CONNECTED VIEW

Comeback of a continent?

Europe is sometimes portrayed as a divided continent that is getting left behind. But is this a fair assessment? Because European economies are becoming increasingly intertwined.

The ING study "Valuing a close connection" clearly shows just how much Western and Eastern Europe benefit from the increasingly close economic ties. These new connections make the old continent a stronger competitor for North America, Asia and South America.

‘Europe has two lungs. It will never breathe easily until it uses both of them.’ A quote by Pope John Paul II and used by Norman Davies, the famous British historian who sees Western and Eastern Europe as two limbs belonging to the same body. In his view communism and the Cold War saw to it that the West was long in denial about the East. He compares old Western European history books to anatomy books ignoring one of the two limbs. The West viewed the East as a completely separate world, which in turn led to exaggerated stereotyping: the rich West versus the ‘lagging’ East.

Eurovision
This image of East versus West disregards the regions’ rich shared cultural and economic past, according to Davies. He says that once the Wall came down there was no longer any reason whatsoever to view the two as separate worlds. And so he hopes, as he wrote in Europe East & West, that there will be an end to this disunity. If he has anything to say about it, ‘the destructive supposed gap will rapidly disappear into history’s cabinet of curiosities.’
Davies said this in 2007. You might expect us to have made a fair bit of progress by now. But the old stereotypes die hard, as can be seen during European elections as well as more light-hearted events such as the Eurovision Song Contest. Western European countries traditionally accuse the Eastern countries of voting for their neighbours. Unfairly. Because the 2014 event saw the top three places taken by Western European countries, helped by many votes from the East. Moreover, research by University College London has shown that voting behaviour during the song contest is not split along East-West lines. While there are clusters of neighbouring countries, this is a pan-European rather than an Eastern European phenomenon.

Eurozone crisis
If anything should have reduced the internal divisions it was the European Union’s expansion. Ten years ago eight Eastern European countries joined the EU: Poland, the Czech Republic, Slovakia, Latvia, Lithuania, Estonia, Hungary and Slovenia. In 2007 they were joined by Romania and Bulgaria, followed by Croatia in 2013. This unique unification of East and West was effected relatively smoothly and boosted economic opportunities after the fall of the Wall.
And yet in 2014 there is little praise for this unique alliance in Western Europe. On the contrary, enthusiasm for this aspect of Europe appears to be on the wane. The sentiment tends to be that the North pays for the South and the West for the East. Conveniently bypassing the fact that these investments do bring returns. One reason why the discord has flared up is the Eurozone crisis. ‘European president’ Herman van Rompuy noted in his book Europe in the Storm that four to five years of crisis have made European politics unpopular with many Europeans, referring to a survey that showed that during this period the popularity of European politics declined more rapidly than that of national politics. Van Rompuy believes that this dwindling enthusiasm is partly due to us having to get used to the idea of being united. The bailout of Greece made citizens realise that there are downsides to Europe as well as upsides. “This is a whole new experience. Citizens need time to learn how to cope with this strong mutual interconnectedness.” Van Rompuy hopes that enthusiasm for Europe will rebound. For this to happen he believes we need to understand that European cooperation brings jobs and prosperity. Because that is what is currently lacking.

Access to new markets
It is difficult for European politicians to show how citizens benefit from cooperation in Europe. Citizens see jobs and prosperity primarily as national achievements and have very limited insight into the economic significance of the ties with other European countries.
Rob Ruhl and Mohammed Nassiri of the ING Economics Bureau took up the challenge of bringing this into focus. With the aid of the vast World Input-Output Database of the University of Groningen they calculated the precise benefits of the closer ties between Western and Central and Eastern Europe/CIS region (CEE+CIS) between 1995 and 2012. In their research report "Valuing a close connection" they conclude that the cooperation has been crucial to the development of the economies of both Eastern and Western Europe, resulting in increased prosperity in both regions since the mid-1990s. Manufacturers in both regions gained access to new markets. Western Europe invested heavily in Eastern Europe, for example in the car industry. Growing demand for each other’s goods boosted production, income and jobs, at least during the period up until the global crisis. According to Ruhl 2.7 million jobs were created in Western Europe in the period 1995 to 2008 as a result of growing demand from Central and Eastern Europe and Russia (RU). At the same time growing demand from Western Europe created 0.5 million jobs in Central and Eastern Europe and Russia. The impression that the West has lost jobs as a result of a lot of unskilled work moving to Eastern Europe is false, says Ruhl. 'The loss of those jobs is compensated by an increase in service-sector jobs and highly skilled jobs.' Nassiri: 'There is a positive balance of low-skilled and more highly skilled jobs. Which means job numbers have increased.'

Connection rates
Analysing the number of jobs is one thing. But how do you demonstrate the degree to which economies are interlinked? Ruhl and Nassiri do so by means of a connection rates. Let’s start with the connection rate expressing the interconnectedness of the Western European economy with that of Central and Eastern Europe and CIS. This reveals rapid growth, rising from 4.2 per cent of the GDP of Western Europe in 1995 to 20.6 per cent in 2012. Nassiri: 'This shows that the Central and Eastern Europe and CIS region is the most important region for Western Europe, excluding its own region, of course.' Conversely the connection rate expressing the interconnectedness of the economy of Central and Eastern Europe and CIS with that of Western Europe rose from 36 per cent in 1995 to over 82 per cent in 2007, falling back to 65 per cent in 2012. Which is still a very high level of interconnectedness.

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The development of this interconnectedness is not the only trend highlighted by the ING study. Ruhl: 'Another is globalisation. In Western Europe added value related to own demand declined from 51 per cent in 1995 to 39 per cent in 2011. At the same time demand from the Eastern European and Russian region rose from 5 to 9 per cent. Especially the more internationally oriented sectors such as the machinery and transport equipment sectors in Western Europe have managed to profit from increased demand from Central Eastern Europe and Russia.'
On the other hand it is clear that Asia is knocking at the door of CEE, with Asian demand growing from 8 per cent to 13 per cent between 1995 and 2011. Despite this Western Europe still remains by far the most important player. 'Forty per cent of what is manufactured in Eastern Europe and Russia finds its way to Western Europe,' said Ruhl.
Given the growing importance of foreign demand it is good for Europe if businesses turn their focus outward and seek cooperation, says Nassiri: 'For example a Western European company outsourcing production to Eastern Europe.' Ruhl: 'Taking on low-cost production makes Central and Eastern Europe stronger. This increases Western Europe’s competitive strength in the global market. And because Central and Eastern Europe are generating more income, they are buying more Western European goods. And so together you stand stronger in the world.'

Lulled off to sleep
If you acknowledge the consequences of these closer ties you realise that there isn’t really a way back. Cooperation brings prosperity benefits and jobs to both Western and Eastern Europe and makes the continent as a whole stronger in the global economy.
A different question is what role the European Union should play. At the height of the Eurozone crisis historian Davies put the importance of this institution into perspective, remarking that like many other political institutions or great kingdoms it might one day disappear. While that need not just happen just yet, the Union’s continued existence is dependent on our willingness to take the bad (for example the Greek bailout) along with the good. Western Europe in particular needs to be more aware of just what the benefits of the present cooperation are. 'It doesn’t take much to explain to Eastern Europeans what it means when a system collapses. Those in the West have forgotten. Prosperity has lulled them off to sleep thinking that the good times will last forever,' he said in an interview with Dutch newspaper NRC Handelsblad.
Van Rompuy also fears that Western Europeans still take prosperity too much for granted. He points out that Europe is in fact doing extremely well. 'Making up just seven per cent of the global population Europeans produce 20 per cent of global wealth. That’s more than the United States and the same as China and India put together,' said the European president. However, it is by no means a given that this will remain the case. 'All European countries will have to become more efficient if they are to survive in the global market.' He also takes the view that Europe needs to take a joint approach to tackling the huge unemployment problem.
You can of course debate whether you need an enlarged Union and the euro to do so. But one thing would seem sure. To paraphrase Davies: with one lung Europe will never breathe easily enough to sustain the competition with other continents.

Sources

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