ISS Seminar Report: The European Union in a Globalized World: Strategic Prospects

Date: 2012-02-02

Venue: , ISS Conference Room, Block C, Brooklyn Court, 361 Veale Street

RSVP:
Sarah Malefo
Tel: 012 346 9500
Fax: 012 460 0997

Chair:

Speaker:

The European Union (EU) currently occupies a great deal of global attention due to the on-going financial crisis and the fact that the solutions employed by the European zone could have a dramatic impact on the rest of the world. This crisis has led to a loss of confidence in the ability of European leaders to make a success of the European Union. The financial crisis has also become a matter of concern for the partners of the EU, including South Africa, some of whom argue that they no longer have a model of economic integration to consult. All this has happened at a time when emerging economies, such as South Africa, have been growing steadily.

The objectives of the seminar were firstly to clarify the conditions fuelling the lack of confidence in the European project among citizens and partners of the EU and then to outline the steps that have been taken by the EU to emerge strong and unified from the crisis. Lastly, the seminar addressed the consequences of the European crisis for Africa and other developing countries.

The 2008 failure of the Lehman Brothers bank led to a worldwide crisis of private debt. The EU tried to minimize the impact of this private debt crisis on the rest of the world through vast public investment schemes intended to prevent the collapse of the banking system. This decision was meant to prevent an even deeper recession through stimulating growth, however, it became the cause for the sovereign debt crisis.

During this time the public debt ratio increased from 66.4% of GDP to 105%. It was also noted that the public debt ratio in the US rose from 62% to 105% and in Japan from 188% to 238%. These figures prove that the debt crisis is not specific to Europe and that the public debt ration in Europe is not as high as in other countries.

A number of factors can explain the high tensions experienced by the Euro. First was Greece’s uncontrolled fiscal policy, as was the real estate bubble that burst in Ireland, Spain and Portugal. Secondly, private sector involvement in the restructuring of Greek debt gave markets the negative impression that EU countries would be unable to repay their debt. Third, was the mistaken belief that the adoption of a single currency would lead to common fiscal policies. Instead it led to dishonest reporting on expenditure. Fourth, although it was deliberately decided that the European Central Bank should lack the capacity to act as a lender of last resort, one of the major consequences has been that investor’s no longer view sovereign debt as risk free. In turn this has led to increased interest rates.

On the basis of these considerations the EU decided in favour of further European integration. The associated measures are based on the core principles upon which the EU is founded, namely responsibility, solidarity, convergence and governance. These principles form the basis of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, which is to be signed in March by all EU member states except for the UK and the Czech Republic. The objective of the treaty is to foster closer economic integration and stronger governance as well as to enhance growth.

A number of recent developments were also discussed. Firstly, the EU has managed to invent solidarity mechanisms, thereby moving away from its previous ‘no bail out’ clause. This should also help overcome opposition to an ‘economic government’ for Europe. Moreover, solidarity is possible only amongst member states committed to the same rules, the implementation of which requires strengthened governance. In addition there has been no shift in the method on which the European project is based, which combines the political leadership of heads of state and government with the European Commission. It is up to the European Council to act as the economic government of Europe. Fourth, not all countries agree. If a member state does not wish to join immediately they can always do so at a later stage. Lastly, it is always possible to build a bridge between the Euro area summit and the European Council, which can be done by choosing the same president for both.

European integration will also benefit the partners of Europe, including Africa. At the G20 summit last November in Cannes the focus on the EU crisis monopolised discussions. While it cannot be denied that the EU is experiencing a crisis, it is misleading to think that it is the only crisis currently happening in the world. However, the implications of this crisis for the global economy can be addressed through international cooperation.

Progress was made in Cannes in terms of ameliorating the regulation of the financial sector. A mechanism has been put in place to monitor the implementation of decisions made regarding banking solvency ratio and the limitation of compensation practices. Principles on the regulation of the shadow -banking sector have also been agreed upon.

The EU should not limit itself to addressing issues of budget consolidation but also of growth, as there cannot be growth without sound fiscal policies. This is vital as slow growth in the EU poses a risk for developing countries. The decisions made on growth at EU level will be implemented by national governments, many of whom have strong relations with Africa.

The EU has consistently resisted protectionism and will continue to do so. The EU’s commitment to free trade is part of a balanced approach to its relations with its partners. It is for this reason that in 2011 the European leaders included reciprocity in the principles of the EU external actions. The commitment to development of the EU in general, and France in particular remains unchanged.

This commitment was illustrated by the following. First, the French President emphasised development issues on the G20 agenda as well as achieving results in the area of food security. Secondly, fiscal consolidation in Europe has not stopped the EU member states from maintaining their flows of development assistance. France specifically decided to exempt ODA from public expenditure cuts. The EU and France in particular remain at the forefront in the discussion on finding new sources for financing development. France implemented a levy on air travel to fund an international program to combat HIV/AIDS. The EU Commission also proposed introducing a tax on financial transactions. President Nicolas Sarkozy is committed to implement this proposal as soon as possible.

Lastly, the EU has not given up on the fight against climate change. Together with Africa, and thanks to the leadership demonstrated by South Africa, Europe contributed to paving the way for a comprehensive agreement to avoid the adverse consequences of climate change in developing countries. A stronger Europe will be in an even better position to move forward on all these issues.

Further topics discussed included declining EU trade with Africa relative to increasing US-Africa trade. While the EU remains the most important trade zone in the world, the decrease in trade was linked to the European financial crisis, and it was noted that the share of world trade with the EU is decreasing overall.

The consequences of the deadlock in the World Trade Organisation (WTO) Doha negotiations were also mentioned.  The parameters of these negotiations were defined 15 years ago when the balance of the global economy was markedly different. Whilst it may be possible to launch a new multilateral trade agreement, regional trade approaches should also be considered. Participants at the seminar reiterated the importance of using WTO mechanisms to resolve disputes.

A number of key lessons that could be learnt from the EU financial crisis for African policy makers were discussed. The history of EU integration illuminated many important points in this regard. Initially the EU was a trade union with a common trade policy, after which it became a single market in the 1980s. Eventually the EU became a union with a common currency, as the continued use of national currencies within a single market became problematic. It was argued that a functioning trade union must be based on a level playing field and that in order to integrate a trade union, single market and one currency, a common set of rules and responsibilities must be added. It was noted that achieving equilibrium between national and union level decision-making bodies remains a challenge.

It was noted that problems stemming from the crisis in Greece could have been settled more successfully had they been dealt with earlier, highlighting the importance of knowledge sharing. In addition, sound economic ways of financing social welfare models need to be developed so that they don’t end up harming the economy.

A participant noted that since the budgets in the EU were under so much pressure, defence departments are likely to suffer. Considering how committed the EU is to anti-piracy operations the likelihood of the EU having to pull back due to budget constraints could present challenges for Africa.

Whilst financial difficulties do put defence programmes at risk, current operations and commitments retain a very high priority for France and the UK. The risk posed to defence departments by the current financial climate also provides a good reason for Europe to examine defence procedures. However, a lack of political will and consensus remains a strategic problem within the EU. Development without adequate control of the financial sector is problematic and that more regulations need to be put in place.

The French position vis-à-vis the recent African Union commission chairperson elections were also discussed. It was noted that whatever the outcome of the next AU elections, France’s common interest with the AU would ensure that it remains committed to its partnership with Africa.

Seminar report compiled by Naomi Kok, Conflict Prevention and Risk Analysis Division, ISS Pretoria Office.