Opinion - Europe Economy

Op-Ed: The Western world order needs growth-oriented economic policies

Key Points
  • The European Union’s economic stagnation is threatening its social cohesion and providing a breeding ground for political extremism, hate, xenophobia and violence.
  • The U.S. has a fully-employed economy, but the winning left-of-center political platforms in Democratic primaries are sending a message that social peace, equity and justice may require a new look at economic management and national priorities.
  • The trans-Atlantic community needs an updated and better integrated system of trade and finance that should remain a point of reference for the rest of the world.
European Union flags flutter in the breeze during the second day of a special European Council summit in Brussels on February 21, 2020, held to discuss the next long-term budget of the European Union (EU).
Ludovic Marin | AFP | Getty Images

The United States and Europe have ample monetary and fiscal resources to promote economic growth and a harmonious development of their free-market democracies.

If that sounds like a truism, think again. Political leaders, especially those in Europe, are now forced to recognize that errors of economic policy have led to rising poverty, unemployment and decaying social infrastructure — laying the foundation to social dissent, violence and political instabilities.

In spite of that, there is no guarantee that those leaders will act to correct their policy mistakes.

That certainly seems to be the case of the European Union, a huge economic system accounting for nearly one-third of the industrialized world's combined economic output. Last week, the EU's 27 leaders spent 28 hours of inconclusive "negotiations" about decimal points (varying between 1.065% and 1.074%) for their contributions to the common budget covering the period of 2021 to 2027.

According to media reports, the "thrifty four" — Austria, Denmark, Sweden and The Netherlands — dug in to lead what was called a "war of attrition" with the spendthrifts. The penny pinchers apparently ignored the solidarity implied by the treaty they signed for an ever closer economic and political union.

Looking down on their poorer fellow members, they ignored more than one-half of EU economies with unemployment rates above the union's 6.2% average, 3.2 million of young people without jobs and a meaningful future, and 113 million people (22.4% of the total) at risk of poverty and social exclusion. And, shockingly, the "thrifties" did not even spare a thought for the 17% living in absolute poverty in the prosperous post-modern EU democracies.

European leaders at an impasse in EU budget discussions
European leaders at an impasse in EU budget discussions

In the middle of all that, German media announced last week that the country was broke (sic). All of a sudden, a nation with a budget surplus of 1.7% of GDP in the first nine months of last year was reported to have billions of euro leaks that required higher taxes and public property sales.

Incredible, isn't it? And, true to form, raising taxes in a quasi-recessionary German economy sounds like Berlin's oxymoronic "austerity growth model" imposed on sinking and indebted euro area economies during the Great Recession.

Ominously, the Germans are not addressing the reasons of their growing xenophobia, hate, violence and political extremism, while the government sweeps under the rug the damage caused by (a) the dogmatic pursuit of "black zero" budget balances, (b) economic hardships in eastern regions, (c) crumbling infrastructure and (d) the mayhem of open-door immigration policies instead of reaching out to 15.5 million EU job seekers to plug labor shortages.

France is also struggling with social strife and domestic violence. But ever ready to mystify the obvious, the governing elite coined last week a linguistic shortcut for all that under a term, "separatism" — immigrant communities that do not integrate into the broader French society. They hope that the charge of "separatism" will whitewash decades of policy errors in the run-up to the monumental thrashing they are expected to take in next month's local elections as a prelude to the presidential contest in 2022.

Looking at the French-German chaos, a relatively well run "thrifty four" may be forgiven for playing an overtime budget game. Some of them are tired of the Paris-Berlin diktat, and could be tempted to create a new fiscally virtuous center of power. Or they simply want to see what they are dealing with.

Whatever it is, a community of nearly half a billion EU people heading into a protracted period of economic stagnation, poverty and high unemployment is a breeding ground for hostility, intolerance, political extremism and violence.

By comparison, the U.S. is in a great shape, with a fully-employed economy and a potentially large labor supply. Still, a strong showing among left-of-center political platforms in Democratic primaries is sending a message Washington cannot ignore, nor reduce to election-year, populist demagoguery. Social peace, equity and justice may require a new look at economic management and national priorities.

The trans-Atlantic order has to strengthen itself before home-grown economic mismanagement gets out of control.

Blaming the allegedly China-led revisionist powers is vacuous sloganeering. That cannot substitute for an updated and streamlined Western (i.e., trans-Atlantic) system of trade and finance that should remain a hands-down winner, and where even those revisionist powers — whoever they are — can be offered an appropriate place and role.

The U.S. Treasury can have a superb hand to play.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.