What is happening in Europe?

September 7, 2007

By Daniel Sachs, CEO Proventus. Published in the The Swedish Association of Graduate Engineers' magazine Ingenjören.

What is happening in Europe? In the suburbs of Paris youths are burning cars in frustration at their feelings of permanent exclusion. And many more – not least young people and women – suffer in silence. Unemployment among young French people of foreign origin is 50 per cent. In eastern Germany sections of the majority population react against the migration of industry, shrinking cities and high unemployment rates by voting for extreme and xenophobic parties. In certain areas, parties of this kind gain up to 30 per cent of the vote. In the Swedish parliamentary elections in 2006 the Sweden Democrats more than doubled their share of the vote compared with previous elections. For the first time the extreme right has become numerous enough to form its own group in the European Parliament. Everywhere we encounter similar experiences and reactions both among old and new Europeans: economic and social insecurity, antagonisms between us and them, racism, extremism, a growing nationalism and protectionism  and increasing numbers of people who are tempted by simple, undemocratic solutions.

In order to understand the situation that has arisen we have to examine developments over a longer term perspective. After the Second World War we had a long period of growth in the Western world. The first decades after 1945, the 30 golden years as they are now called, were marked by industrial construction, innovation and the establishment of a stable and prosperous middle class. Real incomes grew at a more rapid rate than the rest of the economy. Over recent decades the growth has continued, but with completely different overtones. We have had increases in productivity and cost pressures in industry, rapid asset inflation and real incomes which have lagged behind the growth of the economy. Polarisation has increased. In the USA income differentials between the most highly paid and the average are back at the record levels of the 1920s.

At the same time we are experiencing the revolutionary change which for the most part is driven by what rather inaccurately and sweepingly is usually called globalisation. Deregulation and rapid technical developments have led to a new global market for goods and to an increasing extent also for services. With globalisation follows rapid structural transformations in industry, new trading patterns and dramatic redistribution of wealth both within and between different countries and regions. European welfare is being subjected to major pressure.

The globalisation debate has a clear choreography. In one corner of the ring stand the eager advocates of globalisation, singing the praises of the market, in the other stand their equally convincing opponents, warning of its disastrous effects and propagandizing for controls and closed frontiers. There is limited space for subtler attitudes in the discussion. Global markets and technical developments are here to stay, irrespective of what we think about it. Our scope for action lies in the fact that we can choose how we exploit the opportunities created. So far we have tended to exploit the possible short-term advantages – cheap goods and cheap capital – without regard to what this may have in terms of long-term consequences. By taking advantage of a liquid capital market and low commodity prices as a result of the global distribution of labour, industry has achieved record profitability. The increasingly sophisticated but non-transparent credit market where risks are sold on and in this way concealed, a market which is now tottering, has reinforced this development. After a period of wage deflation in combination with supply-led inflation, which has raised the value of our houses and other assets and increased the opportunities of borrowing for consumption, we now find ourselves in a situation in which households are increasingly vulnerable.

Germany is a clear example. We have in recent years seen a rising employment rate, but at the cost of a reduction in real disposable income every year since 2002. The German trade unions have been forced to choose between lower wages or increased unemployment for their members. At present, low interest rates and liquid capital markets are helping create scope for borrowing for consumption. Despite reduced purchasing power we can maintain consumption thanks to lower commodity prices resulting from low-cost production. But we are borrowing from the future, not least in economic terms but also in social and ecological respects. What happens in the longer term if we cannot achieve a new sustainable industrial base offering qualified, well-paid jobs and creating broad prosperity? Does the equation of growth and prosperity work just for the few, whilst unemployment or lower wages applies to a growing proportion of the population? What happens then to democracy and confidence in the ability of politicians to respond to the everyday problems of society and of individuals? If we do not succeed in sharing prosperity widely, we will have a "backlash" in which unity and the democratic foundations of society risk breaking apart.

If one adds to this demographic developments, then it is not difficult to understand that pressure will continue to increase in Europe. The population is ageing, partly because we live longer, but also because fewer children are being born. Today in the Eurozone there are approximately 3½ active individuals per pensioner. In 40 to 50 years time this figure will have halved. Raising retirement age would improve the forecasts somewhat, but to deal fully with the problem we would all need to work into our 80s. There is no doubt that demographic change implies major socio-economic costs.

We live therefore with growing economic and demographic pressure which is leading to increasing polarisation between different social groups. At the same time immigration to Europe is steadily increasing – and it needs to continue to increase in order for us to cope with the demographically driven gaps in the labour supply which will become even clearer in 5 to 10 years time. An increasing number of Europeans have their roots outside Europe. Europe embodies in its own population development the globalisation process that is ongoing, and that means that both jobs and people are becoming increasingly mobile. Sweden is, of course, not spared this development. Integration is the greatest issue to face Sweden in the future. The homogeneous, overregulated and traditionally centrally managed Swedish society has filled its function historically. But in a situation where increased mobility places ever greater demands on the ability to adapt, one might ask oneself whether the Swedish welfare model is sufficiently flexible.

In order to be able to safeguard prosperity, strengthen democracies and a humanist social climate we have in the long-term to build competitive economies in the West and create the prerequisites for a broad distribution of wealth. This is a matter of investing long-term in strategic research and development, and not least of ensuring that our educational institutions keep on developing their quality. As I see it, Europe is faced with two main challenges: on the one hand, we have to create a new and competitive industrial base, on the other, we have to create a model in order to be able successfully to integrate new Europeans into our societies. The results of recent decades as regards integration in Europe unfortunately give no cause for optimism.

For me, integration is about equal rights, opportunities and duties, about being able to live a life in dignity, and about the social structure being able to make it possible for the individual to belong to the majority and the minority at the same time. On the one hand, individuals must be given opportunities for work, housing, education, care and welfare without discrimination, and the self-evident right to exercise their culture and cultivate their individuality. On the other hand individuals have the equally self-evident duty to share and respect those fundamental democratic, liberal and humanist values which have formed the European idea, such as the equal value and rights of all individuals, personal integrity and the inalienable right to question and express one’s own opinion.

The two perspectives are closely connected. Without an industrial base offering employment and a broad prosperity we will not succeed in integration or in creating a humane and open society. Without successful integration we will not create a functioning and efficient labour market in the long term. The industrial base is necessary in order to create demand for labour. Immigration and successful integration are necessary for safeguarding the supply of labour. In the collaboration between these fundamental conditions the prerequisites are created for a broad distribution of wealth, a strong democracy and a humanist social climate.

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