Yesterday the papers splashed a long range forecast which said the UK economy would soon overtake the French in size, and by 2030 would be larger than Germany. The reasons given were the UK’s relatively low tax regime compared to the continent, a younger and growing population compared to declining and ageing populations on the continent, and our avoidance of the Euro. All that makes sense.
However, what the forecasts and figures also reveal is the growing irrelevance of Europe to the progress of the world economy. The individual large EU economies will lose out to China, India and other emerging market countries, as they surge. According to UN population forecasts Europe’s overall population will shrink from 728 million in 2000 to 632 million by 2050. Meanwhile China’s population will grow to be more than twice that of Europe’s and India’s will be more than 2.4 times Europe’s. As India and China get bigger and as they raise their living standards and output per head, so they will come to dwarf the economic output of the main European countries.
Mrs Merkel has wisely asked the question how can such a small part of the world’s population in Europe account for one quarter of world output and one half of world social spending? It looks as if the answer to the question on the share of world output will be answered by Europe’s share contracting over the next two decades, as the emerging economies outgrow the west. Our living standards can only remain substantially higher than those elsewhere if we continue to develop the companies, the products and services with high value added that command good prices around the world. This is going to get more difficult as the rest of the world catches up with brands and technology and as EU government does its best to undermine enterprise.
Whilst some of the high proportion of the world’s social spending will be eroded by the same process, by growth elsewhere, it looks as if the brutal logic of the Euro will continue to put downward pressure on social spending, forcing higher retirement ages, lower pensions and meaner social benefits. That is what Mrs Merkel implied in her remarks.
Europe will make its position worse by continuing with high energy prices, relatively high taxes, and an excess of poor regulation. EU government specialises in the hammer of regulation to miss the nut, and will probably continue with more of the same. This will compound Europe’s difficulty in earning a good living and boosting value added and real wages. The pressures from EU government are mainly in the other direction, forcing EU companies to do less with more.
And what of the UK? If the UK could cut lose from the EU’s dear energy and excessive regulation it could grow faster still. It has an advantage from being out of the Euro, and another from relatively low corporate taxes. If it added more competitive personal taxes and dug itself out of the excessive burden of so called single market regulation it could do even better. Above all it needs a more plentiful supply of cheaper energy, which is probably beneath our feet as we think about it. Lots of cheap gas would power an industrial recovery, which would add to the present recovery underway.