Breakdown of the EU’s 60-year-old Convergence Machine

Rory Foye March 28, 2017 0
Breakdown of the EU’s 60-year-old Convergence Machine

Saturday marked the 60th Anniversary of the Rome Treaty, with the idea of a convergent and cohesive union being a primary aim for the European project over the past six decades. A joint EU statement asserting its “undivided and indivisible” nature was symbolic of the rhetoric on show from leaders across the continent. Economically, however, the view from the White House that “shared prosperity” has been central to the project appears increasingly misplaced, with unity suffering as a consequence. Narratives of lazy Greeks and authoritarian Germans in recent years highlight how central fixing this problem is for the EU to ensure that its seventh decade isn’t its last.

In 2000, Italian GDP per capita was similar in size to Germany, and the prospect of having a common currency was perceived as being a way to ensure that both states continued to grow at the same pace. Fast forward 17 years and Italy remains worse off than it was in 2007 while Germany has seen its economic performance improve considerably. Its GDP is now 20% ahead of where it was ten years ago and shows little sign of stopping. Such circumstances are evident across Europe, with southern states facing a string of economic difficulties while the northern powers continue to surge ahead. At the centre of this divergence are the elephants in the room – the Euro and a lack of solidarity.

Let’s draw a comparison with the UK. Here London is the engine room of economic growth, and it subsidises the rest of the country as a result. The more impoverished regions of Northern Ireland, Scotland, and Northern England can utilise the structure of the United Kingdom in order to gain from London’s growth. Similarly, in the US rural areas are subsidized by New York and California. The common British and American identities allow for this, but a common European identity remains illusory, and the same solidarity in economic structure is therefore almost non-existent within the EU.

Economic union has made the situation on the continent worse rather than better, as some countries – Germany foremost among them – have gained from the common currency at the expense of others. Germany now has an undervalued currency thanks to weaknesses in the south, offering it huge trade benefits. Poland is able to ‘dump’ workers in richer states, and blocks any attempts to change the laws around this. Despite gaining from such a design, these states are unwilling to show reciprocity to southern states whose exports and economies have suffered from an overvalued currency and an austerity-driven ECB. Unemployment has exploded in the main Mediterranean states. In Spain, it has doubled from 9% to 18% in the past decade. Greece has seen the same statistic rise from under 10% to almost 25%. No surprise that young people are migrating to colder shores, then.

Yet while one balloon deflates, another inflates; Germany’s unemployment rate is at its lowest level since before its reunification. The animosity that has been visible between the northern and southern states since the sovereign debt crisis reared its head is hardly a shock.

What can the EU do to rectify this? Tax and spend? No powers to do so. Enhance educational policies? See above. Improve social welfare systems? Same again. Granting the EU such powers would equate to sacrilege in many European capitals at a time of rising nationalist sentiment. Here the lack of a shared identity is proving a roadblock to any initiatives for reform, allowing the issue to fester.

The warnings that an economic union requires a political one have an almost clairvoyant ring to them two decades on from the birth of the monetary union. Yet it didn’t have to be this way; the existence of a social cohesion fund granting €63.4 billion between 2014-2020 to more disadvantaged parts of the continent show that mechanisms promoting economic convergence can be set up. Only by being built on this economic convergence can greater social cohesion solidarity emerge. However, the convergence machine has been broken for a long time and must be repaired for solidarity to be more than just a nice buzzword.

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