George Kerevan: EU plans to recover from recession with free trade

Published on Tuesday 2 June 2009 21:42

TOMORROW sees the European elections. In the UK there has been next to no discussion about European economic policy. On the Continent, however, the debate has been lively, so expect some major changes in the EU business environment as we come out of the recession.

The stimulus for the debate is the record contraction in Europe's economy in the first quarter of 2009 – the worst since the formation of the EU. This is not an interruption to normal service but an implosion of the German and Nordic model of export-led growth. True, European equities rebounded last week on expectations that depressed manufacturing inventories would spark an upturn later in the year. But any sustained recovery will require significant new sources of spending to replace lost export markets and to avoid higher taxes.

One idea for such new investment comes from a former Belgian prime minister, Guy Verhofstadt – dubbed "Baby Thatcher" – who is standing in the European elections. Verhofstadt has just published a book titled Emerging from the crisis: How Europe can save the world. This manifesto is getting a lot of attention and there is a campaign to elect him president of the European Commission.

Verhofstadt is highly critical of the EU's conservative stimulus plan, which is far smaller than the fiscal boosts being applied in America and China. The EU countries are pumping in a net increase in spending equivalent only to 3 per cent of GDP.

Instead, Verhofstadt wants to spend a lot more in order that Europe comes out of the recession abreast of the Americans and especially the Chinese. He argues that the EU cannot emerge successfully from the economic recession "with 27 vertical and at times even protectionist recovery plans, but by one major horizontal European investment plan, geared to the accelerated switchover from the outdated fossil to a new, sustainable economy".

This he dubs his "Europlan". He reckons it will cost at least 400 billion of additional public expenditure.

To finance the "Europlan", Verhofstadt wants the EU to set up a new, centralised Eurobond market. This would issue approximately 1,000bn of new bonds, separate from national borrowing by the individual member states. That may sound a lot – and it is – but it only represents about 10 per cent of the US bond market.

Verhofstadt's Europlan is a mite fantastical, especially as there is rooted German opposition to the EU as an institution issuing its own bonds. However, the European economic policy debate is shifting to a discussion about centralised financing and so marks a qualitative change in the debate over EU federalism.

A massive extension of the eurobond market would also facilitate the euro in overtaking the US dollar as a global reserve currency. In that event, the European city that plays host to the eurobond market will be the centre of global finance. London is not in the running.

Though you wouldn't know it from the British media, there is also a lively debate in Europe regarding the expansion of free trade and cross-border competition. At the Lisbon European summit in March 2000, EU leaders adopted a very Blairite industrial strategy which prioritised entrepreneurship, building cross-border companies and investing in new technology. This so-called Lisbon Agenda was never implemented as it cut across the inbred protectionism that still dominates the industrial policy of the older EU member states, especially France and Germany.

But despite the current rush by the French and Germans to protect their domestic manufacturing industries, there are signs that the downturn is provoking a fresh look at competition policy. This is being led by Gnter Verheugen, the German EU commissioner for enterprise and industry. He is advocating a vastly expanded free trade zone covering all European and Mediterranean countries, including North Africa, Turkey and Ukraine. Verheugen argues a European and Mediterranean common market is vital in order to compete with the Chinese and Indian internal markets, which will soon cover 1.5 billion consumers each.

The Verheugan plan has a neat political advantage. EU expansion is stalled. Iceland and Croatia will get in, but the organisation is too unwieldy to get any bigger. Besides, there is deep opposition to accepting Turkey into the club. But Verheugan's idea of creating a vast new free trade zone sidesteps these problems. As well as creating a new market and source of cheap labour, it would give Europe access to the oil and gas reserves of North Africa, which are still relatively underexploited. Trade within the zone would be conducted in euros, locking out the dollar and sterling. The ultimate prize would be tempting Russia to join such a free trade zone.

A return to the idea of the EU as a free trade area has long appealed to British critics of Brussels but it is Vertheugen who is actually trying to do something about it.