EUROPE IN A CHANGING WORLD ECONOMY

by Alfonso Jozzo and Corrado Magherini

The Federalist, 1994, Number 1

1. In general there is a significant time lag both in the way of thinking about and presenting certain facts and situations; because of this the great changes that have occurred in recent years have been given little prominence. In the field of economics, for example, the development process has reached an ever greater series of countries; hence we currently find ourselves in a very different global economic system from that traditionally described.

Ten or more years ago it was in fact possible to divide the globe into industrialised countries (including, with certain limitations, the Communist world) and the Third World, also known as "developing" countries. Nowadays this representation no longer holds true. The acceleration of development is evident in at least two areas of the world: a traditional area, Latin America, which had already experienced a period of development in the 50s, followed by a period of chronic decline, and which is now expanding with renewed vigour; and a vast new area, Asia, where two thirds of the world's population lives. In Asia, the remarkable development of Japan was initially followed by that of the so-called "Asian tigers", which, to a certain extent, are countries with unusual characteristics, such as Formosa, Singapore and Hong Kong. Development has subsequently spread to more important countries such as Korea, Malaysia, and Thailand. Recently China, India and Indonesia have registered development of notable proportions

.

The current question is whether such development can be consolidated. While no more than ten years ago the fundamental problem was how the North of the world could intervene to launch development in other areas, now we have to ask ourselves how the old industrialised countries, and in particular Europe itself, can shoulder the serious responsibility of encouraging, rather than hindering, the above-outlined process. This implies, first and foremost, a new interpretation of the North-South relationship.

The above-outlined phenomenon does not hold true for the entire world: the Middle East has not yet begun the process, even if the signs of peace between Palestinians and Israelis are undeniably positive; and Africa still remains outside the process.

Nevertheless it is extremely important that huge masses, billions of people, have entered a development phase. However, such a phase is not independent of the choices which Western countries make; if these are mistaken, they could completely block the positive outlook which has been outlined so far. This has occurred in recent times, during the 60s, to certain Third World countries, due to the short-sightedness of the then advanced countries.

The economic development process is crucial for spreading democratic institutions throughout the world, and this correlation is clearly visible for the above-cited countries. This holds both for Latin America and Asia, such that the relationship between democracy and development seems to be strictly interlinked. In addition the economic development of ever larger areas is fundamental for the creation of real international institutions.

Furthermore, we will limit ourselves to alluding to the fact that the type of economic development pursued will have to take account primarily of ecological obligations (scarcity of raw materials and natural resources, proper use of land) and will not in any way be able to follow the route taken by the old industrialised countries, which would have disastrous consequences.

But, beyond this important constraint, the problem of the scarcity of capital at the world level (that is, the endowment of the goods at our disposal) assumes prime importance. Since, clearly, capital that is used in a particular area can not be used in another, the rapid development which is taking place in some parts of the ex-Third World requires large capital inputs. But this can only happen if systems are set up to direct public (managed by state or supranational institutions) and private capital (managed directly by the market) in support of development. This implies a need for world institutions that are capable of directing the process according to certain criteria of priority.

2. Let us now look at what is happening in the old industrialised countries. Here, production methods are changing beyond recognition, from methods implemented in the last century with the industrial revolution, and subsequently evolved, to completely new ones those of the so-called "scientific and technological revolution." As a result the model which has dominated particularly the last 50 years, based on increased consumption, can no longer function, due to the material impossibility of increasing consumption ad infinitum.

Two factors illustrate how industrialised countries are having serious problems implementing the radical changes made necessary by the new production methods.

First, the reluctance to develop trade between old industrial and emerging countries. Second, the difficulty of creating jobs, even for young people who are well-qualified.

Economic theory is categorical about the need for a world market, if the objective is not to diminish development prospects for ex-Third World countries. If these latter are in practice prevented from selling their products in the large markets of Europe, the US, and Japan, they will be unable to accumulate production capacity, and disaster will result. Remember, for example, the case of Burma, which in the 60s gave a powerful stimulus to its textile industry, and which today is one of the poorest countries in the world. This setback was mainly caused by an agreement among European countries to restrict textile imports from the Third World (in the political sphere an authoritarian regime took over). The opening up of the European market is particularly essential, since Europe is the world's largest market the development process can not be launched without it.

It is worth recalling that in the 60s, immediately after decolonisation, the dominant slogan was "Trade, not aid." Aid is significant and useful when it helps to stimulate production activities; otherwise its impact soon fades.

In order to build the new world economic order institutions to govern the market are needed: as Lionel Robbins has explained, the market is not anarchy but organisation, and the need for suitable institutions which regulate and direct it is fundamental. It is not coincidence that the following structures were created in the early post-war period: the IMF (International Monetary Fund), designed to guarantee ordered monetary organisation; the GATT (General Agreement on Tariffs and Trade), whose task was to define and enforce trade rules; and the OECD (Organisation for Economic Cooperation and Development), to coordinate macroeconomic policies. The aim thereby was to facilitate the integration of the US and European countries into world trade. These mechanisms must now be re-thought, so that all the world's countries may participate in the development process.

It is nevertheless crucial that Europe achieves internal economic and monetary union. Some examples will help to clarify this point. During the recent negotiations on revising the GATT, the attitude of the European Community, which inclined towards concluding the agreements, was completely at odds with that of individual countries, which tried to slow down or block them. This was because countries, acting individually, tend to close in on themselves and defend their own markets. The role of Europe, and its economic and monetary union, is therefore fundamental in correcting a highly damaging distortion that Triffin never tired of denouncing. As he continually reminded us, we are not part of an "international monetary system", but an "international monetary scandal." In fact, the world's capital is invested mainly in the US and partly in Europe, notwithstanding the fact that it emanates from the Third World. Logic would clearly presuppose the opposite of such flows, since it is the Third World's production tha

t must be developed. Instead, the scandal of 20 per cent of the world's population consuming 80 per cent of available resources, while the remaining 80 per cent of the world are left only crumbs, continues to repeat itself.

Hence an institutional change is needed if we want to avoid a disaster in developing economies, which would in turn also swamp industrialised countries. And the first change must be the enactment in Europe of economic and monetary union, since it is impossible to imagine that the current trend which drives capital towards the US can be altered without the European Union. Indeed, only the prospect of having to create a European currency has forced first France and then Italy to cut their deficits and wastage so as to become countries which, instead of draining the world of resources, are able to invest, even in the context of a future dominated by a rapidly aging population. The US, which has an enormous deficit, is presently able to continue attracting capital because the US Dollar is a currency demanded throughout the world (this was reinforced by the EMS crisis), and so clearly has no incentive to cut its deficit decisively, as was the case for France and Italy until a few years ago. In order to begin chan

ging this perverse mechanism it is therefore necessary to take action on a decisive issue: the creation of a European currency.

Another point to consider is that the European experience can provide a model for other areas of the world, since it is clear that it is impossible to create a world market, with solid world institutions, if such areas do not establish continental institutions.

The NAFTA (North American Free Trade Agreement) Treaty between the US, Canada and Mexico, which has the significant effect of fully involving Mexico in the economic development process (and what is true for Mexico could hold for other countries in Latin America), encountered difficulties in its ratification in Congress. Yet, clearly, if Europe were decisively advanced along the road to economic and monetary union, this challenge from a large economic space would have forced the US to accept the same logic without hesitation.

Another significant point is that the development which has taken place in Asian countries, mentioned at the beginning of this article, has not suffered over the last two or three years from the crisis and recession which overtook the American economy, and now also the European one. This is primarily because South-East Asian countries have been able to develop trade among themselves (consider that intra-regional trade between Indonesia, Malaysia, Singapore, etc., is more important than these countries' trade with Japan, the US and Europe), opting to develop a regional area which will contribute considerably to the stability and development of the world market.

But if the European enterprise should fail, there would re-emerge at a world level a strong tendency to protection, since it would demonstrate that the continental economic/monetary union path is impractical. As regards this issue the responsibility of Europe is greater both than that of the US and Japan, since the acceptance of the new development model implies a tearing down of frontiers, a willingness to import industrial and agricultural products from ex-Third World countries and, consequently, the elimination of entire sectors of production in Europe as a whole (for example, large part of the textile and mechanical industries, etc.) and their transfer to newly-developing countries. Should this fail to happen, the risk of world economic disaster is very real.

3. How can Europe make this leap forward? The answer lies in the transition from the industrial revolution to the scientific and technological one. Clearly, it is necessary to recall what problems Britain had to deal with during the first industrial revolution; in particular the abandonment of the agricultural sector, eased by the fact that precisely in those years the British Empire was being established (note that one of the reasons which caused the US to declare independence was that Britain's colonies were obliged to buy only British industrial products). Nevertheless, as confirmation that Europe's future lies in the scientific and technological revolution it is enough to use our imagination: if we were to look at the world from a vantage point on the moon, Europe would seem a tiny entity (300 million people in a world of 7 billion), an entity which can be compared to a Renaissance city. Nobody would ever have dreamed of laying out fields to grow agricultural produce in Florence, rather than building art

isans' workshops.

If we consider today's Europe, it is hard to imagine increasing its stock of industrial plant for ecological, organisational and other reasons. Here, artisan workshops in a modern sense should be installed, in other words enterprises representative of the scientific and technological revolution, which contribute to developing the technological capacities of all mankind.

The choice, then, is between trying to defend job prospects and the well-being which we already have, closing in on ourselves, trying to slow economic development down and defending existing industries with subsidies; or making a leap forward, driving and strengthening the process ourselves. From the perspective of the jobs market, we will no longer have any blue-collar workers, nor even white-collar ones: the prevailing image will be that of "white coats", that is of technicians.

If the aim is to give young Europeans the prospect of work and well-being, then flexible work methods (the opposite of "fordism"), which encourage worker participation and innovation, need to be introduced; this partly explains Japan's high productivity. Furthermore, it will be necessary to abandon large production units with thousands of employees, and develop entrepreneurial abilities, in other words the capacity of individuals to fulfil dynamic roles, increasing the human capital employed in small production units.

Another change, which may seem provocative, is a reduction in real wages. This does not necessarily signify a reduction in earning capacity and standards of living. The example of the British industrial revolution was not selected casually: the Luddite movement tried to block the industrial revolution because it was damaging existing jobs (albeit very menial ones); on the other hand, the Manchester School obtained a reduction in the price of wheat, enabling salaries to be kept low without lowering standards of living.

The present situation is similar: the problem is the level of prices, whose reduction would compensate a fall in earnings.

Europe could import food, textile and industrial products at lower prices than those currently maintained by protection. Hence it is necessary to find the courage to open up to international competition, abandon certain sectors of production and concentrate on new ones. It is not true that inflation produces development, that traditional economic development produces jobs, or that prices must always rise. In a world market some prices must fall since prices outside the industrialised world are low. Moreover, Third World countries would still benefit if Europe imported at lower prices, because in the present situation, being unable to sell in a protected market such as Europe's, they sell elsewhere at even lower prices. In this way, if Europe opened its markets, world prices would increase slightly, but remain below the levels European consumers are currently obliged to pay.

Unfortunately the current debate does not emphasise development prospects. The idea that by creating a few public works we can solve Italian employment problems is false. For example, the decision to make high-speed trains should be taken in light of the utility of such trains, not in an effort to solve the employment problem. If it is not possible to export "high speed" products throughout the world, we will be giving jobs to discontented, unskilled workers (and this is not what young Europeans are asking for) and the work will probably end up being done by Third World immigrants.

Hence the real issue is for Europe to assume its world responsibilities, providing simultaneously a contribution to the world and a positive response to its own citizens.

To achieve this, Europe needs three things. First, a single currency, so as to prevent the system from continuing to channel resources in the wrong directions; second, an economic development plan which directs resources towards new technologies, and spurs the creation of research centres which will attract students from developing countries, and so on. However, to achieve the first two points, a third element is needed: a European government.

The EMS crisis has laid bare the two weaknesses of the Maastricht Treaty which the federalists have always denounced. First, that it does not provide for a real European government, answerable to European citizens through the European Parliament which would be capable of directing such a process although a revision by 1996 is laid down. The second weakness is the excessively long transition stage before adopting a European currency. In this light, then, accelerating the creation of a European government and a European currency is the objective of the current federalist battle: an objective which political groups, social forces, and other political actors, will be forced to declare their opinions on during the electoral campaign for the forthcoming European elections.