Opinion & analysis

The Biden presidency is a last call for Europe, by K. Lanoo | CEPS

Image credits: European Parliament

Official visit US Vice President in 2015 Credits: European Parliament

The presidency of Joe Biden heralds an opportunity for Europe, and more particularly the EU, to revive its relationship with the US. But it may also be its last chance. The EU will have to demonstrate tangible progress in the areas of defence, trade and global policy stances generally to ensure the good will of the new American administration.

After very strained EU-US relations over the past four years, the election of Biden and his early statements have produced a huge sigh of relief among many policymakers in the EU, and Europeans at large. The stances of President Trump and his closest advisers were unprecedented in the history of transatlantic relations:  from the open attacks on the EU and some of its leaders, to support for extreme-right Eurosceptic parties and governments, and threats and attacks on the security and trade front.

To some degree, the Trump administration was only pointing to issues others had already raised tacitly before: the asymmetries on many levels in the transatlantic relationship had to end. Europe has sheltered for too long under the security umbrella of the US, and not taken enough responsibilities of its own. Despite warnings that date back to the end of the G.W. Bush administration, defence budgets have hardly increased (see the Dutch Advisory Council on International Affairs (AIV) report). On the goods trade side, where the EU has a huge surplus of more than €150 bn (2019), the US often applies lower tariffs on EU imports than vice versa. The obvious example is the most important EU export product, cars, where the US places a 2.5% tariff on EU vehicles, while the EU applies a 10% on US ones. This has insulated the EU market from competition, which is why it is behind others on electric cars, for example.

The US security umbrella has already folded in Europe’s south-eastern neighbourhood, and will not reopen, nor has it been replaced by European security. Notwithstanding the calls for a geopolitical Commission, Europe has been absent while Russia, and in the second instance Turkey, is becoming the hegemon in the region. As Russia brokered deals in Armenia, Syria (Idlib) and Libya, and extended its influence, Europe was nowhere to be seen. The void left by the retreat of the US has been filled by a former Cold War enemy.

Europe’s precarious security situation became apparent under Trump; without NATO it has no real  actionable security or crisis intervention structure, and is thus very vulnerable without the US. Most recently, EU plans for a more advanced security cooperation (PESCO), started under the previous legislature, have been overshadowed by uncertain proposals to include the UK’s defence capacity in a structure above the EU, in a European security Council. In the meantime, taken collectively, European member states that are allies of NATO do not meet the 2% defense spending as a percentage of GDP objective set by NATO, but stick on average to around 1.6%. This means that Europe lacks core operational capacities, such as the air transport capacity to move troops to crisis-hit regions, for example. EU countries should agree urgently on a division of competences and local specialisation, as part of a European defence agenda, as the Dutch Council for International Affairs argued in its recent report. The EU will only be taken seriously by the US – and also by President Biden – if it takes on more tasks itself.

On the trade front, it will take a long time to re-establish EU-US cooperation to the level where Obama left it. Biden has not yet mentioned TTIP as one of the engagements he would restore, although he will allow the WTO to function again. In the meantime, the EU has advanced with important bilateral trade deals, most importantly with Japan, but also with Canada and Mercosur, while specific trade agreements with China are progressing, such as an investment agreement. The current US Trade Representative, Robert Lighthizer, saw this web of bilateral trade deals as the resurrection of “the system of colonial preferences that prevailed in the pre-GATT era”. These deals do not advance liberalisation, he argued, but force countries to adopt protectionist measures such as ‘geographic indications’. WTO member states should therefore recommit to market reform and most-favoured-nation status, he advised in a piece in the WSJ in September. This is what Biden has already announced, to remove Trump’s tariffs and bring the WTO back to the centre, which the EU should be fully aware of.

Looking at it from an economic standpoint, the incoming administration may take a pragmatic approach: it will restore good old relations with Europe, but will turn to where the gravity is shifting: Asia. In the share of the global GDP weighting, the EU continues to lose ground, the US remains in the lead, while China is advancing. These trends are accelerated by the Covid-19 crisis, which has highlighted our dependence on US big tech. This puts Europe in a dire position with its digital tax, where the only solution is a global one for effective taxation in the realm of the OECD.

The EU will thus need to watch out in the coming weeks and months that it fulfils its side of the bargain in relations with the US, and make genuine commitments on the security and defence side, also by advocating a truly open trade agenda in line with the WTO commitments, to boost its competitiveness.

The EU will need a permanent structure for regular interaction with the US, as is the case for its other most important trading partners. Many attempts were made in the past, such as the Transatlantic Economic Council (TEC), but with limited success. Given Europe’s declining importance as an economic power, this is its last chance, also because more US-centred administrations will come back in the US. Yet another reason for the EU to overcome its perennial divisions, get its act together and assume its rightful role in the world order.

About the author

Karel Lannoo has been Chief Executive of CEPS since 2000, Europe’s leading independent European think tank, ranked among the top ten think tanks in the world. He manages a staff of 70 people. Karel Lanoo was an Independent Director of BME (Bolsas y Mercados Españolas), the listed company that manages the Spanish securities markets (2006-18) and is a member of foundation boards and advisory councils. He has published several books on capital markets, MiFID, and the financial crisis, the most recent of which is The Great Financial Plumbing, From Northern Rock to Banking Union, 2015. He is also the author of many op-eds and articles published by CEPS or in international newspapers and reviews. Karel is a regular speaker in hearings for national and international institutions (the European Commission, European Parliament, etc.) and at international conferences and executive learning courses.

Germany’s silent rebalancing has been undone by Covid-19 | Europp – LSE Blog

Low German wages are often cited as a key contributing factor to imbalances in the Eurozone. Donato Di Carlo and Martin Höpner demonstrate that while nominal unit labour cost growth in Germany consistently undershot that of other Eurozone countries in the first decade of the euro, the country has undergone a ‘silent rebalancing’ following the financial crisis. Unfortunately, this incomplete process is likely to be reversed by the shock from Covid-19.

The history of the euro has been punctuated by external shocks. Just as the financial crisis signalled the end of the first decade of the single currency, the outbreak of Covid-19 has now ended the second phase of Europe’s Economic and Monetary Union (EMU). Given the major implications the pandemic is likely to have, it is worth taking stock of where EMU stands and the future development of its member states.

Prior to the financial crisis, EMU was marked by internal real exchange rate distortions, brought about by excessive wage growth in the South and restraint in the North, particularly in Germany. In a monetary union with a one-size-fits-all monetary policy and no exchange rate adjustments, this is precisely what should be avoided. But how much of this divergence during the first phase has been reversed since the financial crisis? And have wages in Germany grown sufficiently to provide a correction to the previous decade’s undervaluation?

Germany’s silent rebalancing

Figure 1 below shows cumulated nominal unit labour cost (NULC) increases for the period 1999-2019 (1998=100) in comparison to the ECB’s inflation target. We display developments in Germany, France, the Eurozone and Southern Europe (Greece, Italy, Portugal and Spain – labelled as GIPS in the chart). On average, NULC increases were close to the inflation target for the euro area. But the average hides large differences. Germany can be assigned blame for undershooting, which reached a peak in 2007, while Southern Europe can equally be assigned blame for overshooting.

Figure 1: Euro Area cumulated nominal unit labour cost increases, total economy

Note: Indexes, 1998=100. Cumulated nominal unit labour costs reflect a ratio of compensation per employee to real GDP per person employed in the total economy. GIPS is an unweighted average of Greece, Italy, Portugal and Spain. Source: AMECO Database, European Commission (updated 5 November 2020).

In 2009, the discrepancy between Germany and Southern Europe had reached 30 percentage points, pointing at substantial intra-EMU real exchange rate distortions. Remarkably, France features stable NULC growth in line with the ECB’s inflation target throughout the whole period. This is not a coincidence. Although French unions are organisationally weak, the French state has maintained more wage steering capacity than most others. Public sector wages are set centrally under the shadow of state unilateralism. In the private sector, contrary to Germany, statutory extensions of collective agreements’ coverage are encompassing.

Since 2011, however, there has been a partial re-convergence in the EMU characterised by (painful) internal devaluation in the South and gradual wage reflation in Germany which has accelerated since 2017. Southern European countries have restored the competitiveness of their (relatively small) export sectors while harming their (relatively large) sheltered sectors. For lack of import demand from EMU peers, Germany diverted its exports to extra-EMU consumers of capital goods.

But Germany’s ‘silent’ rebalancing before Covid-19 is worth emphasising. To be sure, Germany’s wage growth was not out of this world. But the post-crisis partial re-convergence was nevertheless double-sided and brought about not only by restraint in the South, but also expansion in Germany. Germany’s NULC increases were large enough to correct much of its previous undervaluation, relative to the Eurozone average. But within Germany there has been a two-tier sectoral dualisation between the industrial and service sectors and within the service sector.

German wage dynamics

The second figure displays cumulated NULC changes for the 1998-2018 period (1998=100; data for 2019 are not available yet) for five sectors: industry, construction, low-end services, financial and insurance activities, and the public sector. The findings are remarkable. During EMU’s first phase, restraint in Germany was not driven primarily by the manufacturing sector, but by services and construction.

Marked wage restraint featured in low-end private services, the public sector and construction. High-end services like financial and insurance activities, in contrast, enjoyed sustained wage growth. Increasing dualisation indicates that Germany is not a case of inter-sectoral pattern bargaining, a term used by political economy and industrial relations scholars to describe wage regimes in which the exposed sectors set a competitiveness-safeguarding target which they afterwards transmit to the sheltered sectors. Were that to be the case, we would not observe such inter-sectoral divergence.

Figure 2: Cumulated nominal unit labour cost increases in five economic sectors within Germany

Note: Indexes, 1998=100. Cumulated nominal unit labour costs are a ratio of sectoral hourly compensation to hourly GDP in the total economy. Low-end services are defined as categories G-I in the Stan Industry list. Source: authors’ calculations; data from OECD STAN Database (2020 edition).

Considering that wage-setting is beyond the central government’s reach in Germany (even in the public sector), it is hard to attribute these outcomes to a conscious mercantilist grand plan. Instead, wage developments in these sectors must be understood in light of the respective sector-specific dynamics.

Wage moderation in low-end services (e.g. hospitality and retail) comes as no surprise. This reflects the erosion of unionisation and collective agreements, high unemployment, and labour market liberalisation. It is the extreme restraint in the public sector which is surprising. Public sector employees are highly skilled and relatively well unionised. The public sector’s collective bargaining coverage is the highest across sectors. Yet, public sector wage growth fell even behind the low-end services.

These puzzling public sector developments can be explained only by taking the fiscal policy context into account. Chancellor Schröder’s tax reform in 2000 dealt a blow to the public finances of the Länder. In the quest for fiscal consolidation, the finance ministers of the Länder exited the centralised framework for public sector wage bargaining and fiercely imposed wage restraint and cutbacks throughout the mid-2000s. Germany was unique with regard to its public sector wage developments in the first euro decade. No other euro member came even close.

Wage dynamics in construction resembled those of the public and low-end services sectors. The German construction sector had been shrinking since the Bundesbank’s hard monetary policy stance after the reunification boom. Before the financial crisis, a one-size-fits-none monetary policy resulted in a relatively high real interest rate in low-inflation Germany – which slowed down real estate activity. Based on data from the OECD and the Federal Statistical Office of Germany, the percentage of workers who were employed in construction shifted from 9% in the 1990s to 6% in the mid-2000s, while the number of finished dwellings halved. Beyond the widespread fear of losing jobs, wage policies in the construction sector were shaken up by the European free movement of workers, non-enforcement of the posted workers directive, and illicit work. In no other euro member state did construction wage restraint go as far as in Germany until the financial crisis.

Germany’s great disinflationary push was, in sum, driven by the sheltered sector. Industrial wages were undershooting too, but this was less pronounced than in the case of services, with the exception of financial services. In German industry, trade unions remained and are still powerful. The logic of the industrial wage regime, however, changed due to decentralisation, a process that started in the 1990s and accelerated in the 2000s.

Many firms from then on directly negotiated with trade unions. Where firms remained covered by central collective agreements, opening clauses paved the way to the expansion of firm-level agreements. Firm-level competitive corporatism is only one part of the explanation for the cost competitiveness of the German industrial sector, however. The other part is that the industrial sector consumes construction and other services, delivered by sectors in which wage moderation went much further than in industry.

The Covid-19 effect

In the euro’s second decade, the trajectory of wage growth has changed course and nominal unit labour costs have risen in line with industrial sector dynamics. This rise occurred in the context of an increasingly tight labour market. From above 11% in the mid-2000s, unemployment went down to around 3% (according to the OECD’s adjusted unemployment figures; the national figures are higher). Labour scarcity is a positive contextual factor for wage increases. Wage growth in construction has benefitted from the sector’s steady expansion and rising house prices. The introduction of a minimum wage in 2015 and the reregulation of temporary agency work has strengthened the positions of workers in low-end services.

Germany’s gradual rebalancing was significant, but incomplete. Although the economic and fiscal conditions for rising wages became increasingly better during the second half of the 2010s, Germany has not fully corrected the undervaluation which began following the introduction of the euro. Perhaps, without the pandemic, it would only have taken a few more years for full correction. But the Covid-19 crisis has put an end to such hopes. In the past, Germany reacted to crises by enforcing competitive undervaluation in the private sector and fiscal cutbacks in public sector wage setting. We have no indication that this time will be different.

The bottom line is that we should not be anticipating further wage expansion in Germany. It will not occur in the low-end services sector where Germany has turned into a ‘liberal market economy’. Nor will it come about in the exposed industrial sector, in which powerful works councils are prepared to trade wage increases against job security. As for the public sector, the government has already expressed its intention to return to fiscal consolidation as of 2022. This is an important message for Germany’s neighbours and trading partners. Due to the need to confront the immediate health hazard, some generous wage increases and one-off payments will occur in the public sector and perhaps also in construction, depending on further developments in the real estate market. But we doubt that this will be enough to break the foreseeable overall dynamic of wage moderation.

Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: Alex Osaki (CC BY-NC-SA 2.0)

Policy Insight | New Asia-Pacific trade deal. Implications for East Asia and the EU | CEPS

The conclusion of a new overarching Regional Comprehensive Economic Partnership (RCEP) Free Trade Agreement (FTA) between 15 Asia-Pacific countries has been celebrated across the globe. Its signatories are the 10 members of the Association of Southeast Asian Nations (ASEAN) countries and Japan, Korea, China, Australia and New Zealand; India withdrew from the agreement at the last moment.

The signing of the RCEP is certainly good news for world trade and investment. It brings together a group of countries representing 30% of the global population and generating 29% of its GDP. It aims to facilitate and solidify global value chains; accept opening-up in terms of tariffs (while aiming to discipline non-tariff barriers); build a legal framework for services, trade, and investment; and address e-commerce issues such as the commitment not to impose data localisation. Much like the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (an FTA between 11 APEC countries, without the US), and the EU/Japan Economic Partnership Agreement (EPA), the RCEP demonstrates once again that the US under the Trump administration was effectively alone in its attempts to disrupt further globalisation. Nevertheless, the RCEP is not a deep FTA and stipulates slow liberalisation over long periods of time, among its other peculiarities. It may also impact East Asian regionalism in the long term.

This paper explains the Association of Southeast Asian Nations (ASEAN)-led origin of the RCEP in the context of APEC, summarises the substance of the agreement, and gives an inevitably crude first estimate of its impact on trade and overall income, as well as its structural implications. It concludes with reflections on the possible long-term implications of the RCEP for East Asian regionalism, for world trade and investment, and for the European Union.

Follow this link to download the full publication

Europe’s Capital Markets puzzle, by K. Lannoo and A. Thomadakis | European Capital Markets Institute (ECMI)

On 18 November, the European Capital Markets Institute (ECMI) published a policy brief by Karel Lannoo and Apostolos Thomadakis named Europe’s Capital Markets puzzle, which acknowledged that creating an attractive framework for more market financing in Europe is proving to be an increasingly complex puzzle.

The EU and other European states are battling on several fronts, but without the unity and vision that is needed to move forward. Brexit is one of the difficult pieces of the puzzle, but also problematic is the dominance of universal banks, even more in mainland Europe, and limited acquaintance with more market finance. Market financing is however paramount for Europe’s competitiveness. 

The EU Commission’s latest action plan – the New CMU Action Plan – lacks workable solutions and gets lost in small items that will not allow for significant change or bring Europe’s markets up to speed. A positive development on the horizon is the emergence of a euro safe asset, a crucial building block for European capital markets, but the issues it raises are not reflected in the action plan either. Six years after the launch, we are no closer to the benchmark set by the United States.

The real actionable items of the new plan are limited; several elements are intentions, proposals for studies or elements to strengthen existing frameworks. Of course, there is no need for an extensive new legislative agenda. But rather a clear vision and strategy on what the EU wants to achieve, by when and how, on which there seems to be no agreement. The incremental approach followed over in recent years is now harming the EU’s long-term interests.

Download the full publication here

About the authors:

Karel Lannoo is General Manager of ECMI and CEO of CEPS.

Apostolos Thomadakis, Ph.D. is a Researcher at ECMI.


Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet | OECD

The Global Outlook on Financing for Sustainable Development 2021 calls for collective action to address both the short-term collapse in resources of developing countries as well as long-term strategies to build back better following the outbreak of the COVID-19 pandemic.
The financing gap to achieve the Sustainable Development Goals (SDGs) in developing countries was estimated at several trillions of dollars annually before the pandemic. The report demonstrates that progress to leave no one behind has since reversed, and the international community faces unprecedented challenges to implement the holistic financing strategy set out in the Addis Ababa Action Agenda (AAAA). The report finds that trillions of dollars in financial assets held by asset managers, banks and institutional investors are contributing to inequalities and unsustainable practices. It highlights the need to enhance the quality of financing through better incentives, accountability and transparency mechanisms, integrating the long-term risks of climate change, global health, and other non-financial factors into investment decisions. The report concludes with a plan of action for all actors to work jointly to reduce market failures in the global financial system and to seize opportunities to align financing in support of the 2030 Agenda for sustainable development.

Common currency, common identity? How the euro has fostered a European identity | Europp – LSE Blog

Featured image credit: Paolo Margari (CC BY-NC-ND 2.0)

Does European institution building in key areas of national sovereignty go hand in hand with the emergence of a common identity among European citizens? Drawing on a new study, Fedra Negri, Francesco Nicoli and Theresa Kuhn show that the introduction of the euro has fostered a European identity, leading to a small but significant decrease in the share of people who identify only with their nation and not with the EU.

Over the past few decades, the European Union has acquired important powers in policy areas that are intrinsically linked to national sovereignty. Indeed, the supranational Court of Justice of the European Union (1952), the EU Customs Union (1968) and the Schengen Area (1985) can be seen as the first building blocks of a set of European core state powers. More recently, the euro (launched in 1999; currency changeover in 2002) has pushed European integration even further.

From its onset, the euro was intended to be more than a mere instrument for economic exchange. It aimed to provide a symbol of collective identity that could be tangibly experienced, not only by national and European political elites, but also by a wider audience of European citizens as they engage in cross-border exchanges, purchases, and interactions. As Thomas Risse put it in 2003, ‘[w]e miss the significance of the advent of the Euro for European political, economic, and social order if we ignore its identity dimension’ (p. 487). A common currency is one of the most visible ‘identity markers’ that shapes the EU as a taken-for-granted social fact and helps in building an imagined community.

Almost two decades after the currency changeover, can we say that the euro has helped make the European society real in people’s minds? To start with, have a look at the figure below that displays the share of Eurobarometer respondents who identify only with their nation and not with the EU by country group over time.

Figure 1: Share of Eurobarometer respondents who identify only with their nation and not with the EU

Note: Mannheim Trend File (1996-2002) and Eurobarometer waves (2003-2017). Unweighted by population.

Overall, their share ranges between 13% (Luxembourg in 2016 and 2017) and 72% (UK in 2010). Compared to the full sample average (44%, horizontal grey solid line) and to the countries that introduced the euro in 2002 (41%, dashed line), the share of respondents who identify only with their nation is systematically higher in the member states that entered the EU in 2004 and 2007 and adopted the euro between 2007 and 2015 (46%, dash-dotted line) and in those that did not adopt the single currency (49%, dotted line). It is worth noting that the share of respondents who exclusively identify with their nation increased in all countries between 2005 and 2010, years characterised by both the rejection of the Treaty Establishing a Constitution for Europe in France (May 2005) and the Netherlands (June 2005) and the euro-crisis. However, from 2010 to 2014 – the years of the debt crisis – the share of respondents who identified exclusively with their nation decreased.

Given these trends, we formulate two hypotheses. Our baseline hypothesis maintains that the introduction of the euro is associated with a lower share of people who report an exclusive national identity. Second, we expect that, if the integration of a core competence of sovereignty, such as monetary policy, influences collective identities, then this does not simply happen from one day to the next, but is constructed over time. Thus, our second hypothesis maintains that the negative effect of the euro’s introduction on exclusive national identity increases over time.

The empirical analysis combines Eurobarometer survey data with macro-economic indicators from Eurostat. Our units of analysis are 26 EU member states, observed in the post-Maastricht period from 1996 to 2017 (the UK is included as it was a member state in the sample period; Cyprus and Croatia are excluded due to missing data).

Supporting our baseline hypothesis, our results show that, immediately after its introduction, the euro became a symbol affecting Europeans’ feelings of belonging towards Europe: in detail, the adoption of the euro is associated with a modest in magnitude, but statistically significant and robust across model specifications, reduction (-3%) of the share of people with exclusive national identity. This evidence builds a bridge to the first study on the relationship between the introduction of the Euro and European identity, published by Thomas Risse shortly after the euro changeover, in 2003. He demonstrated that the single currency, being ‘a visible link from Brussels to the daily lives of the citizens’ (p. 501), affected respondents’ identification with Europe already in the short run.

It could be questioned whether an effect of -3% is large enough to claim that the euro has had a positive effect on European identity. A look at descriptive statistics provides a partial answer: the standard deviation of the share of respondents reporting an exclusive national identity within the countries in our sample is equal to 5.7%. Moreover, across countries and years, its mean value is 44%. Considering these descriptive statistics, a change of 3% triggered by the adoption of the euro is not as negligible as it may seem. Moreover, it is worth noting that the euro is not the only supranational institution affecting European citizens’ ordinary lives. Thus, there are reasons to believe that, together, European institutions are capable of building and fostering collective identities.

Instead, contrary to our expectations, our results do not support our second hypothesis: the currency changeover exhausts its effects on European identity in the short run. The euro triggers a momentum-like, short-run, negative effect on the share of people with exclusive national identity, but such a negative effect does not increase over time.

All in all, our study suggests that common identities may stem from the construction of state powers, insofar as these contribute to creating the conditions that allow meaningful social interactions. While the lack of common identity is often used as a rhetorical artefact to constrain the construction of supranational institutions, our study suggests that integration processes could benefit from effective institutional designs as the latter may be essential factors in the emergence and fostering of a common identity.

For more information, see the authors’ accompanying paper in European Union Politics

European strategic complacency is not an option, by Josep Borell | Project syndicate

Featured image Credit: European Union, 2020 Source: EC – Audiovisual Service

“It is now more clear than ever that Europe must take its security, broadly understood, into its own hands. Doing so will not only secure the European Union’s proper place on the world stage, but will also ensure a healthy transatlantic partnership in the years ahead” Commission Vice President and EU High Representative Josep Borell argues on Project Syndicate.

Read the full article here

Understanding the role of political knowledge in support for fiscal solidarity | Europp – LSE Blog

Featured image credit: Adolfo Lujan (CC BY-NC-ND 2.0)

It is often assumed that citizens with higher levels of political knowledge will evaluate political arguments in a more rational way than other citizens. But is this really the case? Drawing on a new study, Klaus Armingeon finds little evidence for the idea citizens with greater political knowledge displayed a more rational approach toward fiscal solidarity during the Eurozone crisis.

There is a simple and convincing idea that motivates everyone from teachers of civic education to political activists carefully putting their arguments to the general public: citizens who are well informed and have substantial political knowledge will evaluate political arguments in a rational way. If arguments contradict previous beliefs and decisions, these choices will be revised.

Unfortunately, this is largely a folk tale. Recent political behaviour research highlights the role of ‘motivated reasoning’ in the process of preference formation. Whenever citizens are confronted with new political proposals, they (unconsciously) check whether this conforms with their basic values or prior positions. If there is no contradiction, citizens are happy and those with substantial political knowledge use this knowledge to rationalise their decision. However, if the proposal goes against the basic convictions of a citizen, this knowledge is helpful in explaining why the proposal has to be declined, with the initial decision on the proposal being based on prior values or political stances.

In a recent study, I apply this insight from political psychology to analyse support for fiscal solidarity during the Great Recession. Given fiscal support for countries such as Greece was ultimately supported by EU governments, one might assume that knowledgeable citizens would tend to follow the reasoning of their governments. As we know, even the German and Dutch governments arrived at the conclusion that the costs of the dissolution of the Eurozone would likely be larger than the costs of a bailout.

Hence, we might expect that politically knowledgeable citizens of Germany and the Netherlands should exhibit stronger support for fiscal solidarity than less knowledgeable citizens. Unsurprisingly, and much to the frustration of civic education teachers, I found little evidence for this effect in my study, which consisted of a reanalysis of a large Europe-wide survey.

I also tested whether knowledge ‘crystallises’ prior attitudes and stances – very much in the sense of motivated reasoning. I found strong support for this in my empirical analysis. The two graphs below visualise this effect. The left figure (a) is based on party cues: whether a respondent feels attached to or votes for an EU-friendly or Eurosceptic party. The right figure depicts the effect of knowledge conditional on prior values about EU membership of the nation. The more knowledgeable citizens are, the stronger the effect of cues or prior values.

Figure: Predicted support for fiscal solidarity

Note: For more information, see the author’s accompanying paper in European Union Politics.

It should be added that this crystallising effect of political knowledge is limited and varies from country to country. This is another blow to our teachers of civic education. Of course, this is not a plea for dismantling civic education in school. It might still matter for more general issues such as attitudes towards the EU, democracy or election turnout. However, political sophistication seems to play only a secondary role in preference formation for policies; much more important are deep-seated values and orientations which mainly evolve through political socialisation as well as cues from political parties to which citizens are attached or which they vote for. These findings are not a swan song of democracy either. Rather, they show the central role of parties and interest groups in identifying the social and political interests of their supporters and proposing to them positions which are in their interest.

What does this mean for the support of Europeans for generous EU policies to help countries hit most strongly by the Covid-19 crisis? The most plausible conclusion is that values and attachment to Euro-friendly parties will be key, rather than knowledge about the specific economic and social problems caused by the pandemic. Garnering support for generous policies may have less to do with rational arguments and far more to do with the basic orientation of citizens toward European integration and the messages parties send to their followers.

For more information, see the author’s accompanying paper at European Union Politics

The Biden era: What can Europe expect from America’s new President? | Europp – LSE Blog

Featured image credit: Adam Schultz / Biden for President (CC BY-NC-SA 2.0)

With the election of Joe Biden as the next President of the United States, the transatlantic relationship is set to enter a new era. Effie G. H. Pedaliu examines what Biden’s presidency will mean for the EU and the post-Brexit UK.

What can the EU expect realistically from a Biden presidency? An awful lot really. At a minimum, decorum, civility and predictability in a world of growing uncertainty. Anything more than this will depend, ultimately, on Europe. It can no longer expect the US to act as a deus ex machina to cure its woes.

The EU’s wish list when it comes to a Biden administration is on the long side. The transatlantic relationship is not only about NATO, but also about economics. The combined size of the US and EU economies shape the global economy. Therefore, the first thing the EU needs from the US is to re-energise the global system from its ‘creeping paralysis’. Equally important is for the US to retract President Trump’s thinly disguised threat in July 2018 to pull the United States out of NATO – the cornerstone of European defence – and to reengage fully. Furthermore, the EU would like to see more American involvement at its eastern border and the MENA region and a lowering of tensions in Sino-American relations.

Biden’s priorities are to unite his politically polarised society by reducing social and racial divisions in America, to restore its people’s trust in democratic institutions, to tackle the pernicious advance of Covid-19 robustly and rebuild the American economy. At the same time, he will wish to restore multilateralism, continue to withstand the challenges posed by the relentless rise of China and confront Russian provocations. Biden will also seek to resolve the conundrum of finding a golden mean for climate change, energy security and economic growth as well as expanding international trade.

A known quantity

What the EU, the UK and NATO are getting in Biden is somebody who has been a known quantity over the last 47 years. Foreign policy is in his blood. He understands how diplomacy works, knows how to work across ideological lines and recognises that security and economic growth are more easily achieved through international collaboration. His long stints in the Senate’s Foreign Relations Committee, as chairman of its NATO Observer Group and its Sub-committee of European Affairs, his opposition to President Reagan’s policy towards Apartheid in South Africa, his support for humanitarian intervention in the Balkan Wars of the early 1990s and his time as President Obama’s Vice President reveal him to be a liberal, a traditionalist and an institutionalist who will seek to work together with other democracies.

Biden gets the transatlantic relationship and the value of allies. He will not hurl gratuitous insults at his NATO allies or describe them as ‘delinquents’ and NATO as an ‘obsolete’ institution. He believes in the values of the West. He realises the importance of European integration and will not launch destructive attacks on the European Union which he rates as ‘an indispensable partner of first resort’. He will not use the UK to harm the EU.

He has high regard for multilateralism, international institutions and the rule of law. Biden is unlikely to ever use the words ‘America First’. He does not define American security and interests as narrowly as his predecessor who approached American defence through a bunker mentality. He is on record as saying that, ‘in exactly 77 days a Biden Administration will rejoin’ the Paris climate agreement. He has promised that ‘if Iran returns to strict compliance with the nuclear deal, the US would rejoin the agreement as a starting point for follow-on negotiations.’ How much of his policy agenda he will be able to fulfil is ultimately down to the composition of the US Senate, which will not be known until 5 January 2021.

In sum, Joe Biden’s election as the 46th President of the United States brings an end to a Trump era based on ‘alternatives facts’ and populism. Donald Trump’s legacy is increased global uncertainty, division and distrust. It has made the world a more dangerous place. Europe and the UK have watched on tenterhooks the playing out of the American democratic process as the global and economic shocks of Covid-19 gather strength. News of the final victory of the Biden/Harris ticket came as a relief to Brussels, EU capitals and probably, even in Brexiting London.

In a Covid-19 plagued era, unpredictability has now lost its strategic gloss even among those who courted it and used it wantonly. What the Trump administration chalked up as foreign policy ‘successes’, namely the withdrawal from the Paris climate agreement and the Iran nuclear deal, have been seen from this side of the Atlantic as dangerous liabilities. His courting of chaos, his attraction to ‘strong men’, his disregard for etiquette and his aversion to international cooperation have injured the transatlantic relationship as well as America’s position in the world, and have had a detrimental effect on global cooperation in dealing with the threat from Covid-19.

The need for a strong EU

The turbulence in the international system has put a soft power like the EU under severe stress. Many in Europe hanker for a new golden era in transatlantic relations. But, the reality is that although transatlantic cooperation will be restored, this will still be a difficult time and some strains in the transatlantic relationship may even grow. This is because the EU’s systemic weaknesses and many pressures over a short time have reduced the EU into adopting a policy of appeasement towards all threats and waiting for both Trump and Covid-19 to disappear.

For Biden, the EU is a natural ally, but he needs the EU to be a strong international actor. He needs it to be a reliable ally that does not merely pay lip service to supporting NATO. Biden will want a Europe that pulls its weight on defence and security so that it complements NATO, pays its fair share and does not turn a blind eye to Russian skulduggery because of its energy needs.

Trump demonstrated to Europe the limits of an overreliance on the US, yet the EU has still to become an assertive and confident voice on the world stage. Its efforts in foreign and security policy continue to be diffident and plagued by an inability to speak as one. Its legendary cacophony on foreign policy-making does not originate primarily from its rule demanding unanimity, but from ‘the rule of double standards’, where immediate and short-term economic interests outweigh long-term strategic thinking.

A Biden administration will want to see an EU that forsakes appeasement and stands up to the aggressive revisionism of Russia, Turkey and Iran that destabilise its eastern and southern borders. He will happily partner a purposeful EU but will not act as its border guard.

Biden’s approach to the Middle East is likely to be more circumspect than the EU wishes. He has described Trump’s withdrawal of US military forces from Northern Syria as a ‘complete failure’, a ‘betrayal of [our] brave Kurdish partners’ and ‘taking the boot off the neck of ISIS’; and, above all, as ‘demolishing the moral authority of the United States of America’. However, Biden, too, wishes to ‘end the forever wars’ and Europe will have to find a means of dealing effectively with its troubled neighbourhood. The cavalry is not likely to be dispatched from the other side of the Atlantic any time soon.

A Biden administration will also want the EU to join it in pursuing a more active agenda on human rights and civil liberties with regards to China as well as ‘problematic European states’ such as Hungary and Poland. China may complicate relations between the US and the EU as the President-elect will raise, quite forcefully, the issue of Hong Kong with President Xi and will also expect the EU to adopt a less ‘mild approach’ to China’s economic penetration of European territory.

Flash points and the special relationship

Matters of economic and technological cooperation are likely to be flash points between the EU and the Biden administration. He is unlikely to use the vacuous term ‘America First’ but he, too, will seek a ‘fair deal’. He won the elections primarily by recreating ‘the blue wall’ therefore, he will seek to rectify perceived imbalances in trade between the two blocs especially in agriculture and industry. Biden will expect the EU to act as a partner not a competitor on issues of technology and economic and trade policy. It is quite likely that there will be friction over the aviation industry, AI, 5G and tech in general. There is still scope for close cooperation between the US, the EU and the UK as the Biden administration tries to re-purpose the US economy to overcome Covid-19 and become more competitive against the Chinese. The question then is how far are the EU and UK prepared to go to keep the US happy.

With the UK, the ‘special relationship’ may become thornier than it was even during the Clinton-Major years and this time, disgruntlement will not be mitigated by joint efforts to bring about peace in Northern Ireland. Indeed, it will be the sanctity of the ‘Good Friday Agreement’ itself that may cause tensions. A new trade agreement with the US will not be about the UK having to eat ‘a little bit of humble pie’. It will be about the realities facing the UK in negotiating with an economic giant like the US.

Pleasant, even successful, meetings on international trade in DC rarely mean that an agreement with the US is likely to emerge quickly. As President Obama warned when David Cameron recklessly gambled the economic certainties the UK enjoyed on a Brexit referendum, the UK will have to take its place in a long queue. The Johnson government may have to perform some quick finessing of its foreign and trade policy negotiating stances at an awkward time as the transition period comes to an end. Yet, Biden’s victory may concentrate minds and a ‘deal’ may emerge.

The Biden era

The Biden administration will not seek to ‘Make America Great Again’, but its mission will be to keep America great. For the EU, to capitalise on the opportunities arising from Biden’s presidency, it will have to tidy its messy house, stop ignoring geopolitical truths, discontinue wishful thinking and take the realities underlying its defence seriously.

There are no better words available to President-elect Joe Biden than those of President Abraham Lincoln in his 1861 inaugural address: ‘We are not enemies, but friends. We must not be enemies. Though passion may have strained, it must not break our bonds of affection’. Lincoln’s words address directly the domestic and international challenges Biden faces, namely, a deeply divided American nation and alliances worn down by four years of scorn and petulance.

Finally, no piece on the result of the presidential election of 2020 should end without mention of the profound and historical significance of the election of the first woman and the first woman of colour as Vice President-elect of the United States, Kamala Harris.