Europe: Great Absent or Great Power? The European Business Review, November-December 2010, pp.55-58.

A good foreign policy, it has always been recognized, starts at home. Judged by this measure,Europe’s foreign policy must be in deep trouble. Output remains 7% below the pre-crisis trend, public debt levels have reached all-time highs; banks remain fragile; workforce participation is low, and those who do work take longer holidays, spend more time unemployed, and retire earlier than theirUScounterparts. In the medium term,Europefaces a sharply contracting labour force due to adverse demographic trends. What is worse, the European export champion faces a near 20% drop in the size of its labour force over the coming two decades, whereas the United States will see its larger workforce expand by over 5%.

The picture looks even bleaker when we observe an ageing Germany locked into a structural surplus within the EU. Since the mid-1990s, German exports to the EU have grown from 45% of the total to 65%, while preserving the status ofGermanyas a manufacturing platform. The fundamental reason is two fold: German businesses have used the opportunity afforded by the previous administration reforms to continue to drive down relative unit labour costs at home relative to Club Med countries. Over time, German goods have become increasingly competitive on EU markets. And German business has accelerated the internationalization of their operations, with about half of overall stocks invested in the “old” EU, another 30% innorth America, with the ten countries which joined the EU in 2004 accounting for about 6%. Large utility investments have gone intoUkraineandRussiato ensure the long-term provision of energy sources. The result is thatGermanyruns as large a trade surplus asChina, with the rest ofEuropein the same position as the United States as the consumer of last resort.

Added to this, the Lisbon Treaty has got off to a probematic start. Billed as providing the EU with the institutional wherewithal to stride out as a major player on the world scene, the EU summit in Madrid in May 2010—where the heads of state and government of the 27 member countries gathered to celebrate theTreaty’s final passage into life—coincided with the unfolding drama of Greek public finances, threatening, it was feared, to unravel one of the club’s main achievements in crafting a monetary union out of 16 different states. What is more, President Obama decided not to attend, indicating a degree of skepticism even among well-wishers to the EU project in the US that much had changed. This blow to the EU’s self esteem followed on the debacle of the Copenhagen summit on climate change last December, when final agreements were made over the Commission’s head by a de facto alliance between the US and main emerging market countries of China, Brazil, South Africa, Russia and Brazil.

By contrast, successive signals from Washington indicated that the US now looked to China, not the EU, as its main rival and partner on the world scene. Every year for the past decade, the US Department of Defence has produced a “China threat” survey, predicated on the belief that the only long term challenger to US primacy in the world is China. Since China’s entry to the WTO in 2002, the two economies have become inextricably intertwined as global manufacturers use the China production platform to sell products into the US, financed by the Chinese government’s purchase of US Treasury bonds. The Chinese leadership, intent on achieving status on the global scene, have gone out of their way to knock the EU off its pedestal as their contender to being the US’ prime alternative partner. Their intent was symbolized byBeijing’s  unilateral cancellation of the EU-China summit in December 2008 on the grounds that President Sarkozy had intervened in an internal Chinese matter by speaking critically about Chinese policies inTibet. No such inhibitions prevented the holding of the US-China summit, four months after the sudden bankruptcy of Lehman Brothers and the subsequent shock to the global financial system.

There can be little surprise about the gloom surrounding the EU. All assessments appear to indicate that business as usual points to a downward track of growth at home and reduced influence abroad. Demography shrinking. Leisure rather than work. Bankrupt governments. Frustrated publics and growth of radical movements.  If we accept this diagnosis, the argument runs, we may as well enjoy decadence before it starts getting nasty. We can metaphorically join the demonstrators in France who wish to stick to a 60 year retirement age, and militate for  poverty in old age. But if we wish for something better, then perhaps we should start by thinking differently about Europe, and then matching our thoughts with our actions.

Ah, people will say, but we have done that. We have thought hard about the disastrous first half of the twentieth century, and done everything to move away from the inherited chauvinisms that brought the tragedy on preceding generations. That is why we proclaim the EU as a post-modern entity, and re-invent our past in order to build a prosperous future. Our semi-sovereign states pool resources to co-govern each other, thereby setting an example to the rest of the world which has no option but to follow suit. Global challenges of climate change or financial market regulation, the argument runs,  require global responses and inclusive institutions, such as the G-20 whose members account for 85% of global gnp, four fifths of world trade and nearly 70% of world population. By this token, the EU leads the way into the global future as an example of how to anesthetize old feuds, socialize national leaders into a shared project for the common good, and show by policy the benefits of solidarity among the peoples.  Only the blind or the bad can disagree.

There are two problems though. The first is that the post-modern view of Europe is not a description, but a wish. The EU is better described as a mosaic of like-minded sovereign states, interdependent among each other and with the rest of the world. They form neither a new sovereign nor constitute an international organisation. That is the conclusion of Germany’s Constitutional Court which has judged that the Lisbon Treaty does not constitute the EU as a federal state. Rather, it is an international law, agreed-to by sovereign member states. The club now has a president and a foreign minister, a parliament, a college of commissioners and a court, but each one of its 27 member states are legally constituted, and active members of the global society of states.

It is true that if you search hard, that you will find components of a common public opinion across the 27 member states. Definitely, the expanding powers and influence of the European Parliament point in that direcftion, while the jurisprudence of the Court of Justice builds a growing body of shared law. But as long as the EU is not a federal state, diplomacy between the sovereign states is its politics. And because EU states are recognized sovereigns on the global scene, international diplomacy between its member states and their diverse external partners remains an integral part of intra-European politics. It is in this light that the Chinese party-state investment in Greek port facilities may be understood. For those who wish the EU to become a federal entity, the IMF contribution to the terms of the Greek bailout, capped by theChinainvestment, is a major humiliation. It shows that the EU cannot get its own house in order. By the token of the EU as a mosaic of interdependent states, it shows to the contrary that the open EU has calls on multiple sources of support to help get its house in order. In particular, it demonstrates thatChinais very eager to get a voice at the EU high table.Greeceis not likely to sell its vote cheaply.

The second problem is that the post-modern view of Europe does not chime well with the rest of the world.Russia,China,India,Japan and Brazil make the assertion of national sovereignty the kernel of their development at home, and the assertion of their influence abroad. This is the path that all of them have chosen to modernize, and the choice at different times in the past has been cast as resistance to European imperial pretentions. Indeed the rest of the world has absorbed the prime lesson from the 1648 Treaty of Westphalia, which is that the hypocrisy of a sovereign being in charge of his own territory is a precious tool to preserve, by war if need be. The ethos of the EU—the language in which the Brussels village talks to itself about itself, the rest of Europe and the world—that the concept of sovereignty is old hat appears on the contrary as old Europe in a new, pre-imperial guise. If Europe, outsiders may be forgiven for thinking, does unite as a new sovereign, we will be confirmed in our anticipation of its imperial pretensions as soon as its representatives start to talk down sovereignty, and talk up the benefits of pooling it.

Of course, outside powers are more than capable of disentangling EU rhetoric from EU reality. The EU rhetoric is all about overcoming Europe’s inherited fragmentation into states in favour of a closer union. The hope has been to tip-toe around member state sovereignties, flattering the local monarchs while stealing their robes. Sooner or later, the expectation has been, the European publics will spot that their monarchs are naked. But, as outsiders observe, this has not happened. Quite the contrary, EU member states remain the near exclusive proprietors of their citizens loyalties. Better under these conditions to play on the EU’s internal divisions by strengthening bilateral ties between Moscow, Beijing, Tokyo, Delhi or Brazilia  and the EU’s national capitals, with a view to puncture the EU’s collective pretension to union. Let us divide now, so that we prevent a united EU from being tempted to rule later.

If we Europeans go down this route, we are likely to see conspiracies everywhere. We should relax, while seeking to maximise what we are. The point may be made by reference to Henry Kissinger’s apocryphal question, which he was supposed to have asked in 1973, the so-called Year of Europe: “who do I call if I want to call Europe?” The answer provided by the Lisbon Treaty would have been illustrated comically at the EU summit in Madrid in May, had Obama decided to attend.  Obama would have been surrounded by monarchs, presidents, prime ministers and foreign ministers, and no doubt anyone else eager to snatch a photo opportunity with the world’s most powerful person. The answer provided by Europe as it is, and even more so, as it could become, is “Henry, that’s your problem”. The two key conditions which hold for this to be an effective answer are: a deepening of interdependence among the 27 member states in flows of trade, investment, people and energy; and a huge strengthening of intra-European networks for research, for universities and schools, for sports clubs, for museums and, not least, for companies.

Europe has to be confident that it is sui generis. It is not like others, and because of that it appreciates that they are different. Paradoxically, the barrage on the way to a strongly interdependent and networked EU is the view, widespread in the Brussels village, that we should do as others do. The puritans of EU integration, the Thatchers of “ever deeper union”, aspire for our member states and peoples to be exclusively married to Brussels. We should do what others do, they say, like the sovereign powers of the United States  and China There IS No Alternative, they cry. Well, there is. Our member states, and their peoples, think and act polygamously. They like to pick and choose who they live with. They get claustrophobia about the idea of monogamy.

Polygamy is the European way of life, and has been for centuries. That is why Europe has so many links into the rest of the world, unparalleled by any other continent. There is no part of the world with which one or other member state or citizen is not in touch with through formal bilateral ties, through membership in a plethora or international organizations or through corporate ties.Europe is the world’s No 1 economy, and trader. As the world’s prime importer, it has no alternative but to maintain open markets, not least because 16 of its member states have below 2% of the EU total, while a further 6 have below 5% each. Most of these have anywhere between 60 to 80% of their national economies accounted for by trade.Germany, the biggest, is entirely bound in to the global economy, and represents no more than 19% of the club’s total. No member state could go protectionist than the club could collectively adopt the Chinese script. Its labour force is 225 million strong, and yields a per capita income of $32,000, less than the high productivity labour force of the US at $46,000 but six times that of China. The EU is China’s prime trade partner, as it is for Africa,Russia, the Mid East and Gulf, the Mediterranean countries, while counting among the top trade partners of Latin American countries andIndia.

More importantly, the European footprint on the world economy is  giant size. It is overwhelmingly the world’s prime recipient of inward investment, and by far the largest source of foreign direct investment in the world—with a stock of historic cost based foreign assets about twice that of theUS. Even more to the point, given the central role in the global economy of multinational corporations, the EU and theUSboth chose to place the great part of their stock in each other, while over the past two decades EU corporations have accounted for over 70% of the total inward investment to the US. The total stock of US investment in Spain alone is greater than the combined position of the US in China and India together, and the EU investment stock in China is barely 5% that in the US. In essence, the Chinese surplus with the EU runs through foreign corporates manufacturing inChina, adding some value from offshore component suppliers, and re-exporting to the world’s prime importer.

If all this is so, how come that the rest of the world either does not understand or does not take the EU as a serious player?  The answer is that until the Europeans’ say who they are, and affirm  their arrangements as sui generis, not comparable to anywhere else  in the world, they cannot expect others to appreciate their identity. This can be seen in three areas: armed forces, investment and sport.

Take military matters first. It has been obvious for some time that Iran is aiming to achieve nuclear warfare capabilities.Iran’s leadership has declared its preference to liquidate Israel, a close European ally. Given the weight of the Holocaust in Israeli memories and in those of Europe, his is many steps too far. All the more so, because an Iranian delivery capability will have the potential to target EU territories. Evidently, only one of the instruments in the EU foreign policies towards the region and towards Iran, is military. Because loyalties are national, that instrument remains firmly in the hands of the member states, with their varied stances to the regions and their different sensitivities on the use of military force. As the Iraq war showed, it is very problematic for the EU to “talk with one voice” in matters military-diplomatic. That would have been the best tactic: not cavilling on the sidelines, but sending a powerful confederal EU contingent to the Gulf. It did not happen. But for the EU to be effective, the lesson could be learnt: better a choice between a “one voice” or flexible confederal arrangement than a choice between “one voice” or none.

Then  comes investment. The EU’s combined footprint in China is just huge.China’s foreign direct investment inEuropeis tiny. True enough, that means that the Chinese party-state can and hold EU investors to ransome by skewing procurement and standards to  Chinese state corporate benefit. But it also means that the EU has at its disposal a galaxy of information about the detailed workings ofChina’s market-state system that is waiting to be deployed for the preferential benefit of EU companies. A proposal to this effect has been submitted to the Commission by Friends ofEurope’ China Advisory Council, entitled “Winning China’s Markets”. It proposes a network arrangement whereby member state information centres and support units in China become multi-hatted” to represent the EU as a whole, to make the EU a brand name in China and above all to serve th direct interest of EU businesses on the ground. This could serve as a model for the EU presence  in the world.

Then there is sport. The opening ceremony of the Beijing Olympics in September 2008 was exploited by the Chinese leadership to declare its espousal of universal norms of friendship between the peoples of the world, combined with a display representingChina’s millennial cultures. There was barely a mention of the regime’s founder, other than the President’s wearing of a Mao suit. At the Games, China’s athletes competed with impressive results: on a national table of results, China came first with a tally of 51 golds, 21 silver and 28 bronze medals for a grand total of 100 medals; the US came second with 36 gold, 38 silver and 36 bronze for a grand total of 110 medals; Russia came third, 23 gold, 21 silver and 28 bronze for a total of 72 medals. Next came theUK,AustraliaandGermanywith a respective and impressive tally of 47,46 and 41  medals each.  But the overall winner, far ahead of any other part of the world in terms of medal tally, was the combined EU member states with 280-nearly 3 timesChina’s impressive score. If the results of the Ukraine, Norway, Turkey, Switzerland, Croatia andSerbia are added, the tally rises to 340.

What does war, investment, and sport have in common, one may ask, and what has this to do with the EU’s position in the world? My answer is: everything. Military policy is made, corporate investors are rooted, and sport issues are promoted at member state level. Judged on a world scale, the EU is a global power with global reach, while the aggregate of standards  among EU member states is very high, and capable, to boot, of indefinite improvement. All we have to do to ensure success is to reproduce more.

Jonathan Story holds the Marusi Chair of Global Business at the Lally School of Management and Technology at the Renseelaer Polytechnic Institute, and is Emeritus Professor of International Political Economy at INSEAD.

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About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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