Future of Europe - strains and stresses, economy, eurozone

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I wrote this back in June 2006 – about the future of Europe.  Judge for yourself against the realities of Europe’s challenges as they are today:

Strains in Europe from monetary union

The strains in Europe will be immense. Monetary union means that the foundations of economic policy are now dictated in most countries by a majority of others who do not even speak .their own language, and perhaps have never lived in their country. But monetary vision without progressive alignment on all major issues will be impossible. Common immigration, asylum and visa rules, common defence (or attack) policies, common foreign policy - all these things to agree on or be steamrollered over. Then there are the legal strains.

So what will happen to Europe?

The core nations of the old EC will continue to move together to align their economies and many other areas of life, in a process which will continue until the day the whole thing starts to fall apart. No nation will want to risk being left out, even if it means economic gridlock. Yet those same nations will in the future be just as relieved to get out of the all-embracing European mega-politik.

Pressures will remain to protect national economies from cur¬rency instabilities through regional economic alliances, and these pressures will increase as further globalisation produces ever larger surges on the foreign exchange markets. The way ahead will there¬fore be very difficult and messy.

European Monetary Union

And what of the single Euro currency? One thing is clear: it won’t be sustainable without pain. The individual countries are in too much of a mess for that. It will continue as a fudge, with France, Germany and other countries squeezed into a straitjacket from which there is no escape. The harder the squeeze to get in, the greater the agony of staying in. Countries with different economic problems and in a different stage of their business cycles will often experi¬ence great pressures. Imposed squeezes on budget deficits will continue as I predicted to create agonies for public spending on health, education and social security - all three sensitive areas for the electorate.

Never again will a member country be able to allow its currency to devalue to offset inflationary pressures, or to set interest rates at a higher level than its neighbours to control inflation. All Euro¬zone members will swim or drown together. But conditions that enable some to swim will drown others.

Many businesses are keen. They cannot understand how nations in Europe could have hung on to their own currencies in a globalised world which demands currency stability.

So there will be a conflict between ‘corporate’ tribes who want a simple trading area across the region, and ‘people’ tribes who will sometimes be very hostile to the emerging meta-state.

One of the destructive pressures on the ‘United States of Europe’ will be high unemployment caused by changing conditions and labour force immobility inside Europe, combined with a progress¬ive, long-term shift of manufacturing and service provision to the lower cost Pacific Rim economies and to other countries such as India and, later, African nations. Germany has recently seen more people out of work than at any time since Hitler came to power, with dole queues four million long.

This problem will partly be offset by labour shortages in some areas caused by an ageing population but has so far grown worse.

However Europe ‘Will benefit in the short to medium term from relative instability elsewhere, becoming a haven for investors. Dictatorship-led econo¬mies are inherently unstable due to the lack of openness, account¬ability and transparency in their governments. This has been a factor among many in the currency crises in Asia and elsewhere. Dictatorships also have a habit of being overthrown, followed by further internal conflicts and uncertainty.

Europe will also benefit hugely (if attitudes change) from some of more than 500 million people in emerging economies who would like to live and work in the EU. Many of them are highly educated, while others are willing to do much needed but unpopular jobs for low wages, helping reduce labour costs and boost the economy.

Productivity challenges in the EU

Productivity growth in the EU is likely to fall further behind the US and Asia for several reasons which the governments will try to tackle. Firstly, lack of techno-innovation. The EU venture capital industry will remain small compared to the US with lower levels of investment at each stage. EU culture is likely to continue to be less entrepreneurial and less tolerant of risk-taking, while also making cross-border mergers and new market entry difficult.

Extract from 4th edition of Futurewise book by Patrick Dixon - written 2006, published early 2007.



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