Europe’s Place in the Global Economy – What does the Last Half Century Suggest for the Future?

Fifty years ago, the first issue of Intereconomics was published. In honour of this anniversary, many top European and international economists have contributed papers to this Forum, which looks back on five decades of European integration – from the early days of the European Economic Community to the lingering effects of the recent financial crisis. The contributions also look ahead to what the future holds for the European Union, covering issues as diverse as global trade, the future of the euro, reviving economic growth, the impact of demography and international relations.

When Intereconomics was founded 50 years ago, the world was very different. A large part of Europe did not participate in the global economy. China was closed, India seemed a basket case and most of Africa had just recently become independent. Global trade in manufacturing was dominated by the US and a handful of European economies. Almost all of these elements have now changed. Europe’s weight in the global economy has diminished as other nations have grown quickly.

In this contribution, we describe some of the major developments in the global economy and provide an outlook for the medium-term future until 2030. We assess broad demographic trends for major regions of the world, then look at GDP growth and trade, before we turn to human capital and innovation.

Europe versus European Union

In terms of economic mass, the European Union today essentially represents Europe. This was not the case 50 years ago. At the time, the European Economic Community had six members with a population of around 200 million. The EEC represented an ambitious approach to European integration with its goal of “ever closer union” already enshrined in the founding treaty. In 1966 the EEC was still on its way to becoming a customs union, and there was another group of European countries offering a different vision, namely that of limiting integration to free trade in the European Free Trade Association (EFTA). The United Kingdom and the Scandinavian countries were the most important members of this group.

Today is of course very different: EFTA plays only a marginal role, and the EEC has evolved into the EU, which now has a population of over 500 million in 28 countries. Today, in terms of population and economic output, the EU is Europe.

We also note that one factor which seems to persistently accompany European integration is the feeling of crisis. One of the contributions to the very first issue of Intereconomics 50 years ago was entitled “Economic Aspects of the Current EEC Crisis”. 1 In it, Erhard Kantzenbach decried a lack of economic policy coordination, even as integration had continued within what was then the Common Market. This same message, with only slightly differently formulations, would resonate with many today. In fact, as shown in Box 1, all articles from the first issue of Intereconomicsremain relevant today.

All of the contributions from the very first issue of Intereconomics 50 years ago dealt with issues which remain relevant today.

Even today anti-dumping remains an important, and controversial, trade policy instrument (perhaps even more so today, since tariffs have subsided to a secondary consideration). The current discussion on whether to accord China the status of “market economy” is essentially about this issue, since market economy status makes anti-dumping more difficult to use.

The interview dealt with the question of how Germany could continue to maintain its exports of machinery despite high wages. The only competitors mentioned are the US and European countries.

This is a key problem in many emerging economies (like Brazil and Indonesia, but also Russia) whose growth had been driven for decades by higher commodity prices.

Crisis has accompanied European integration from its beginning. The author, a long-time president of the institute responsible for Intereconomics, notes the diverging strengths of the French and the German economies. He also argues that an integrated market needs an integrated economic policy.

An evergreen and a precursor of today’s Purchasing Managers’ Index, but the geographical focus has shifted today.

Demography: the EU is old and ageing

Demography is one of the key driving forces behind long-term economic growth. Fifty years ago, Europe was still in its post-war baby boom. Ageing was not a concern. On the contrary, the main concern of demographers was continuing, rapid population growth, which led the Club of Rome to its warning about the “limits to growth”.

Today’s perspective is quite different. The pace of population growth has slowed down everywhere. Most of Europe and developed Asia have already reached zero or negative growth, and a stable world population might be reached towards the end of this century. In the medium term, most projections agree that the global population will continue to expand, albeit at a much slower pace, through 2030, with 40 per cent of total population growth occurring in Africa and another 20 per cent in India.

China’s population is predicted to remain roughly flat, as is the population of EU. Of these five major economies, only India’s share of the world population will increase, and that of the US will remain roughly constant thanks to continuing modest growth.

As a share of the world population, the EU reached its peak after the 2007 enlargement added Bulgaria and Romania to the union, but it will decline steadily for the foreseeable future (see Figure 1). Around six per cent of the world’s population will reside in the EU in 2030, exactly the same percentage as before the Eastern enlargement in 2004. In fact, it is only through enlargements that the EU has so far been able to compensate its slower population growth.

The working age population might be a more useful gauge for potential economic growth than overall population. Figure 2 presents a projection of the labour force of major economic and/or population centres until 2030. India and Sub-Saharan Africa are the only regions expected to experience meaningful labour force increases. Most other regions, including the EU, have rather flat profiles, with a small decrease in China. The figure also shows how different population dynamics are leading to quite different weights over time: India’s labour force used to be half that of China, but it will soon be of a similar order of magnitude. An even more radical change is visible in Africa: the labour force in all of Sub-Saharan Africa was about as large as that of the EU in 2000. By 2030 it will be more than twice as large (and still growing).

It is well known that Europe is ageing, driven by continuous expansions in life expectancy at older ages and a long-term trend of falling fertility rates. However, what is less often observed is that this process is also taking place in most other world regions. While the median age will increase in Europe from 42 to 45 in the next 15 years, it will increase even more rapidly in Japan and China (to 51 and 43 years, respectively) and somewhat more slowly in the US (to 40). In terms of the demographic transition, Europe is following Japan with a lag of 15-20 years, and China is roughly another 15 years behind. Even India is expected to see a rapid increase in the median age – though from a lower starting point.

Changes in the global labour force, 1965-2030

Median ages in major regions, 2000-2030

The labour force and support ratios

Changes in population size and structure are important for economic growth due to their impact on the labour force and the support ratio. An important consequence of ageing is the decline in the working age population or potential labour force (traditionally measured as 15-64 year-olds) as a share of the population. This has important consequences for the support ratio. Japan was the first major economic region to experience a decline in the support ratio in the early 1990’s. The US and the EU have faced the same phenomenon since the start of the current decade, and China will soon follow. When a country or region reaches the turning point, i.e. it goes from an increasing to a decreasing support ratio, not only does this have clear implications for the management of public finances, but it has also resulted in deep and prolonged crises in Japan, the US and the EU.

Total Support Ratio: Boom to Bust

The question is whether this will be the case for China as well; could the slowdown of 2015 be a harbinger of much lower growth rates for China in the future? One obvious difference between China and the other countries facing declining support ratios is that China is still a middle income country and there is still much space for growth in the quality of the labour force.

Both the support ratio and labour force in Europe will evolve in a more favourable manner if pension reforms and the political push for extending working lives bear fruit. By way of illustration, the number of dependents per 20-69 year-old in the EU in 2035 will be the same as the number of dependents per 20-64 year-old in 2015. An extension of working lives by five years would thus be sufficient to manage ageing in Europe for the next 20 years.

Economic growth, trade and innovation

The drivers of economic growth will be largely productivity growth in the richest economies, i.e. the EU, Japan and the US. For China and other emerging regions such as Latin America, both the quality of human capital and the catching-up process will be important, whereas for India and Sub-Saharan Africa the three forces of demography, human capital and catching-up will drive economic growth.

GDP growth

Since 1965 the world economy has grown by a little more than three per cent annually in real terms, with a limited slowdown since 1990. The EU has managed approximately the same growth rate over the period, but only if one counts enlargements as growth. US growth has been similar, though the slowdown in growth since 1990 is much smaller (and the increase in the population came through immigration and higher fertility rates). China’s GDP has on average expanded by eight per cent annually over the past 50 years, and at an even faster rate since 1990. Growth in India has also accelerated over this period, although this was from a very low base and has not been with the same speed as China. Japan had significant economic growth until 1990, but has since then slowed considerably to less than one per cent growth per year.

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