The EU and an inescapable sense of urgency

Europe faced the beginning of the century with great optimism. The EU political agenda was on track and the euro, the key European project in the last 20 years, seemed to set the beginning of the final process towards European integration. Overall, the EU seemed to be heading towards a long period of prosperity.

This context provided a key opportunity to close the gap with the US in terms of competitiveness and innovation. In this respect, the European Commission took the important step of launching an ambitious effort in this direction: the Lisbon Agenda, presented two years before the birth of the euro, set the target of the EU to become the most competitive region in 2010.

The program, however, never permeated to EU Member Countries through policy actions and has radically failed to achieve its goals, as several evaluations from the very own EU have stated.


Paradoxically, while the Lisbon Agenda presented some of the most ambitious objectives ever included in an official EU document, resource allocation did not change much. Among other things, the Common Agricultural Policy (CAP) continued to be the largest recipient of EU funds.
In addition, few social and labor reforms – some of them considered essential but politically unpopular – were carried out by Member Countries.

The Lisbon Agenda never presented the reforms as zero-sum games – by which a more competitive EU would imply a reduction in programs such as the CAP and certain short term political costs – but as add-ons to the social and economic achievements of the EU.

Basically, it seemed like no sacrifices were needed to provide the elements for a more competitive economy. New resources – theoretically available when required – would take care of all the necessary reforms. For the rest, it was just business as usual.

With probably the exception of Germany, the EU did not question its current social benefits structure, the low correlation between salaries and productivity gains, and the potential sustainability of its privileged status relative to the rest of the world.

In a buoyant economy, no one considered increasing the competitiveness of Europe a priority. EU leaders seemed incapable or uninterested in addressing the key problems of Europe. There was no sense of urgency.

In the meantime, other things were happening. The world was becoming a bigger place, as the very own growth of Europe and the US was accelerating the development of other countries, through the import of jobs and the export of workers.

The weight of regions such as Asia and Latin America in the world economy has increased dramatically since the beginning of the century, becoming high-growth markets and lifting millions from poverty to an emergent middle-class. China, Brazil and India have become the main engines of this process.

The current economic crisis brings larger challenges to the EU. This is the first global crisis that affects developed countries more deeply than developing countries. While for the next few years European governments will be working hard to reshape their economies through public fiscal support and measures to reign on public debt avoiding a sustained recession and higher unemployment, emerging economies will continue to grow at healthy rates – somewhat affected by the slowdown in the US and the EU – while its companies retain and even increase their competitiveness.

The underlying process of what is and will occur in Europe is a more relevant one: for the first time, the EU countries are aggressively reigning on social rights that were believed to be acquired and indisputable. For many, this is the most dramatic attack on the core European values; for others, it is just the first step towards finding the way out from a profound economic crisis.

The question is whether this radical social and economic reform process is the specific result of this crisis or an unavoidable consequence of a larger global economic shift towards developing countries. The answer is probably the latter. Today, the asymmetry between developed and developing economies is even larger – this time in favor of emerging economies – and for the EU the problems have become bigger and more challenging.

For this reason, there are several adjustments still waiting to happen. First, the reduction in social benefits will continue. Second, we will be working more for less in order for our companies to be able to compete with those in emerging markets. Third, we will have to accept the legitimacy of other economic models, with larger state intervention and managed competition. Fourth, we will witness increasing labor mobility as Europeans seek other growth markets with better economic opportunities.

In the meantime, the EU will try to protect its privileged position through economic and non-economic trade barriers limiting competition and avoiding playing in a leveled playing field with the rest of the world. The impact of these measures in the medium and long-term will be neutral or negative.

The key question that should be raised within the European debate is whether the values that underpin our society are unsustainable in the new economic context. If the answer turns to be yes, Europe may be at one of the most important crossroads of its history: our social and economic model may have reached a dead end unless ambitious and brave political decisions are taken.