Executive summary
Two trends that appear well established at the global level are:
- i) continuous, if slow and gradually decelerating, population growth and
- ii) a rapid economic convergence of emerging markets, implying a considerable relative decline of the EU.
The combined effect of these two trends is that there is a real possibility that by 2035 the EU-27 will not be among the three biggest economies – even if per capita growth continues to increase slowly in Europe. A further implication of this shrinking relative weight of the European economy is that for most Member States the internal market might become less important than the global market, thus strengthen centrifugal forces (‘no Brexit without China’).
Uncertainty about the future global economic order arises less from the predictable shifting weights than from different views of the relative roles of the government and markets in the two emerging large powers, India and China.
Globalisation
Globalisation in the traditional sense (trade volumes relative to GDP) might have peaked. Given the likely dominant role of China, the major uncertainty concerning the global economic system relates to two of its policy choices, both pertaining to the degree of state control over the economy:
- a) At present, the major assault on the global trading system comes from an erratic US President. But in the longer term, the survival of the open and multilateral global trading system will depend on whether China will choose to become a fully-fledged market economy or whether the ‘guiding role’ of the Communist Party, which has now been enshrined also for all private corporations, will continue to remain paramount. It is difficult to imagine a global trading system in which the largest economy is subject to extensive state control.
- b) The degree to which the US dollar remains the dominant global reserve currency will depend on the degree of capital market opening permitted by the Chinese authorities over the next decade or so. Accepting free capital movements carries a substantial cost for the Chinese authorities, as they would thus lose control over the exchange rate, which would considerably complicate their control over the economy.
Growth
The rapid growth of emerging economies should not represent a problem for the EU economy (which has already adjusted to China). An expanding middle class and continuing high levels of investment in emerging economies should even benefit European industry, which specialises in high quality investment and consumer goods.
We find that tangible benefits in terms of productivity from the undoubtedly rapid advances in information technology (IT) have so far proven elusive. However, there are strong arguments that they might materialise in the medium term.
The EU’s fragmented internal market for IT services is likely to constitute a handicap in a sector dominated by ‘winner takes all’ competition. Without a major effort to increase expenditure on R&D in some key technologies, it is thus likely that the European economy will continue to fall behind in this area, relative to both the US and China.
Energy and climate change
Recent years have seen further significant falls in the cost of renewable energy, mainly for photovoltaic solar and offshore wind. The cost of storage has also fallen rapidly, mitigating the drawback of the intermittent nature of these power sources. The key uncertainty at present is whether these cost reductions will continue. Until now, price reductions have concerned core technical elements(wafers in photovoltaic installations and in battery production), but system costs include many other elements for which reductions appear more difficult. These ‘soft’ costs are particularly important for residential applications and are thus likely to impede the emergence of a de-centralised power generation system. The exact date of ‘peak oil’ (demand) remains uncertain, but it seems likely that competition for hydrocarbon resources will be mitigated. Increases in oil prices will be limited by the fairly elastic, and price-sensitive, supply from unconventional sources.
By 2035, the evidence that the climate is changing should have become even more compelling, and the associated costs should be apparent. However, policy might find itself in a bind because the vast new global capital stock accumulated in today’s emerging economies (not only in terms of coal fired power generation, but also housing and transport infrastructure) might make it very expensive to shift to a low carbon economy. The EU is unlikely to play more than a secondary role in global climate policy because its own emissions should have fallen to less than one tenth of the global total.
EU internal dynamics
Over the last two decades, there has been considerable east-west convergence in the EU-27, but not north-south within the eurozone. However, problems in the future might not be along these known fault lines, but between countries, which can benefit from new technologies because of strong domestic governance (most importantly high-quality education) and those where knowledge accumulation and generation is weak. Research on the limits to longer-term convergence in the US confirm the key role of education and investment in R&D even within a very integrated economy. Our scenarios are based on these elements, which make a continuation of slow growth and gradual convergence the most likely outcome.
Inequality is widely perceived as an increasing problem. However, we find that that the EU evidence is very different from that in the US, where one finds a continuous trend increase in inequality. In Europe, by contrast, no such trend can be found. Over the last two decades one finds very different experiences across Member States in terms of inequality, with some increase, but also falls in others. Moreover, different indicators give a different picture. In sum, the data does not confirm the impression of a generalised trend increase in inequality throughout the EU.