POLITICO: Europe’s economic Apocalypse

Pic.: Strategic Culture

Europe is running out of time. Stagnation, flagging competitiveness, Donald Trump. The continent is facing "an existential challenge," writes POLITICO.

With Donald Trump poised to retake the White House in a few weeks and the continent’s economy in a deepening funk, the bedrock on which the region’s prosperity rests isn’t just developing fissures, it’s in danger of crumbling.

Europe’s economy has proved remarkably resilient in recent decades on the back of the bloc’s eastward expansion and strong demand for its wares from Asia and the United States. But as China’s long-running boom winds down and trade tensions with Washington blur the transatlantic trade picture, the salad days are clearly over.

The economic crosswinds sweeping across the continent threaten to stir into a perfect storm in the coming year as an unchained Trump sets his sights on Europe. In addition to levying new tariffs on everything from Bordeaux to Brioni (the president-elect’s favorite Italian suit-maker), the incoming leader of the free world is certain to reinforce his demand that NATO countries either pony up more cash for their own defense or lose American protection.

That means European capitals, already struggling to rein in surging deficits amid dwindling tax revenue, will face even greater financial strains, which could trigger further political and social upheaval.

Recessions and trade wars may come and go, but what makes this juncture so perilous for the continent’s prosperity has to do with the biggest inconvenient truth of all: the EU has become an innovation desert.

Once synonymous with cutting-edge automotive technology, Europe today doesn’t have a single entry among the 15 bestselling electric vehicles. As former Italian Prime Minister and central banker Mario Draghi noted in his recent report on Europe’s flagging competitiveness, only four of the world’s top 50 tech companies are European.

If Europe remains on its current trajectory, its future will also be Italian: that of a decaying, if beautiful, debt-ridden, open-air museum for American and Chinese tourists.

“We are living through a period of rapid technological change, driven in particular by advances in digital innovation and unlike in the past, Europe is no longer at the forefront of progress,” European Central Bank (ECB) President Christine Lagarde said in November.

Speaking at the medieval Collège des Bernardins in Paris, Lagarde warned that Europe’s vaunted social model would be at risk if it doesn’t change course quickly.

“Otherwise, we will not be able to generate the wealth we will need to meet our rising spending needs to ensure our security, combat climate change and protect the environment,” she said.

Draghi, who presented his report to the European Commission in September, was more blunt: “This is an existential challenge.”

With Donald Trump in the White House and his Republicans in control of both houses of Congress, Europe has never been more exposed to the whims of American trade policy.

If Trump follows through on his threat to impose tariffs of up to 20 percent on imports from the continent, European industry would suffer a body blow. With more than €500 billion in annual exports to the U.S. from the EU, America is by far the most important destination for European goods.

“The failure of Europe’s leaders to draw lessons from the last Trump presidency is now coming back to haunt us,” says Clemens Fuest, president of the Munich-based Ifo Institute, a leading economic think tank.

Fuest cautions that Trump might not be all bad news for the EU. If, for example, he follows through on his plans to renew massive tax cuts for the wealthy and impose new tariffs, inflation in the U.S. could jump, forcing interest rates higher. That would strengthen the dollar, which would benefit European exporters when they convert their U.S. revenue back into euros.

Trump might also be open to a broader trade negotiation with Europe to avoid a new round of tariffs altogether.

At an EU summit in Lisbon in 2000, leaders resolved to make “Europe’s economy the most competitive in the world.” A key pillar of the so-called Lisbon Strategy was “a decisive leap in investment for higher education, research and innovation.”

A quarter of a century later, Europe has not only failed to achieve its goal, but it’s fallen well behind both the U.S. and China.

Faced with some of the world’s highest energy costs, expensive labor and onerous regulation, many big German companies are simply upping stakes and relocating to other regions. Nearly 40 percent of German industrial companies are considering such a move, according to a recent poll by DIHK, a business lobby.

Veronika Grimm, a member of the German Council of Economic Experts, a nonpartisan panel of leading economists that advises the German government, argues that the only way for the country to reverse its decline is to pursue fundamental structural reforms to encourage investment.

“The situation is pretty gloomy,” Grimm said last month following the release of the Council’s annual analysis of the state of Germany’s economy.

As the EU’s largest economy, Germany’s economic misfortunes are reverberating across the bloc. That’s especially true in Central and Eastern Europe, which German car- and machinery-makers have turned into their de facto factory floor in recent decades.

If Europe’s economic fortunes don’t reverse soon, those countries will face some difficult decisions — just as Greece did in 2010 — as their borrowing costs inch upward.

The likely result is a radicalization of politics, as Greece experienced during its debt crisis, as populists on the far right and left seize the opportunity to attack the establishment.

That radicalization is already underway in a number of countries, most worryingly in France. The success of the fringe is all the more disquieting when considering that the worst of the economic pain is likely yet to come.

The trouble is, by the time Europeans wake up to their new reality, it may be too late to do much about it.

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