City AM: Six reasons for the EU’s existential crisis

Amid all the navel-gazing, establishment angst, and project fear surrounding Brexit, it is easy to forget that the EU faces an existential crisis all of its own – and perhaps sooner than we think.

Here are six reasons why. I call them the six Ds, that together make up the Sword of Damocles hanging over the EU.

First, disconnect. Eurobarometer surveys show that the number one concern for EU citizens is inward migration from outside the EU.

The disconnect is between the views of the general population and the EU’s own assumptions regarding migration from beyond its border. European Commission projections assume that, between now and the middle of the century, over 50m new migrants will come into the EU. An influx on this scale is surely politically impossible, and likely to further intensify populist pressures against the EU itself.

Second, the demographic timebomb. The EU working-age population is due to decline every year between now and 2040 (by around 0.4 per cent per annum). The decline in working population results in a reduction in projected employment levels and working hours from the 2020s onwards, thereby reducing the contribution of the supply of labour to GDP growth.

The consequence, according to the European Commission, is that in order to maintain pre-financial crisis GDP growth rates, the EU will need to double its pre-crisis productivity rate.

This is a daunting challenge, made all the more difficult because the costs of an ageing population will put greater upward pressure on already high levels of public spending and taxation across the EU, thereby undermining the incentive to work, save, and invest.

Third, the threat of default. I have discussed previously the reasons why the euro crisis could return. Italy faces the prospect of three decades of lost growth – the internal contradictions of euro participation have exacted a huge cost, epitomised in the so-called Italian death cross, when rising non-performing loans are plotted against declining nominal GDP relative to trend. In such circumstances, continued banking crises are almost inevitable.

Fourth, the digital effect. John Gillingham, America’s preeminent historian of the EU, has written that “the very survival of the EU is now at stake”. His view, stated prior to the UK referendum, is interesting because it comes from an outsider looking in.

Gillingham argues that successful adjustment to the future technological and economic challenges the EU faces will require, as a first step, political devolution and the revival of national power.

His thesis is that we are in an era of techno-geopolitics, where power is being redistributed internationally, placing new leverage in private hands. Gillingham sees moribund EU institutions as unable to cope with the new challenges posed by technology.

Fifth, defence. The EU’s share of the global population has fallen from 15 per cent at the time the Treaty of Rome was signed in the 1950s, to just seven per cent today, and is projected to be six per cent in 2030. Power is projected by economic, demographic, and military supremacy. The economic and demographic challenges facing the EU are compounded by its unwillingness to project military power – epitomised in the recent Nato spat with President Donald Trump.

The sixth D is the domino effect. This is the argument that, in the 2020s, the other five Ds will combine together in a domino effect which undermines current levels of trust and support for the EU.

Old generals never die, they just fade away.

To read Graeme Leach’s piece for City AM in full, click here.

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