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    Tuesday 25 June 2019

    What now for Europe?

    Global Insight

    Europe’s long-term unity faces a number of threats in these turbulent times. 

    Greece's debt problems have been postponed at a cost of €86 billion. Putin’s Russia is still rattling its sabre, having re-armed significantly over the last five years, and now appears to be seeking to split European allies. The UK is looking to renegotiate its relationship with Europe, with a possible exit on the cards. Yet hundreds of thousands of people are risking their lives to come and live in Europe. Why?

    Europe today
    Europe offers stability, peace, rule of law, education, governance, open societies, functioning democracies, culture and history. There is perhaps more uniting the continent than pushing it apart. Despite the media and political rhetoric, Europe remains relatively wealthy, with GDP per head of $34,650* per annum on a purchasing power parity basis. Despite the poverty, particularly in some southern European countries, overall European GDP compares favourably with, say, the UK, at $37,600* per annum. Continental Europe continues to invest more in higher education as a percentage of GDP than the UK. Outside Europe the comparison is more marked, with GDP per head of $46,600 per annum in Australia and $54,800 in the US.  

    As a region in which to do business, Europe remains relatively attractive. However, productivity measures in both the euro area and the UK still lag behind the US by a considerable margin. The only slight downside for the owners of capital in Europe is that allocation of profits from business is less generous to shareholders and more attractive to employees than in North America.

    Taxation is higher in Europe, currently at about 40%** of national incomes, compared with 26% for Australia and 27% in the US. Although rates of taxation are an issue, regulation is more important. While there is a need for rules in a single market, many would argue that European regulation has become too onerous. Regulation generally benefits larger and established businesses, as it creates cost barriers to smaller companies and start-ups. Europe’s regulations are in need of significant revision, otherwise economic growth may slow with a long-term impact on future prosperity in Europe.

    Strength in co-operation
    Most of the challenges facing Europe are best met collectively, whether migration, defence, Greek debt or the banking system. Many of the financial problems in Europe are the result of national governments over-promising and under-delivering for too many years. 

    The European Central Bank (ECB) is one good example of success due to collective effort. Since the appointment of Mario Draghi as President, the ECB has been effective in restructuring and strengthening the banking system. For instance, between 2010 and 2012 the ECB helped provide emergency funding for countries in financial trouble including Ireland, Spain, Portugal and Italy, and all of these countries are now operating with primary budget surpluses.

    Investors have continued to be rewarded, although with lower returns than we have seen in other parts of the world, particularly in the US. European structures have generally worked well for business. Without the European Union, Europe might have struggled more in the aftermath of the credit crunch and many of its citizens might have seen their standards of living fall more significantly.

    The European Union is still seen by many as the most likely forum to ensure Europe’s political stability and prosperity in 100 years’ time. Lest we forget, 100 years ago, during the Battle of Isonzo on the Western Front in August 1915, 90,000 people lost their lives. As Churchill said, “it is far better to jaw-jaw than to war-war.”

    For more information, contact:
    Mark Garnett
    Smith & Williamson, UK
    T: +44 1483 407163
    E: mark.garnett@smith.williamson.co.uk

    * - Trading Economics, August 2015
    ** - Eurostat, August 2015

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