Glass half-full in Europe

As global finance ministers convene on Washington for the IMF/World Bank meetings, for the first time since 2008, they can finally view Europe with some optimism. Not only is the economy on track to recovery, but a sense of direction is also returning to the continent’s politics. Many challenges remain, but painstakingly, Europe has turned the corner. This is good news for the United States. Europe is still its most important partner both economically and politically, as seen by the new deal with Iran.  A more confident Europe is key to concluding the historic transatlantic trade and investment partnership (TTIP) in 2015.

The economic news is now firmly on the upside. Germany is again the continent’s powerhouse, with industrial orders beating analysts’ expectations. Ireland, heavily affected by the 2008 banking crisis, is expected to be the EU’s fastest growing economy this year. Even Italy saw a 39 percent increase in permanent labor contracts in the first two months of the year, compared to the same period in 2014. Sanctions against Russia have proven to be a source of false alarm, with mild impact on European exports.

{mosads}Of course, some major challenges remain, Greece above all.  Negotiations over payments from the bailout fund remain difficult and fractious. Contrary to other southern European countries, Greece’s exports have been flat despite painful cuts in labor costs. This poor economic performance is not due so much to enforced austerity but to other reasons – electricity prices, lack of access to credit, specialization in stagnant markets. The need for a massive reinvention, and not just a financial bailout, is all the more glaring. But if the Syriza government fails to take on this challenge, the rest of Europe is now far more prepared for the consequences.

Even more important than the economic headlines, a change of philosophy is taking place in Europe. In traditionally interventionist France, where the state sector contributes well over half of the economy, this year’s 0.7 percent increase in public expenditure was the lowest since the 1950s. Changes to the tax code in Spain have led to higher consumer confidence. Italian labor market reforms are expected to create more jobs, as rules on hiring and firing are relaxed. Youth unemployment in some areas is painfully high, but only these reforms, coupled with educational changes, will provide an answer.  The Eurozone crisis has slowly changed Europe, making it leaner and more focused on results.

These national economic reforms are reinforced by a cultural change inside the European institutions in Brussels. The Commission, the EU’s executive, aims to be bolder on big issues without poking its nose into smaller things. This is a welcome shift from previous years when the EU would prove its worth by the amount of legislation it produced. The “Juncker plan,” a €315 billion investment package and flagship project of the Commission, may not be big in size, but is a welcome indicator of commitment to targeted investment in infrastructure.  New initiatives to build stronger EU-wide capital markets and energy markets should create benefits of scale, giving Europe a better foundation for growth.

As Europe moves forward in these areas, it must still continue to reform the way the euro is governed.  True, Europe’s attention is no longer occupied exclusively by the risk of default and contagion.  An annual review of national budgets by the Commission is now in place – a system far more intrusive than anything the US states would tolerate from the federal government. But there is no EU-wide mechanism or even an agreed strategy for moderating the swings of the business cycle or intervening to give the economy a boost. The European Central Bank has moved in this direction with its efforts to create more liquidity, but it cannot do it alone.  The discussion over what needs to happen next in the Eurozone should resume at the June European Council, but in the meantime, Europe has become fragmented.  In particular, strong efforts must be made to bring together the banking sector and complete the single market. Ironically, the easing of the crisis will make it more difficult to push for further reforms.

The biggest threats now looming over Europe are no longer financial, but political and strategic.  “Our borders are on fire,” commented an EU official recently, referring to Ukraine and the unrest in Libya, Syria, and elsewhere to the south.  Internally, the possible departure of the United Kingdom – “Brexit” – looms over the EU.  If it happens, there would be psychological shockwaves. Europe has successfully enlarged over the years, attracting new members, but has never has a member state left. The May election will not end this possibility, no matter the result, but a recent YouGov poll showed the highest support for staying in four years: 46 percent favor staying in the EU, while 36 percent favor leaving, and 18 percent are undecided.  

For the past six years, the doomsayers have regularly predicted the failure of the European experiment. Europe has struggled, and has often seemed more like a dysfunctional quarreling family than a unified political entity. Now there is a path forward.  Should Europe’s friends relax their guard? No, there is still much to be done. But neither should they expect Europe’s failure – that will not come.

Burwell is a vice president of the Atlantic Council and Świeboda is president of demosEUROPA: Centre for European Strategy.