is the transfer element. To the extent

that tax receipts and other revenue sources are lower in low-income regions while

federal expenditures are higher, a federal budget generally implies a sustained net

transfer of funds or resources from higher-income to lower-income regions although

the scale and pattern of transfers depends on the specific composition of revenues

and expenditures and may sometimes be surprising.


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Europe 2030

North

Europe

West

Europe

UK South

Europe

East

Europe

Income per capita ($2005 per year)

2012 37,800 33,300 32,100 24,600 14,800

Struggling on 44,900 38,400 35,500 26,800 19,900

Multi-speed 50,700 44,800 39,600 37,700 25,800

Federal Europe 50,200 45,300 42,200 40,100 28,200

Government services (% of GDP)

2012 29 25 26 25 25

Struggling on 29 23 21 20 21

Multi-speed 34 25 29 31 23

Federal Europe 33 24 27 29 21

Fixed investment (% of GDP)

2012 16.1 16.4 11.0 14.5 14.9

Struggling on 16.0 15.1 14.0 14.1 15.4

Multi-speed 16.6 16.0 13.6 15.5 17.5

Federal Europe 18.4 16.6 14.3 17.6 19.9

The potential impact of an incipient federal system are illustrated in the table above

which assumes, entirely hypothetically, that all parts of Europe except the UK will

contribute to a federal budget reaching 5% of GDP on the revenue side in the 2020s

with a higher, debt-financed level of expenditure focussed on resolution of some of

the most important problems of lower-income regions including low employment

rates and high national government debt.

The table suggests that both ‘solutions’, multi-speed and federal, could have similar

effects over a medium term period. The fact is that most of the policy objectives and

instruments required to make a success of a multi-speed solution are equally

relevant in a federal system. The main differences concern the currency system, the

federal budget and coordinating functions of federal agencies. If either solution or a

more complex blend of the two were adopted over a similar timescale, most of the

results suggested in the table should in principle be achievable.

Policy issues and politics Trends in patterns of economic growth and governance, globally and in each region

including Europe, establish the context in which a wide variety of policy issues have

to be tackled through political lobbying and debate, executive action of governments

and large corporations and international institutions of various kinds. As far as the

current and prospective situation in Europe is concerned, the most urgent and

immediate concerns are government debt, financial stability and economic growth.

Somewhat longer-term but closely related are trade, technology and energy that

reshape the global economy and have a major influence on the distribution of


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income between countries and regions, as well as trends in demography, migration,

employment, health, education, social inclusion and income inequality which affect

the well-being of individuals and societies. All the above are reviewed in detail in

different chapters of the full report and summarised here briefly. The final chapter of

the report, also summarised below, examines trends in the political process and

discusses ways in which political support for fundamental changes in the European

Union could develop in response to current events as well as ongoing economic and

social trends.

Budgets and government debt

Starting with the problem of government debt, let us note that for many decades

past it has been normal for high income countries to have government deficits

ranging up to 5% of GDP and outstanding government debt of between 40% and

60% of annual GDP.8 Countries in South Europe had relatively high levels of

government debt but their debt to GDP ratios were falling as their economies

expanded before the 2008 financial crisis. The financial crisis, both in the US and

Europe, has pushed government debt up to a new level, partly as a result of bail-out

transactions but also on account of stimulus policies that pushed budget deficits up

to 8% or more to counter a collapse in business and consumer confidence. Although

there have been strong political pressures insisting that most if not all highly-

indebted governments must find ways to reduce or eliminate budget deficits and

bring down the level of outstanding debt, rating agencies and bond market investors

have been highly selective with Greece as a principal target and Spain and Italy

intermittently in the firing line. Japan, which has the highest debt/GDP ratio of all,

has remained a safe haven for investors, still with a debt basically owned by

nationals. Meanwhile the US and UK, having embraced fiscal austerity, enjoy very

low long-term bond yields.

It remains unclear how and when the US, UK and other European governments that

have high levels of outstanding debt will be able to bring debt/GDP ratios down to a

‘normal’ 40-60% range. In principle there are several ways in which the ratio may

come down: debt write-offs (so-called haircuts), asset sales (e.g. bank equity

nationalised after the 2008 crisis), budget cuts, real GDP growth and finally, inflation

which pushes up the nominal value of GDP while eroding the real value of

outstanding debt. In a good scenario, debt problems can fade away over a period of

only a few years with real GDP growth, mild inflation, government revenue

increasing substantially and positive economic prospects enticing investors to pay

large amounts for any government-owned assets that may be on offer. For example,

if outstanding debt could be stabilised in money terms by a combination of asset

sales and budget economies, the debt/GDP ratio could be halved in 14 years with

nominal GDP growth at 5% p.a. (e.g. real growth of 2.5% and inflation at 2.5%).

8 Japan is the well-known exception with government debt rising rapidly since the early 1990’s in a context of

prolonged deflation to reach around 180% of annual GDP by 2008. The interest burden is relatively low because Japan has had a static or falling price level and nominal interest around 1% p.a.


16

But for many highly-indebted governments the scenario is not so favourable. In a

context of recession and deflation real GDP growth is minimal and inflation may be

negative while budget cuts, even if they save money, risk making recession and

deflation worse. Government revenue may fall as companies report losses and the

informal economy grows. Ultimately the two crucial problems are stagnation of the

economy and a large, ongoing government deficit that makes haircuts and asset

sales unconvincing. Only in the context of sustained economic recovery will the

government deficit and debt/GDP ratio be brought down to normal levels.

The implication for the European Union is that so long as recession persists in

affected parts of the Eurozone, governments will continue to incur deficits and the

debt/GDP ratio will remain high for many years to come. Yet it is difficult to envisage

recovery from recession in South Europe without a reversal of austerity policies and

higher government spending in the affected countries as well as other parts of the

euro zone. Therefore in one form or another, financial support for weaker member

states will be an enduring and unavoidable obligation. Eventually, if such support is

not forthcoming, governments of weak member states will at some point face major

financial crises, being unable to service outstanding debt or satisfy expenditure

commitments. At this point their country’s membership of the Eurozone and most

probably the Union will terminate abruptly.

Financial regulation and macro-economic stability

Financial stability is a global public good but financial regulation is a matter for

national jurisdictions. Since the deregulation of financial markets in the 1970s there

has been a persistent tension between liberalisation and regulation.

“Financialisation” has brought a steady growth in holdings of financial assets relative

to income with deposits growing faster than government debt and securities growing

faster than deposits. The most dramatic increase has been that of cross-border

investments, particularly since the late 1990s as the Eurozone came into being. By

2008 cross-border investments reached nearly 300% of European GDP.9 As a result

governments and business are increasingly financed by loans and securities held by

financial institutions and investors in other countries and for investment funds to

have highly-diversified portfolios invested not only across Europe but in many other

parts of the world. As a result the 2008 financial meltdown that originated in the

USA immediately and dramatically impacted European financial institutions and

investors and involved several European governments in major bank rescues.

The costs of the meltdown and its repercussions gave rise to a new determination to

regulate financial institutions and markets. The emphasis has been on rules that

minimise the possibility of individual bank failures and prevent contagion in the

event that failures do happen. Nevertheless there is a risk that new regulatory

9 The international market in sovereign bonds is now worth around $100 trillion, or 140% of world GDP; the

largest component being $33 trillion of US bonds, equivalent to 220% of US GDP.


17

systems now being introduced may fail to satisfy these objectives as controls are

being implemented separately by the USA, UK, European Union, Japan and

authorities in other parts of the world whose role in global finance is growing.

Moreover the new regulations are often complex to the point at which it is doubtful

whether their effects will be properly understood or can be monitored clearly.10 The

consensus that characterised the early years of the current crisis has waned and

attempts to extend the international regulatory architecture have so far not resulted

in a satisfactory response to the deficiencies exposed by the crisis.

The main reason for the lack of progress is the macro-economic nature of the

deficiencies which go far beyond what have in recent decades been regarded as

appropriate matters for regulation. Financial instability affects not only banks and

investors but also stock indexes, currencies and corporate and household borrowers,

compounding risks and provoking cuts in orders, production and spending when

confidence crises ripple across global markets. The flexibility of financial markets

and portfolios makes confidence fragile and multilateral arrangements for

coordinated intervention and mutual financial support are necessary to maintain

stability of currencies and debt markets. Capital controls may be required in some

cases as the IMF increasingly recognises. The G20 has pursued a global approach

with little success. ‘Macro-financial’ stability may be pursued to better effect at the

regional level where there are sufficiently-powerful sponsors such as the US for

North America, Japan/China for East Asia and France/Germany for Europe. The aim

in each case would be to provide macro-economic stability and ensure adequate

growth of trade and GDP in the region as a whole.

A more specific and immediate issue for the Eurozone is the separate issue of

sovereign bonds by individual governments without collective guarantees. The

resulting bond-market instability has strongly reinforced the mood of fiscal austerity

which is blocking recovery from recession as governments give priority to market

sentiment over public services, social protection and economic growth. However

‘realistic’ or ‘inevitable’ such policies may be for individual governments, they are

not realistic or inevitable for the Eurozone as a whole. The most immediate way out

of this blockage is a collective guarantee for the debt of Eurozone governments -

tantamount to the replacement of individually-issued sovereign bonds by a Union

bond. Financial requirements of member governments must then be negotiated with

the agency responsible for issuing collectively-guaranteed bonds. Currently member

states and the ECB have gone some way towards this solution but cannot

contemplate treaty modifications to make collective guarantees more far-reaching

and permanent as they fear popular rejection of such new and binding commitments

in several member states.

A longer-term issue that worries investors and financial authorities is the persistence

of imbalances in international trade and investment, most notably current account

deficits in the US and southern Europe and surpluses earned by China, Germany and

some oil producers. Another aspect of the same conjuncture is the dependence of

10

Basel I was 30 pages long, Basel II 347 pages, whilst Basel III consists of 616 pages. The implementation of Dodd-Frank is expected to require in excess of 30,000 pages of regulation.


18

China and Germany on an export-dependent growth model – a model that can only

be sustained if they recognise their dependence on the prosperity of their customers

and either become willing to take steps to adjust global imbalances or accept that

they must continue to finance the indebtedness of deficit regions including the US

and weaker members of the Eurozone. This is not an issue that can be resolved by

financial engineering. It requires coordination of macro-economic policies and

development policies including investment and trade preferences to align potential

GDP growth more closely with social and economic needs.

Trade and technology on an unequal playing field

Economic growth in each country and world region depends crucially on the country

or region’s ability to maintain or increase its share of world trade. Although countries

that are perceived to have good long-run prospects can attract sustained capital

inflows and finance current account deficits over a long period, even they face limits

on expansion of demand and GDP unless growth of their exports is at least sufficient

to match growth of imports. Since exchange rates may move perversely and cannot

reliably correct imbalances in international trade and investment, structural policies

play a key role in the competition for shares of global markets and income.

Trade shares are influenced by a wide variety of trends including patterns of

innovation and technology transfer, strategies of international business with respect

to integration and specialisation and social, political and geographic factors as well

as resources and infrastructure. Issues that may particularly affect Europe’s position

in the world economy over the next two decades include macro-economic and social

developments such as:

changing patterns of consumption, employment and business organisation in

Europe related to ageing of a relatively high-income population

adaptation of Europe’s social model to the changing economic context

improved cohesion and growth performance in Europe and mitigation of the

North-South divide

development in neighbouring countries and regions (CIS, Middle East and

Africa)

performance relative to the US in education, R&D etc.

ability to maintain lead positions in the area of business services

whether Europe can maintain high-tech, high-quality specialisations within

vertically-integrated value chains increasingly dominated by emerging

economies.

All the above long-term trends may be affected by major scientific/technological

changes that could potentially transform the nature and delivery of a wide range of

goods and services over the next 20 years. Digital and biological technologies might

be expected to stimulate a sustained investment boom in the manner of other

historic transformational technologies such as the railways, electricity or the internal

combustion engine. But although the impact of these technologies is already widely

evident they appear to have contributed to growing inequality and under-


19

employment rather than stimulating a new wave of aggregate demand growth while

defensive reactions to risks introduced by new technologies such as nanotechnology

and genetic modification may also give rise to new non-tariff barriers to trade.

Struggling on in Europe with reduced government globally will have negative effects

on innovation and infrastructure and weaken Europe’s position in global value

chains. Such trends could be worsened by US-China initiatives and greatly

compounded by EU break-up.

Positive governance scenarios at European and world level with regionalisation as a

core trend will give more space for growth and restructuring within Europe and

development of links with neighbouring countries that could reduce the North-South

divide across Europe’s borders and within Europe. Nevertheless market openings for

low income countries in South Asia and sub-Saharan Africa may remain limited in

such a context unless there are multilateral commitments to provide preferential

support for investment in infrastructure, social services and technology transfer in

these countries.

Energy needs, climate change and sustainable development

The global community has already been made highly aware of risks of climate

change in the modern world. Through the present century climate change and

energy security issues will have major implications not only for the use of fossil fuels

and substitute energy sources but also for technology and lifestyles and economic

and financial policies. Given the cumulative impact of greenhouse gas emissions and

long gestation lags in adjustment of infrastructure and technology, developments in

the period up to 2030 will affect the climate and local environments with increasing

force for the rest of the century. Potential bad surprises beyond 2030 include very

high oil and gas prices as well as environment disasters. There is a risk of carbon

lock-in reinforced by improved extraction technology for fossil fuels. Recession or

low rates of economic growth won’t help to avert this risk and may compound the

problem by postponing investment in low-carbon technology, infrastructures and life

styles. Even with more rapid economic growth green investments may still be

deferred if interest rates rise and investors remain uncertain whether they will be

profitable in the long term.

Europe accounts for about 10% of world energy use and carbon emissions and

cannot unilaterally have much impact on global outcomes. Nevertheless, Europe can

continue to play a significant role in innovation and policy development to support

sustainable growth in the world as a whole including growth in emerging market and

low income countries that need to increase trade, GDP and income much faster than

Europe. To reduce the risk of carbon lock-in it is highly desirable to develop a

system of preferential low-interest, long-term finance for green investments.


20

Demography, employment and migration

The lack of employment is a major problem in both developed and developing

countries. When their working-age populations are not adequately employed, they

have difficulty in supporting their economic dependents (whether they are the

elderly, the young, the unemployed or the inactive). The Economic Dependency

Ratio (defined as the ratio of all economic dependents to the total employed

population) can help gauge the true extent of this problem. Most importantly, such a

ratio helps place the demographic problems of a large elderly or young population

within the broader economic context where higher employment rates for the

working-age population, possibly reinforced by immigration, could often provide an

adequate solution.

Economic dependency ratios by 2030, four scenarios

North

Europe

West

Europe

UK South

Europe

East

Europe

Starting point: 2012 1.16 1.30 1.26 1.71 1.67

Struggling on 1.31 1.41 1.38 1.77 1.72

EU break-up 1.50 1.56 1.54 1.80 180

Multi-speed Europe 1.13 1.12 1.23 1.41 1.33

Towards Federal

Europe

1.13 1.11 1.23 1.40 1.33

The table reviews results for four macro-model scenarios.11 Compared with the 2012

starting point the first two scenarios show a significant rise in the EDR, particularly

in case of EU break-up. In contrast, the last two scenarios show a similar marked

decrease - primarily because they assume similar employment stimulus policies

across Europe.

Migration scenarios in the period to 2030 (millions)

North

Europe

West

Europe

UK South

Europe

East

Europe

Projected working-

age population in

2030 12

3.63 24.32 7.24 12.24 6.28

Cumulative net immigration (18 years)

Struggling on 0.77 1.68 0.38 2.80 -0.75

EU break-up 0.29 -0.19 -0.17 2.46 -1.57

Multi-speed Europe 1.01 4.64 0.92 5.70 0.31

11

The global governance assumptions are, respectively, reduced government with Europe struggling on, US-China accommodation with EU break-up, global regionalisation with multi-speed Europe and multipolar collaboration with ‘towards Federal Europe’.

12 Projection for the ‘struggling on’ scenario.


21

Towards Federal

Europe

0.91 3.83 0.86 6.09 -0.69

Migration has substantial potential to help reduce economic dependency. The Table

shows projected net immigration in different parts of Europe for the same four

scenarios with estimates of the size of the working-age population as a reference

point. Even if only half of the migrants are of working age it appears that in case of

an economic recovery in South Europe immigration could boost the size of the

working age population by 1% per year.

Projected immigration would be minimised in the case of EU break-up and relatively

low in the struggling on context. For most parts of Europe the multi-speed scenario

generates the highest immigration projections since the last scenario, “towards

Federal Europe” with a global context of multipolar collaboration, implies substantial

convergence of per capita income in developing countries towards the levels of

developed countries which would tend to slow down net migration into Europe from

elsewhere in the world.

While Europe faces the problem of an ageing population, many developing countries

confront the problem of a large youth population that critically needs employment.

Widespread unemployment and underemployment are big problems in many such

countries, especially among the young and among women. Therefore our research

used the macro-model to test the feasibility of employment-generating economic

policies in two exercises, one for North Africa and West Asia and the other for India.

The exercise for North Africa and West Asia, set in the context of a multi-speed

Europe with global regionalisation, implies that employment-stimulating policies

could help bring down the Economic Dependency Ratio from a very high 2.58 to

around 2.00 in North Africa and from a similarly high 2.58 to 1.86 in West Asia.

The exercise for India, set in the context of multipolar collaboration with movement

towards Federal Europe, implies that economic stimulus aimed explicitly at raising

women’s very low employment rate could help bring down India’s Economic

Dependency Ratio dramatically from 2.00 now to 1.38 by 2030.

Health, education, social inclusion and income inequality

In recent decades there has been global convergence in several aspects of well-

being but not in equality of income and wealth which has worsened in many

countries under the pressure of global markets. The main challenges for European

well-being in coming decades are demographic change and bleak employment

prospects, the reduced role of family and monetisation of care, constraints on public

budgets and market pressures that could erode labour market safeguards.


22

Social protection and reduction of inequality are also becoming important issues in

emerging-market economies and as in Europe these issues are linked to quantity

and quality of employment. With increased life expectancy, healthy ageing and

participation of old people in social activities is becoming a priority. Widely different

levels of attainment in education remain a concern as these result in rising inequality

in a context of increasingly-differentiated employment opportunities.

Low growth prospects under the “struggling on” assumption present a particular

challenge to policy-makers who have to be concerned with trends in well-being and

their eventual political fallout. Measures to mitigate financial crisis do not contribute

to quality of education and employment of young people or healthy ageing. But

Europe will hardly be able to maintain its position in global trade and services if

these problems are not addressed. In some countries at least the perspective of

ageing and increasing unemployment is not socially or politically sustainable in the

medium term. Beyond a certain threshold the middle classes who pay the bulk of

the cost will not tolerate rising inequality and disparities without major political

upsurge. Given that public services remain a crucial support for European well-being

with social cohesion and support for democratic systems underpinned by

redistributive schemes and universal entitlements, the way in which services are cut

and the distributive impact of adjustments between classes and age groups will be

crucial for how democracy and governance evolve.

More positive economic outcomes for Europe imply a better prospect for social

inclusion and open the door for stronger public programs to reduce educational

disparities and income gaps between and within member states.

The quality of democracy - policy making and European integration

The character of the political process in the USA and European countries has been

changing in recent years under the influence of economic globalisation and evolving

media technologies. Economic globalisation limits what governments are able to

deliver and gives an increasing role to international cooperation as a platform for

decision-making. The internet has rapidly become an important tool for mobilisation

of community movements including those searching for alternative forms and new

directions. Other media are increasingly used for political marketing rather than

policy debate with issues presented by experts and technocrats.

Commercialisation of the media has led to increased partiality as media frequently

support political groups which are aligned with economic interests. The media create

political spectacles around personalities rather than reporting on policies and

outcomes. Voters are hardly provided with objective assessments that would be

needed to make political elites accountable. The internet gives greater access to

bottom-up creation of information and expression of opinion which is of considerable

importance for democracy. But the internet suffers from information overload.

Facing the deluge people rely on information portals to select information and

opinions and the internet itself is subject to commercialisation. Popular portals are


23

subject to the same tendencies as mainstream media with political promotion

replacing content-related debate.

The increasing role of international organisations and economic globalisation is an

even more serious challenge for democracy as it means that policy decisions are

referred to a supranational level whose legitimacy is unclear. The growth of

international business and global financial markets has driven the trend to

undemocratic decision-making in international arenas and bends policies in the

direction of privatisation with weak national regulation. International elites enter into

a close symbiotic relationship with national elites on a technocratic basis.

The gap between political elites and society at large tends to widen. In many

European countries a majority of people regard political parties as corrupt or

extremely corrupt and this compares unfavourably with other institutions including

private business and public officials. Voter turnout has generally fallen while support

for anti-establishment movements is on the increase.

European integration has introduced public competence (policy) with little

development of political institutions (politics). EU decisions on important policies lack

a democratic mandate. The trend at the national level is the reverse and could be

described as “politics without policy”. The fiasco of constitutional referenda in France

and the Netherlands in 2005 made it clear that citizen’s participation would impede

further integration. There are no political communities with a predominantly

European identity and there is no pan-European public debate or mass media. On

the other hand Euro-sceptic movements have growing popular support. The

European Commission is open to the participation of NGO’s in policy discussion

which helps to counterbalance the influence of lobbying by large companies. But

such participation cannot replace election-based democracy.

The financial crisis which started in 2008 has strongly impacted the USA and Europe

and its fallout will affect their economies for a long time to come. Voters may be

confused by the complicated mechanisms through which the crisis impacts jobs and

benefits but hold governments at least partly responsible. The first effect of the

crisis was to cause ruling parties to lose elections. In the longer run it has decreased

trust in political elites which are seen to be closely associated with top management

of financial institutions. In the European case anti-crisis measures are decided at

closed meetings of experts and national leaders and decisions that are negative for

most citizens are made under the pressure of financial markets.

Continuation of the current style of decision-making in Europe without significant

policy-making will imply rising support for anti-establishment movements, political

nationalism, low EU budgets and failing solidarity. One important difference from the

1930s may be that the extent of economic integration makes it implausible for

nationalist movements to rely on traditional protectionism as a way out of the crisis.

It will be hard for political parties that join government to pursue consistent

mandates on core economic and political issues and their fortunes may prove to be

unstable.


24

Break-up of the EU would be caused by mutually-reinforcing economic and political

factors. Although extremist and anti-establishment parties may take strong positions

in resisting erosion of rights and benefits and often turn against immigrants, it will

remain very difficult for them to convince voters that an exit from the Eurozone and

the EU would improve the economic situation in their country. A large part of the

society in countries other than the UK can hardly imagine leaving.

The crucial political condition for cooperative solutions to Europe’s economic and

financial difficulties, whether by means of federal or multi-speed evolution, will be

establishment of a growing consensus in favour of European policies to end the

Eurozone crisis and implement stronger macro-economic and financial supervision.

National politics would focus on ideological issues with economic policy outsourced to

the European level.

Political pathways to EU break-up and federal Europe

Political transformations are more likely in times of instability but harder to predict.

The Keynesian political economy that prevailed in Western Europe and to a lesser

extent the US from the end of the Second World War to the mid-1970s was followed

by a monetarist and neoliberal era until the crisis of 2008. The recent crisis may be

followed by something new - thus far an emphasis on regulation of financial

institutions and budgetary ‘consolidation’ to reduce high levels of personal, corporate

and public debt. The Eurozone is the weakest link in the tripartite global alliance

(US, Europe, East Asia) and has recently been the main focus of concern for markets

and rating agencies. Neither the EC nor ECB have the instruments and political basis

for decisive action. The politics of austerity is uncomfortable for mainstream parties

and brings distributional issues to the fore, heightening class, regional, generational

and ethnic conflicts providing a climate in which extremist parties can flourish.

Long-term trends include “de-alignment” of affluent and better-educated citizens

from political parties. Personal autonomy has become a core value of modern

society. Voters, rather than engaging in the messy business of pluralist democracy,

expect to choose what they want out of the political process. Governments,

incapable of meeting people’s concerns, are ignored or attacked. Single-issue

pressure groups use increasingly strident anti-political rhetoric. These trends, set in

motion well before, combine with the crisis to create a context of instability that

leaves electorates increasingly despairing that democratic politics can deliver. This is

not necessarily all bad. It is at times of crisis that a new political consensus is most

likely to emerge.

European politics at party level reveals two dimensions of ideology - big versus small

government and national versus international authority. EU break-up might be

supported by anti-establishment parties with “big, national” ideology. Federal Europe

needs a “big, international” ideology. Struggling on is favoured by the “small,

international” standpoint.


25

Anti-establishment parties have several flavours but share hostility to elites and to

globalisation. Extended recession will build support for these parties and could

foment the political conditions for EU break-up.

Political support for more positive European solutions has to be founded on a sense

of shared identity and the lead in building this has to be taken by political elites.

Three types of appeal can be considered: instrumental, civic and cultural. The

instrumental approach sells institutional innovations but is a weak basis for popular

political support. The civic appeal based on shared institutions and codes of conduct

is more solid. Cultural appeals are the most powerful but also dangerous as they

have the potential to isolate minorities and impede global cooperation.

Britain and France have had low scores for ‘feeling European’. Franco-German

agreement is a key condition for any important move forward and German voters

have fewer reservations about the Union even if they are reluctant to support aid for

weak member states. France has the main responsibility and opportunity to change

direction and a hopeful sign is that its political parties have tended to move from

Gaullism to internationalism. The instrumental themes that a pro-European

movement must espouse certainly include new measures to stimulate economic

growth and maintain social protection. The civic appeal has to embrace democratic

accountability with specific steps to democratise European institutions. The cultural

appeal has to take pride in Europe’s diversity, its multi-ethnic, multi-cultural society

and extensive network of relationships with other parts of the world.

Conclusions

The future of the European economy is dependent both on decisions made within

Europe and on the future of global economic relationships. Nonetheless, a clear

result of the studies outlined in the following chapters is that a fundamental re-think

of European economic organisation is necessary, whatever happens elsewhere.

Muddling through, the current “strategy” can lead only to twenty years of low

growth and rising unemployment, with accompanying political risks. The core of the

re-think must be to find a way of reconciling the economic integration of European

markets with diversity of economic performance – phenomena that current Eurozone

structures have notably failed to reconcile. Two scenarios yield significant

improvements in performance. The first consists of a movement toward a federal

Europe, with an enlarged unified federal budget and significant transfers to sustain

demand throughout the Union. The second, multi-speed Europe, eschews both

transfers and a centralised budget, but instead derives macroeconomic balance from

managed variation in exchange rates, with stability sustained by an all-Union

commitment to the financial variable geometry. Actually implementing either of

these scenarios – getting from here to there – is obviously fraught with

extraordinary economic and political difficulties. But when compared to the results of

muddling through, the challenge of choosing a new future does not appear quite so

costly.


26

Scenarios: Global Contexts and Hypotheses for Europe

Scenarios in this report examine hypotheses for Europe in different global

contexts.

The global contexts are labelled reduced government, US-China accommodation,

regionalisation and multipolar collaboration.

Reduced government refers to an environment in which global market pressures

result in a gradual shrinkage of the role of government in the economy and a

retreat from reliance on international institutions.

In a context of US-China accommodation the governments of the two dominant

economic powers respond with more interventionist policies in their own

interests. Other countries accept the parameters of the accommodation.

Regionalism represents a switch from unfettered globalisation in favour of

regional groupings in Asia, Europe and North America. Regional institutions and

policies supplement or replace attempts at universality and foster internal

cohesion.

The assumption of multipolar collaboration bridging gaps between high-income

regions, emerging markets and low income countries allows us to examine what

might in principle be achieved by concerted action to meet global challenges.

Global contexts define the environment within which alternative hypotheses for

Europe labelled struggling on, EU break-up, multi-speed Europe and towards

federal Europe are worked out.

Struggling on represents a style of political plays and institutional adjustment

that seeks to maintain the Eurozone intact without addressing long-term

problems of government finance, regional depression and unemployment.

If crisis management fails the consequence may be EU break-up. Whether

precipitate or gradual break-up of the Eurozone will trigger severe financial

instability, undermine business confidence and weaken European Union

institutions.

A more positive assumption is the construction of a multi-speed Europe within

which institutions of the EU are strengthened to manage a division into multiple

currency areas where exchange rates adjust gradually. The EU continues to play

a central role in policies to support convergence within Europe and cooperation

with neighbours.

The final hypothesis, towards Federal Europe, envisages a big- government

solution to unequal development in the Eurozone. The EU institutes a growing

central budget that redistributes income between rich and poor parts of the

Union and a Treasury managing bond issuance to fund federal deficits and debts

of member states.


27

Global contexts and hypotheses for Europe

The report does not examine all possible combinations of global and European

settings. Chosen pairings are set out in the following table.

Scenario Hypothesis for Europe Global context

1 Struggling on

Reduced government

1a US-China accommodation

2 EU break-up

Reduced government

2a US-China accommodation

3 Multi-speed Europe Regionalisation

4 Towards Federal Europe

Regionalisation

4a Multi-polar collaboration

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