What To Do About The EU’s Relative Decline

The European Union will be marginalised if it continues to shrink compared to other parts of the world; however, two former Italian prime ministers, Enrico Letta and Mario Draghi, are proposing remedies. While anxious leaders welcomed Letta’s report about how to improve the bloc’s single market at their summit last week, they may lack the will to drink the necessary medicine.
There are two ways of looking at the EU’s relative decline. The first is in terms of living standards. Here, what matters is not that developing countries, led by China and India, have been dragging themselves out of poverty in recent decades and so closing the gap on Europe, says Erik Nielsen, UniCredit’s chief economic advisor. Rather, it is that the EU has not been moving ahead as fast as the United States.
EU income per head has grown 55% since the single market was created in 1993 when measured on a purchasing power parity basis. That’s not far behind the 65% gain enjoyed by the average American.
However, the EU has only kept up because new members, such as Poland, have expanded very fast: that country’s income per head has almost quadrupled. By contrast, income per person in the bloc’s bigger and older members — Germany, France and Italy — is up only 37%, 35% and 20%, respectively, over the same period.
The other way of looking at the region’s relative decline is in terms of power. Back in 1992, the EU was a geoeconomic giant. With 29% of global output and a strong position in leading technologies, it could set many world standards.
By 2022, the bloc’s share of world output had shrunk to only 17% while the U.S. share was stable at 25% over the same period. What’s more, the EU now has only four of the world’s top 50 technology companies, Draghi noted in a speech last week.
The EU’s relative economic weight is not just declining because other regions’ living standards are growing faster. Its currency has weakened, and its population is stagnant. This would not matter if the post-war global economic and political order was intact. But Russia has invaded Ukraine, while both China and the United States are undermining the world trading system. The EU is worried that it will be bullied by larger rivals.

(Source: Reuters)