Transatlantic Relations, Economic Crisis, and the Future of the European Union

An Interview with Sir Michael Leigh

By
Sir Michael Leigh
Transatlantic Relations, Economic Crisis, and the Future of the European Union : An Interview with Sir Michael Leigh - The Editorial Staff

Abstract

As the European Union emerges from an economic crisis that caused deep internal tensions and at times threated to undermine its very existence, it is also growing in size and engaging with the international community in new capacities. During this period of rebuilding and transformation, Sir Michael Leigh, senior advisor at the German Marshall Fund, tells the Journal why he believes that EU cooperation will prevail in the coming years. Europe’s unity in the 21st century is a hard-won victory for a region that has a long history of conflict and division, he says, and the continuation of this peaceful partnership is crucial to the success of its member states and to the larger global community as well.

Outlook for the EU

What do you think EU membership will look like in the next twenty years?

If we were to fast-forward about twenty years, the countries of the Western Balkans will probably have joined the European Union, although at the moment there are some complications in the region. Turkey probably will not join the EU during that period, but it might begin discussions with the EU on a new framework for membership. In terms of Western Europe, Iceland will be a member. It’s conceivable that Norway might be reconsider after Iceland has acceded and applied for membership. Probably the last country in Western Europe to apply for membership will be Switzerland, which is nowhere on the horizon right now. Beyond that, it seems unlikely that other countries will accede, although under the EU treaty any European country that shares the foundational values of the EU may apply for membership. It’s conceivable that in a longer time period, say twenty years, countries like Ukraine and Moldova might shape up and apply for membership, and possibly even join the EU.

Do you think these countries will want to join at that time? Will membership in the EU still be an attractive prospect for them?

One of the striking things of the present situation is that, although the Euro crisis has undoubtedly harmed the EU’s international image, countries in the EU’s immediate environment are still intent on membership. Take the case of Serbia, for example. For them, the EU offers a kind of blueprint for modernization and development. Scarcely a decade and ahalf ago, Serbia and many of its neighbors experienced dreadful wars—with those memories still relatively fresh on their minds, they know there are worse things in the world than economic crises. Then there are the countries like Ukraine that are caught between Russia’s attempts to entice them into a customs union and the prospect of a very far-reaching association agreement with the EU. Yet ultimately these countries know that the path of modernization and development means adopting the standards, the values, and the norms that prevail in the European Union. In fact, no significant public figure even in Ukraine raises a question about that. Although we’re doing a lot of navel gazing during this economic and financial crisis, it’s clear that for the countries on our periphery that hope to attain living standards similar to those that prevail in the European Union, there really is no alternative than the path to EU membership.

What is the short-term economic outlook for the Eurozone? Will they come to a resolution to end the crisis anytime soon?

If we were to fast forward three to five years from the present, it’s clear that the Euro crisis will be behind us in one form or another. Even today some of the most beleaguered countries in Southern Europe are on a path to getting their public finances in better order, although the search for growth still remains elusive. Yet I think that the countries that are now caught up in the Euro crisis will find a new model for development.

They are going to adapt to lower living standards. They’re going to find that as a result of the shrinking of their economy and the shrinking particularly of their public sector, they’re going to be more competitive in the future, and labor is going to be more productive. Economies are more diversified than one imagines— despite the image of these countries still as having very important agricultural sectors, countries such Spain, Italy, and even Greece do have a number of high- tech industries.

Therefore if we look back from the perspective of three to five years, I think we’re going to see the Eurozone retaining much of its present membership. The EU will be grasping for a new growth model. Economic competitiveness, which has been put on the back burner because of the crisis, will return to the forefront.

Then there is the demographic crisis. How do we cope with an aging population? How do we cope with pensions? Can we develop an immigration policy to meet our labor market needs and to equip the labor force with relevant skills? Can we re- allocate resources away from entitlement policies and toward growth-promoting and innovation-based policies, at both the EU and national levels? All these issues existed before the crisis struck. And when the crisis recedes, they will be at the top of the agenda.

There will be a transition period as countries adjust to new economic realities and attempt to move toward a more sustainable path. How difficult do you think that this will be, and will there be political consequences?

It is a painful process. Even the IMF has warned that there is a price to pay for fiscal consolidation and there will be a painful period before the benefits are seen. There is no doubt that this has been the experience in Southern Europe today and that this explains some of the turn from traditional political parties to protest parties like the Five Star Movement in Italy. But it is not only the countries under fiscal distress that will have to make sacrifices. Other countries that value solidarity as the basis of the Eurozone, particularly in Northern Europe, will have to accept higher inflation rates in order to increase consumption demand within the currency union. There must be a concerted effort toward recovery by all Eurozone members. I think there is a dawning awareness that one simply can’t blame the weaker economies for imprudence; there are economic imbalances throughout the Eurozone that need to be addressed. But little by little this progress is being made, and I believe within three years or so it will begin to bear results.

How would you evaluate the state of the currency union and its prospects in the coming years?

With the risks and uncertainties that remain, it would be premature to suggest that the problems in Eurozone have been resolved. We could wake up any morning and find that a protest movement in one member state or another has resorted to violence and frustration at the recession and unemployment. We could find that the markets have not been reassured to a sufficient extent. There are risks of another Eurozone country—France for example—not being in position to meet in own obligations in the future. It would be quite wrong to sound complacent.

Nonetheless, a kind of grand bargain has been evolving in the Eurozone. On the one side, there is solidarity expressed by institutions like the European Central Bank and the European Stability Mechanism and on the other hand, there is a growing acceptance of the EU supervision of member states’ political stances and budgets. The question for the future is whether the EU is headed in the direction of true political and economic union or if it will stop after reaching the minimum of cooperation necessary to retain market confidence and currency stability. For the time being, it does not seem there is willingness in Germany to go the whole way towards a banking union. In France, there is apparent resistance to the prospect of a fiscal union. There are always elections on the horizon, and one feels that perhaps after the next round of elections, further steps will be taken. In other words, will Europe progress through a series of diagonal, incremental steps towards a higher degree of integration in the Eurozone or will it stop at the level it deems just necessary to maintain the credibility of the Euro?

The U.S. & the EU

Turning to the international sphere, the United States and the European Union are negotiating a new trade agreement, the Transatlantic Trade and Investment Partnership. From a European point of view, how significant is this?

Politically, the commitment of both the United States and the EU towards the Transatlantic Trade and Investment Partnership is an extremely positive signal. It assures the Europeans that from the US perspective, Europe still counts. And it shows the Europeans that despite the much-discussed pivot towards Asia, the United States itself is aware that its trade and investment activities are highly integrated with the European Union. After all, the United States and the European Union still constitute over 40 percent of world trade.

It could also potentially bring enormous economic benefit to both sides. There’s no denying that part of the impetus of this new partnership is related to the rise of China and the awareness that by integrating their two markets, they will be in a more economically competitive position in the years ahead. In effect, this agreement serves to strengthen the global economic leadership of both parties, so that norms and standards developed in the EU and the United States will continue to be the global standards in the future.

As for the policy implications, since tariffs between the United States and Europe are already relatively low, the main challenge of the TTIP will be in the area of regulatory convergence. In the past, trade has halted due to issues like genetically modified organisms or hormone use in beef production. These types of disagreements will extend across a whole range of health and safety regulations. The challenge is for the United States and the EU to accept a set of minimum shared standards, and to move towards a mutual recognition of one another’s divergent standards. There are strong vested interests in both the US Congress and the European Parliament that will raise hurdles for these changes. So it’s a major challenge, particularly given the current goal of completing negotiations by the end of 2014, but I think it is a job worth taking on.

Finally, there is the relationship between large bilateral trade negotiations and multilateral trade negotiations. Given that the Doha Round has not succeeded thus far, some wonder whether the US decision to launch TTIP negotiations is a signal that it does not expect any further successful multilateral trade rounds, and is instead choosing to go down the bilateral route. It remains to be seen whether there is still life in the multilateral process, and if bilateral agreements can actually be steps toward multilateral liberalization in trade and investment.

Do you see any political implications for this new US-EU partnership? How do you think the EU views its relationship with the United States at present, and how do you think that will evolve?

It’s a very complex question. I think that there is still awareness in Europe that there are a set of shared fundamental values between the US and the member states of the EU. Both Europe and the US can benefit enormously through cooperation on foreign policy problems, whether in the Middle East, Iran, Afghanistan, North Korea, Africa—these challenges are better addressed through transatlantic cooperation than either side trying to go it alone. In Europe, there is still strong awareness still of those benefits.

One has to acknowledge that there are currents of feeling in Europe that the United States is to blame for the present economic and financial crisis began in 2008, with the collapse of Lehman Brothers. In reality I would say this was a catalyst and would not have led to the prolonged recession if it were not for the structural weaknesses within Europe itself. Yet in some quarters there is still a feeling that the United States is responsible for the current crisis, an attitude that may pose some political difficulties as the US and the EU seek to strengthen economic ties. Certainly there are divergences between the US and Europe on issues like capital punishment, the role of religion in public life, or the proportion of the population in prisons. However, with the TTIP renewing transatlantic cooperation, I think there will be a renewed recognition of the commonalities between US and Europe, which in turn will have a positive spillover in terms of foreign policy and economic issues.

The EU & the World

What about the rest of the world? How would you characterize Europe’s ties to Africa, Asia, and Latin America, and what kind of importance does the European Union place on its relationships with emerging market countries?

There’s been discussion recently that Europe, like the US, is pivoting towards Asia–in other words, that Europe understands and acknowledges the growing importance of emerging countries in Asia, in South America, and to some degree in Africa—which, for the moment is the world’s main source of economic growth. To that end, the European Union has developed a number of strategic partnerships with key countries in these regions. Politically, the EU faces similar challenges as the United States in this realm. Namely, the choice between a foreign policy that is based on a projection of European values and a more pragmatic foreign policy that is dedicated to the promotion of tangible interests like security and energy. In practice it’s always a subtle blend of the two—Europe maintains a political dialogue with the emerging markets, drawing attention to issues like the respect for human rights, democracy, and the rule of law, while simultaneously pursuing negotiations based on reciprocal interests. It is always a very fine balance, but it is one that both Europe and the United States contend with.

The EU Internally

Within Europe, do you think relationships between countries have changed as a result of the EU?

In recent years, the European Union has adopted the motto of “unity in diversity”, which I think is an accurate reflection of its current policies. There is full recognition of the cultural and linguistic diversity of the different cultures of Europe. Strong regional identities are part of Europe’s inherent richness, and the European Union project does not intend to diminish that. At the same time, over the last twenty to thirty years, the obstacles that used to exist—particularly of the free movement of persons across borders, freedom of movement of goods, capital, services and so on—have been progressively eliminated. We live in a time when young generations have only known a Europe in which one could travel across borders at 80 or 100 kilometers an hour—or in a high-speed train at 350 kilometers an hour—in which passports are no longer needed to travel within the European Union, in which the kind of long lines at the borders that existed when I first traveled on the Continent have never been experienced. So you have a young generation for whom free movement across borders, the right to work in other member states, is in a sense taken for granted. One of the main challenges of EU leadership, apart from overcoming the present economic crisis, is to find a narrative that demonstrates to younger generations the value of the EU enterprise and that it is worth strengthening and fighting for.

On the whole, the younger generations in Europe have never known war on the European continent. They have never been involved in wars. Most of them are too young to remember the wars that took place in the former Yugoslavia in the 1990s. For this reason, peace is also something they take for granted. A commitment to celebrating diversity is a good way to approach Europe’s complexities, but at the same time our leaders have the challenge of making Europe meaningful to the young generations and ensuring that when crises come along, young generations will see the continued value of working to maintain the unity that has been achieved over the past decade.