The revival is European*

European citizens are now optimistic on the future of Europe and they feel European. A survey published in a report this month by the Pew Research Center testifies to this, with favorable views of Europe increasing everywhere in 2017, even in the UK. The only country that saw a deterioration was Greece, but this is understandable given the austerity measures imposed on its citizens by the hefty economic adjustment process from Brussels. We can also read the French presidential election result as a referendum primarily fought and won on Europe.

The old continent is regaining greater political strength at a time when growth is also picking up speed. The planets are finally aligning and the outcome is positive. The region’s political environment is more stable and the risk of populism has dwindled.

In a complex, tough and unpredictable world, Europe is now a safe haven of stability, and this haven looks more assertive, particularly with Germany’s impetus.
We all heard Angela Merkel indicate that Europe should take its fate into its own hands as yesterday’s allies look less reliable and yesterday’s enemies are still there, and talking about the need to reform Europe, even if that means setting up a finance ministry and having a joint budget.

The situation is changing because Germany has noticed that Europeans have had enough of the country’s domination over the past ten years, and Germany must take a grater role in this European momentum. The situation is also changing as France may at last adopt a positive attitude to Europe. No French president since Mitterrand has seen Europe as an ambition in itself, but this is probably changing with Macron and his intentions to change the European institutions and even create a European defense community at last.

Europe wants to, and must, seize this opportunity.

At last year’s dinner, I talked about the possibility of Donald Trump making it to the White House and the chance of Brexit taking place. I stated that these events would not be good news for the world economy, and we are now indeed seeing that the US and the UK are sources of concern, against a backdrop of a more optimistic world outlook.

In the US, the economic cycle is flagging and the economic policy that we see emerging will benefit the richest 1% of the population to the detriment of the 50% of Americans who are under the median income mark, as the planned tax cut program will be financed from savings made from the likely abolition of Obamacare. This policy will help 800,000 Americans, even if it is at the expense of the 20,000,000 who will lose their health insurance. This will in no way drive momentum in the economic cycle, and will only serve to push up savings levels.

But I think we need to look into what is happening elsewhere in the USA. The decision by California to set up a social security system, independently of federal programs, the choice by California and other States to find a way of implementing the Paris agreement against Washington’s wishes, and the White House’s intentions of reducing the effects of article 10 of the Constitution, which allows each State to implement a policy that would not be borne by the federal government: these are all examples of the emerging stand-off between States and the federal government. And this is the part of America that is fascinating. This disconnection between the federal government and local States can hamper the coherence of the US model. Meanwhile, citizens moving from one state to another, generally as a result of the economic context, provided a major source of macroeconomic momentum and adjustment. This is what many US economists often held against the euro area, as it does not benefit from these population moves to facilitate and speed up adjustments. This trend is now at its lowest in the US, so we have a worrying image of what is happening on the other side of the pond, the emergence of greater divergences between States.

Looking to Brexit, there are two key points to note.
The first is the performance from the British economy. What comparative advantage did the UK really gain when it opted for Brexit? None for now, as far as we can see, yet Brexiters gave the impression that the referendum signaled a move out of darkness and into the light.
The second is the total mystery surrounding the UK’s strategy for leaving the EU. The country does not seem to know what it wants and seems to be waiting for an appeasing proposal from the European Union to get it out of its unbearable predicament.

These two moves from our English-speaking neighbors at least served as a wake-up call for the rest of Europe. Concerns over the increasing power of populist movements at the start of the year have now eased: populist parties were beaten in Austria, the Netherlands, France and the situation in Germany doesn’t look good for AfD, which is now polling well under 10% in surveys for the elections due to take place on September 24. Those who rubbed their hands together in glee at Trump’s victory and the Brexit vote, seeing them as strong determinism that could be replicated in Europe, have been resolutely crushed. Even Emmanuel Macron’s victory in France can be partly seen as a vote for Europe.

Lastly, political stability we are witnessing now in Europe is partly a result of events in the US and the UK.
We are seeing a growth revival in Europe and no-one wants to make a move and take the risk of interrupting this trend. And so the ECB is in no hurry to change its monetary strategy as it sees the asymmetrical nature of monetary policy. It is better to sit tight, rather than take risks on economic activity at a time when there is no inflation. This was the Fed’s strategy and it will also be the ECB’s approach. Meanwhile, the European Commission is not putting any particular pressure on States to force them to reduce their deficits.

This growth context is set to continue and this is a key point. However, the main change is political, and this is what reforms to the European institutions must confirm. As Draghi stated on July 26, 2012, Europe is first and foremost a political creation and we all have a role to play. Each citizen, each European among us is responsible for this political impetus and it is this very momentum that will allow us to live together successfully in Europe.

Thank you

*This is a speech I gave during a dinner with the press on June the 22th

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