Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

Speeches and Papers

Does Europe Have an Economic Future?

by Mario Monti, President, Bocconi University

Fifth Annual Stavros S. Niarchos Lecture at the Institute for International Economics
May 8, 2006


The positive fallout in Europe from the Institute for International Economics has been remarkable and widespread. Europe has been listening a lot, though perhaps not enough, to the Institute’s research and policy recommendations and always discreet advice, and the Institute itself has become a model. In fact a few years ago French President Jacques Chirac and German Chancellor Gerhard Schroeder sanctified in their final summit communiqué the idea of creating in Europe a think tank on international economic issues with an EU-wide perspective, and the Institute for International Economics was the very ambitious model. Caio Koch-Weser, who is here with us this evening, was instrumental to this project. He will know better than I do, but originally it was a Franco-German idea, and unlike some other Franco-German ideas, this one, as well as many other good ones, was fruitful—perhaps because it was inscribed not into a framework of forced cooperation but in an open approach. The idea to set up what is now known as Bruegel was Franco-German, but it was open. Fourteen EU member governments support the project, as well as 27 large corporations, most European but a few American.

The issue whether Europe has an economic future is a key issue. But not for Europe alone. It is very important for the global economy, because Europe has so far been a nonnegligible component of it, and also for the improvement of global governance, economically and noneconomically.

I am fully aware of the weaknesses of the European Union right now. But for all its weaknesses, I strongly believe that the EU experience with governed continental globalization has been the closest approximation to the combination of market integration on one hand, and policy coordination on the other, which is needed on a global scale if globalization is to proceed overcoming the increasing backlash it faces. Only the European Union has in its DNA the two ingredients of market integration and coordination of public policies. But for Europe to deliver this unique contribution to global governance, it has to do two things: First, act as one in policy areas beyond the few where it can already do so, hence the importance of the constitutional debate. Second, become more credible as an economic player, hence the importance of current economic developments and policies to achieve greater competitiveness.

On the first front, it is very important for Europe to act in a united way. So far, this has been possible only in three areas. Two date from the Treaty of Rome in 1957: trade policy and competition policy. The third area is recent but not unimportant: It is monetary policy and was born with the Maastricht Treaty and put in place in 1999. Only in areas where Europe can act as one can it expect others like the United States to take it seriously and cooperate constructively with a multilateral aim. I have been acquainted a bit with maybe the most modest of these unitary areas—competition policy. Since the 1950s the European Commission has done virtually all the key things in Europe in competition policy, and this has been quite fruitful not only in Europe but also in terms of bilateral cooperation with others (most notably with US antitrust authorities) and also multilaterally.

I am delighted to see Bob Pitofsky here this evening. He was chairman of the Federal Trade Commission when I started my activity as competition commissioner. I still remember very vividly the day in September 2000 when something changed. Until then Europe had been advocating the need to deal with competition issues in the context of the World Trade Organization (WTO). The US administration was adamant about not wanting to deal with competition policy issues multilaterally. Then on that day in September 2000, Bob and our colleague from the Justice Department Joe Klein were in Brussels for a conference, and Joe Klein revealed that a new position had been adopted by the US antitrust agencies—that of wanting to do something multilaterally but not in the context of the WTO. And we jumped on this opportunity and decided to set in motion in Washington and Brussels the International Competition Network, which now comprises some 90 antitrust agencies from across the world and is doing very fruitful, modest work of soft convergence, which is very useful to business and consumers. Unfortunately there are not many areas where Europe is able to speak with one voice, and we need to have more of them.

The current economic performance in Europe is not entirely satisfactory, but it should be seen against the background of the last 10 to 15 years. Europe has achieved three and a half major things during that period. Ten or fifteen years ago the United States had a single market, and had had it for a long time; Europe did not. At that time, the United States did have a single currency; Europe did not. The United States had done its adventurous enlargement to the West; Europe was just starting to talk about its eastward enlargement. And the United States had a Constitution; Europe did not.

Of these four things, Europe has definitely put into place three: the single market, the single currency, and enlargement. I consider the constitution half but not zero because, after all, there is a signed agreement among 25-plus member states, which has been ratified by a majority but not all of member states. In the present configuration and political system, it would not come to fruition, but I believe it would proceed further in the near future than we might believe. And is it surprising if there has been some integration fatigue in Europe after all these achievements, after such a huge concentration of political energies into creating the infrastructure for the continent? Other parts of the world have done much better economically but may have accumulated some dust under their respective carpets. Europe has underperformed in current terms but has invested in its future by creating these elements.

The EU economy is doing badly. If we look at the aggregate figures, especially over the last few years, but recently there has been some positive accumulation of current indicators. I’m not going to give you figures, just a perception. In spite of the progress in terms of integration, it is not possible to comment on the performance of the European economy because there are huge divergences within Europe. For example, it’s not possible to attribute the divergent economic performances to relative tax pressure or to whether a country belongs to the eurozone or not. We have high-growth countries in Europe with low tax rates (the United Kingdom, Ireland, and some of the new member states), but we also have good performers with high tax rates (most of the Nordic countries, for example). We have good performers in terms of growth and competitiveness outside the euro area and also within the euro area, like Ireland, Finland, and Austria.

A more promising explanation of relative economic performance—and there is a lot of evidence to this effect—is the different degrees to which different member states have modernized their social-market economies in two respects: reform of their social models and the degree to which they have effectively embraced the market economy. A Bruegel paper recently produced by Andre Sapir noted that Europe does not have just one social model. There are at least four models: Anglo-Saxon, Continental, Nordic, and Mediterranean. It is not necessary for Europe to give up altogether its cherished social models, and that paper provides evidence that some countries are doing better than others in that respect. With respect to the effective embrace of the market economy, we have taken a lot of analysis from the Institute for International Economics, in particular by Martin Baily, in terms of the degree of reform in product markets in particular being a good explanator of the acceleration of productivity, hence of growth. Some countries in Europe are visibly lagging in terms of these market reforms.

Let me give you some indicators of the fact that countries within the eurozone are not really embracing the single market to the extent that some countries outside the eurozone are. It’s a worrying paradox. The euro was meant to be the crowning achievement of the single market. But we are seeing that the single market exists less in the eurozone than it does elsewhere in the European Union. Consider the big three, Germany, France, and Italy—members of the eurozone and also of the European Union. These three account for 70 percent of eurozone GDP and 55 percent of EU-25 GDP. We discuss a lot in Europe about budget deficits, but one should also look at deficits in terms of implementing the single market. For example, one indicator is the deficit of adoptions of the single-market directives in national legislation, to the extent that they are not transposed, that bit of the economy or that country is really outside the single market. If we look at this transposition deficit, we see that the eurozone has a 2.2 percent deficit that is nontransposed. The non-euro countries in EU-15—that is, the United Kingdom, Sweden, and Denmark—have a deficit of only 1.2 percent. They are much closer to a perfect single market.

Take another indicator: the deficit of transposition of a crucial component of the single market, the financial services action plan. The eurozone has a 20 percent transposition deficit whereas the non-euro countries have only a 15 percent transposition deficit. Take another indicator: state aid to companies as a percentage of GDP. The figure for the big three of the euro area is 0.54 percent, for the eurozone it is 0.37 percent, and non-euro countries, 0.33 percent. Or consider the share within state aid of good state aid (given for horizontal objectives such as research and development) and bad state aid (for example, to rescue companies). Here too, the big three are doing worse than the eurozone, which is doing worse than the non-eurozone.

Europe has the Lisbon strategy, which is meant to bring about greater competitiveness through structural reforms and other policies. If we rank the countries (this was done by the Center for European Reform) relative to the Lisbon objectives, the average ranking of the countries not in the eurozone is 3.4 compared with position number 8 for France, 10 for Germany, and 23 for Italy. I will stop providing you with figures, but I wanted you to have an idea of the paradox: Countries that have decided to go further in terms of integration by embracing the single currency are really backward in terms of the more fundamental and basic integration of markets.

So the issues in many cases concern the advancements in terms of structural reforms. This is part of the case in Germany, France, and Italy, with the different degrees to which now they seem to improve relative to their political cycles—with Germany having the elections behind its shoulders, Italy being in the midst of the immediate after-election, and France of course looking forward as we all do to their presidential elections next Spring. What is interesting and worrying in some of these countries is that the problem is not only one of not fully implementing the market ingredients but also one of not accepting the market economy. This has been particularly visible in the last several years in Germany and France.  From the language point of view, you increasingly find in Germany, but particularly in France, connotations to the market economy of the notion of the ultraliberal Anglo-Saxon market economy. This is a historical paradox. Where is the origin of the market economy in integrated Europe? It is in Germany and France. Who invented it? Ludwig Erhard of Germany established the social market economy in the 1950s. Inspired by Germany, helped by France and Italy, the principles of the social market economy found their way into the Treaty of Rome in 1957, where you find the basic ingredients of single-market competition and so on. Where was the most Anglo-Saxon country of Europe in 1957? It was 22 years before Margaret Thatcher. If anything, the UK economy was socialist, not ultraliberal. If you look back at the debate in the early 1970s in the United Kingdom, about the referendum on whether to confirm the decision to join the “common market” as it was called, the advocates of joining proposed the following argument: Let’s join the common market because only by doing so will we be forced to the market discipline of the Germans and thus we will put an end to the economic chaos of this country (the United Kingdom). Decades later, the Italians, Spaniards, and others embraced a similar argument: Let’s tie our hands in terms of budget discipline by joining those virtuous Prussians. Hence the Maastricht Treaty and the euro. The Germans were so delighted by the success they enjoyed with their pupils that they lost the pleasure of daily virtue in terms of budgetary discipline for a few years themselves but now seem to be back on course.

Let me round off with one observation that is linked to the difficulty in fully implementing a market economy in the countries that were the origin of the market economy in Europe. We see these days a lot of discussion is devoted to economic nationalism. Economic nationalism is neither a new nor a purely European phenomenon. I went back the other day to the 1984 Per Jacobsson Lecture of our Chairman Peter Peterson, which was titled “Economic Nationalism and International Interdependence” and subtitled “The Global Costs of National Choices.” So economic nationalism is not a new phenomenon, nor is it simply European. The United States has seen quite a bit of economic nationalism in terms of the CNOOC-Unocal and Dubai Ports World cases, and all those in Europe who want to embrace economic nationalism rather than integration see the outcome of these cases as a blessing. I am delighted that the Institute is releasing a new study, US National Security and Foreign Direct Investment, which is closely related to these topics. Economic nationalism in Europe is taking several manifestations, most visible of which has been a renewed willingness by national governments in the last few months to resist cross-border consolidation by industrial services companies. Last year we saw Italy’s resistance to foreign takeovers in the banking industry and more recently France and Luxembourg’s weak enthusiasm over the Mittal-Arcelor steel transaction, Spain and France’s reluctance to cross-border operations in the energy sector, and so on.

I’ve probably been somewhat pessimistic about the European economy this evening, but I don’t see these manifestations of economic nationalism in Europe as an unreserved negative signal. Of course I’m concerned about these economic nationalist moods. But they would not have arisen if it had not been for huge progress in implementing the single market. A few years ago, when I was competition commissioner, if political authorities and national regulators raised eyebrows about certain cross-border deals, companies would give up and not dare challenge the authorities. This has changed. Finally business has become bolder, more daring, and wants to reap the fruits of the single market. And the politicians react in a defensive way, especially after the two negative referendums in France and the Netherlands last year. Politicians may now think that doing something against European integration is popular and politically advantageous. So they react defensively. But the European Commission in turn has the instruments to react against nationalist reflexes. It has used those instruments in the areas of internal markets and competition. This is the moment to go ahead with cross-border consolidation, which other things being equal will concern competition authorities less than would purely domestic mergers. But it is very important to think through the political reactions that big deals across borders may generate and be ready to challenge such resistance with the available instruments.

Finally, I will say that yes, Europe does have an economic future. It is important for the global economy and global governance that Europe have an economic future. For this to be possible there must be full awareness of the threats on the road to having an economic future for Europe, and I tried this evening to give you a feel of what some of these threats may be. Thank you very much.


Testimony: Banking Union in Nine Questions September 30, 2014

Book: Managing the Euro Area Debt Crisis June 2014

Book: Inside the Euro Crisis: An Eyewitness Account June 2014

Testimony: European Banking Union: Current Outlook and Short-Term Choices February 26, 2014

Book: Responding to Financial Crisis: Lessons from Asia Then, the United States and Europe Now October 2013

Policy Brief 13-17: A Realistic Bridge Towards European Banking Union June 2013

Op-ed: Five Myths about the Euro Crisis September 7, 2012

Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012

Testimony: Challenges of Europe's Fourfold Union August 1, 2012

Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012

Book: Transatlantic Economic Challenges in an Era of Growing Multipolarity July 2012

Book: Resolving the European Debt Crisis March 2012

Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012

Policy Brief 12-5: Interest Rate Shock and Sustainability of Italy's Sovereign Debt February 2012

Policy Brief 12-4: The European Crisis Deepens January 2012

Policy Brief 11-13: Europe on the Brink July 2011

Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011

Book: Transforming the European Economy September 2004