The Foreign Service Journal, April 2017

30 APRIL 2017 | THE FOREIGN SERVICE JOURNAL lands and Germany, and quite possibly elsewhere if the political temperature in Europe rises. More volatile developments are overtaking the relatively manageable details of trade agree- ments and “level playing fields” for business rivals handled by policymakers and diplomats. Europe’s difficulties may well be compounded during the coming months by significant changes in longstanding U.S. policies. But the important point is that Europe has serious structural difficulties of its own making to deal with. It is begin- ning to suffer the first effects of a huge demographic deficit, and it has at the same time failed to address the poor productivity that has been gnawing away at its competitiveness in the global marketplace. Cause for Alarm Alarm bells on both these issues have been ringing for some time, but were widely ignored by vote-seeking politicians. The answer to the continent’s rapid aging and growing labor short- ages is to increase immigration—a visceral issue that has seen populist parties across Europe garner millions of votes. Even in prosperous Germany, the arrival in 2015 of about a million refu- gees and economic migrants from conflict zones in the Middle East triggered a surge of support for the anti-E.U. Alternative für Deutschland (AfD) Party, which has come almost from nowhere to gain support from 16 percent of voters. Just as alarming are Europe’s productivity problem and its economic stagnation. Sluggish growth as the con- tinent slowly recovers from the global financial crisis of 2007-2008 has seen Europe slip downward in the international economic league tables. Ten years ago, 17 of the world’s 50 largest corporations were European; today, they number only seven, compared with China’s eight. In the closing quarter of the 20th century, annual improve- ment in Europe’s productivity outstripped that of the United States. Average productivity growth was 2.7 percent a year, more than double the American figure of 1.3 percent. But at the dawn of the 21st century, most European countries made the wrong business choices; their focus on tried-and-tested sectors like heavy industry and banking led them to neglect the digital revolution. The result has been a reversal of the trans-Atlantic productiv- ity equation. Since 2000 the United States has been steaming ahead with productivity gains of more than 2 percent a year, while Europe is floundering at barely half that rate. The profits of Europe’s top 500 companies are consequently much reduced and now run at roughly half those chalked up by their American competitors. Over the same period, the E.U. has also lost a good deal of political momentum, and its project of ever-closer political and economic union lies becalmed. The question that many policy analysts are asking themselves is whether the waning of Europe’s ambitions has acted as a brake on the tough reforms and industrial policies needed to stimulate growth, or whether it’s the decline in Europe’s wealth creation that has discouraged far-sighted political strategies. In fact, the two trends feed on each other. The disruptive effects of the economic crisis that began to bite hard in 2008 very quickly eclipsed the E.U.’s grandiose plans for centraliz- ing more powers in Brussels. Those plans were replaced by far more urgent priorities, such as saving the Eurozone. The European single currency, launched to much fanfare in 1999, enjoyed a trouble-free decade; but by 2012 debt crises in Portugal, Italy, Ireland and Spain—and in Greece, most of all—threatened the euro’s very survival. For a time, Brussels was at least able to point to a huge growth in E.U. membership. In 2013, the arrival of Croatia as the 13th new member-state since 2004 was greeted as a sign that the European project still exerts its old magnetism. But the E.U.’s enlargement from 15 to 28 countries also created major strains. The mantra that Europe could widen as well as deepen gave way to a realization that the E.U. has become an unwieldy body often riven by divergent interests. The formerly communist countries of Eastern and Central Europe have, on the whole, thrived economically after over- coming the hardships of adapting to free-market conditions. Less positive has been their political relationship with the rest The answer to the continent’s rapid aging and growing labor shortages is to increase immigration—a visceral issue that has seen populist parties across Europe garner millions of votes.