Blog Post

European worries about isolationist trends

Populist shocks in the UK and US threaten the multilateral order on which the EU depends. What lies behind these earthquakes, and what does it mean for Europe? Withdrawing from the world is no solution to geo-political upheavals, but Europe needs to reassess the future of globalisation.

By: Date: November 7, 2017 Topic: European Macroeconomics & Governance

European integration, the ‘ever closer union’ of Europe’s states and economies, has faced a very difficult 10 years. Even as growth finally re-emerges, the legacy of the financial crisis is far from resolved. Meanwhile, poorly managed migration and refugee pressures saw huge population flows into and around the continent from the South and South-East. For many, this decade has brought echoes of old and very different eras.

These long-running crises exposed major imperfections in the architecture of European integration. Internal EU reform is long overdue. But two more recent events have also forced Europe to rethink its place in the wider world. Europe’s allies are withdrawing.

Europe’s allies are withdrawing.

First, the US unexpectedly elected Donald Trump. This has only accelerated an existing trend: the US is questioning its role as the anchor of the global system.  And this is not just about withdrawing from an active leadership position. Trump’s ‘America first’ rhetoric argues that the US can make better deals for itself if it acts alone – possibly outside the confines of multilateral frameworks.

Second, the UK voted to withdraw from the EU. The government now attempts to brand the move as the launch of ‘Global Britain’, an open country finding its own ways of engaging with the rest of the world. But the campaign rhetoric of ‘taking back control’ is not all that different to the US tendency to look inwards, to protect one’s turf and adopt an antagonistic rather than cooperative position with others.

These are two very different events, but to European eyes they reflect a similar desire to ‘withdraw, as a way of doing better.’ This is quite different from the multilateral creed the EU follows internally and in the world: ‘work together, as a way of doing better’. European integration and globalisation are both built on this idea.

Work together, as a way of doing better. European integration and globalisation are both built on this idea.

Are these US and UK withdrawals a sign that globalisation and multilateralism are in reverse? Or are they simply domestic reactions? If so, to what? The answers will determine Europe’s path.

I would like to offer two possible explanations of these events, with rather different implications for the future of globalisation and Europe’s place in the world.

The first explanation is that these political earthquakes are actually aftershocks of the worst financial crisis in 50 years. On both sides of the Atlantic, also in Europe, the last decade has brought a rise in populism, protectionism and ultimately even nationalism. In my view this is a consequence of decisions taken in order to correct large economic imbalances in the financial system. The system was saved, but there were many innocent losers.

Now, while this phenomenon can be seen across most of the western world, continental Europe has managed to contain populism more effectively than the US and the UK. And while the populists, and even nationalists, are still there, electorates have held back from bringing them to power. There is as yet no withdrawal.

The reason behind this difference is that Europe has been better in distributing the benefits of openness and trade to its citizens.  European welfare states manage to prevent large inequalities, and as a consequence they ensure a more consistent support for globalisation. This is less the case in the US and the UK, where citizens’ resentment about inequality enabled populist voices to force huge changes in direction: Trump and Brexit respectively.

On the upside, if inequality was all that lay behind this observed discontent, active policy could eradicate the causes of populist calls to withdraw. More effective redistribution and social protections could re-establish support for openness and global trade.

However, I believe there may be another reason, more entrenched, that will prevent this: there is a slow but epochal shift in the balance of global powers.

The emergence of China on the international stage, along with the US’ steady withdrawal from global leadership, has led to a tri-polar system of global powers shared between the US, Europe and China. But why would such shift lead to greater inwardness in the US or some European powers like the UK?

One possible explanation is that tri-polar is not equivalent to truly multilateral: bargains still need to be struck. But now they are more difficult, as the rules under which countries interact can no longer be agreed between just the US and Europe; there needs to be Chinese consent as well. The west won’t always come out on top. Voters and workers will notice.

There are real and serious difficulties here: China has very different views, in particular about the role of the state in the marketplace. This inevitably means that the west’s traditional laissez-faire ideology is now challenged. Competition won’t always feel fair. Multilateral governance has never been easy, but disagreements about the very principles of economic interaction are an obstacle to globalisation for the Europeans and US alike. It could very well be that withdrawal is a reflection of this standstill on what the collective rules ought to be.

The US is threatening to reject multilateral fora in favour of bilateral agreements, as a way of exerting its direct power. The UK is turning away from the world and its neighbours alike. The EU is less clear on how to proceed. On the one hand, it wants to preserve what has always been the most natural of partnerships with the US; but on the other hand, it also wants to protect multilateralism, which it cannot do alone. China is a staunch defender of multilateralism as a concept, but its economic values are quite different from Europe’s.

The question, then, is whether the prevalence of different views on ‘how to do business’ puts a natural limit to globalisation. Protectionism, and even the threat of protectionism, runs against the spirit of globalisation and threatens to destroy economic relationships made in the past. But perhaps a populist shift toward protectionism is inevitable, given the shift in global powers. Must the west withdraw, or can powers with different underlying economic ideologies still unlock the benefits of closer economic cooperation?

The future of European integration depends on the answers to these questions. Here in the EU there remain major unresolved problems and populist pressures that could still push us into the trap of isolationism or even European disintegration. Withdrawing is not the way to do better. We must all find a way to do business together, but success is far from guaranteed.

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