By George Capell
As an economic power, the European Union (EU) is not what is once was. Its share of the global economy has shrunk from 26% in 1980 to just 15% in 2022 and is predicted to fall further still. As other countries have grown at phenomenal rates, the EU now finds itself sliding to the back of the pack, with an average annual economic growth of just 1.62% over the last decade, compared with 2.09% for the United States and 6.2% for China. For European leaders who dream of the EU as a great geopolitical power, this matters. Economic might brings with it political heft. So why has the EU been left so far behind?
One reason is the frenzy of almost constant crises in the last two decades, ranging from Covid-19 to Brexit and from the migrant crisis of 2015 to the eurozone crisis. Economic mismanagement in both individual member states and from Brussels itself can be blamed for the severity of this final instability. Unsustainable debts, most notably in Greece, and the lack of a fiscal union at the EU-wide level were partly to blame for the EU’s paltry GDP growth of 2% from 2008 to 2022. Over the same period, the United States’ economy grew by 72%. Some progress has been made towards fixing the structural issues within the eurozone, such as proposals to complete the banking union. Any sort of serious euro-area treasury however is a very long way off. Without these reforms, Europe will continue with a half-finished solution to the problem of eurozone integration.
A further headwind is the demographic challenge of Europe’s declining and ageing population. From 2002 to 2022, the proportion of people over 65 increased in every member state. In the EU as a whole, the share of the population belonging to this demographic rose from 16% to 21%. They now outnumber the under 20s, who made up just 20% of the population in 2022. All this comes despite fervent natalist efforts by many EU governments. The most notable example is Hungary, where mothers of four or more children pay no income tax at all. In Poland too, the government encourages people to have more children, with families receiving 500 Polish zloty (£99) each month for every child after their first. However, all these measures have failed to lift the fertility rate above 2.1 children per woman while the population size is stable, suggesting lower birth rates are here to stay.
An older population brings with it many economic challenges. Firstly, for each working-age person there are more pensioners to support, and so workers must pay more in taxes. Innovation decreases because there are fewer young people starting new businesses or inventing new products and as a result, both productivity and growth are stunted. Also linked to an older population is population decline, something the EU is experiencing. From 2020 to 2022, the EU’s population fell by 585,000, with a fall seen in both years. While an older population can make an economy less productive, a smaller population reduces the total number of workers. With no increase in productivity to compensate, the EU’s economy is fighting a losing battle on two fronts.
To add to the trouble, a possible solution presents itself every day on Europe’s shores. In the first half of 2023 alone, the EU received 519,000 asylum applications, up by 28% from the same time in 2022. Most asylum applicants are young people, in fact, over 80% were under 35 in 2022, and are looking for a better life in Europe. It is not necessarily the case that those who apply for asylum in the EU would perfectly fill the gaps in the job market, but it is likely that a large group of workers could help. Yet despite this, the EU is facing a backlash against immigration generally and asylum applicants specifically. Germany’s social democrat chancellor, Olaf Scholz, said in a recent interview with Der Spiegel that Germany, the EU’s economic powerhouse, must “finally deport in a big way those who have no right to stay in Germany”. This marks a decisive shift from Angela Merkel’s response to the 2015 migrant crisis with a confident: “wir schaffen das” (“we can manage this”). Without a willingness to accept more immigration, or to create a welcoming environment for people to move to, the EU is scoring a demographic own goal.
The relative decline of the EU’s economic size is perhaps inevitable as much of the rest of the world’s economies have expanded. Economic growth in China has been particularly spectacular over the last few decades, as well as in countries such as Indonesia and India. While still much poorer than the EU in per capita terms, these countries consequently may have lots more room to grow and could further crowd out the EU.
A force pushing in the other direction is enlargement. The European Commission has recently recommended that formal talks begin on Ukraine’s entry into the EU. Ukraine however will not join the EU any time soon and there are many countries which have been in negotiations for years without significant progress. Despite this, Russia’s invasion of Ukraine has given new impetus to the application because of the clear threat that Russia poses. Enlargement could slow down the EU’s decision-making progress on economic issues and make it even more difficult to find a coherent common foreign policy, threatening to reduce the EU’s flexibility in an increasingly volatile world. However, if done well, an enlarged EU could find it easier to stand up to a belligerent Russia, and the new member states would find themselves less vulnerable to Russian aggression due to closer economic and political ties with their allies. Enlargement also necessarily increases the size of the EU’s economy. If all current membership candidates (excluding Türkiye, whose membership application is now effectively frozen) were to join today, the size of the EU’s economy would increase by over $301 billion. Although this would represent just a 1% increase, the membership applicants all have a GDP per capita significantly lower than the EU average, and so there may be greater potential for significant future growth in these economies too should they become members.
It is not hard to see the reasons why the EU’s relative economic muscle could dwindle. The headwinds are great and structural and have few compelling answers. But all is not lost. Crisis in Europe could lead to a larger EU with a more significant economy. There is still plenty of room for economic growth, and with better politics some of these issues could be resolved. For this to happen though, a herculean effort would be required. The EU could yet be up to the challenge.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Image: European Parliament