Among the many abilities of the Indian Trade Minister Kamal Nath, one of the least appreciated is his ironic sense of humor. He has one particular quip that goes right to the heart of the contemporary politics of globalization. Whenever a European refers to India as an emerging economy, Nath shoots back that by this definition Europe must be a "submerging economy." Nath knows exactly what nerve he is touching. The idea that the so-called Old World (in what sense is Europe's civilization older than China's or India's?) is struggling to hold its own against the dynamic rise of the new is familiar enough. Even though this is not the case -- or need not be if we make the right public policy choices now -- it has not stopped many Europeans and Americans from fearing the emerging political and economic landscape of the 21st century. How Europeans respond to this picture will matter not just to Europe but to the rest of the global economy as well.
The raw and explosive growth of China and India in the last two decades is enough to make most other economies look pedestrian by comparison. But the reality in Europe remains anything but pedestrian. Seven of the world's ten most competitive economies are European. Europe continues to dominate export markets across the entire range of manufactured goods and services, especially for products with a high degree of creative or technological content. Europe still accounts for a share of global economic output that dwarfs China and India combined. These are not arguments for complacency in the face of economic competition but they are reasons for perspective.
Many Europeans intuitively believe that a world in which China and India achieve export superpower status must be a world in which Europe's own prosperity is proportionately reduced. While this might be the case for raw measures of relative power in the global economy, it does not hold for economic prosperity. Despite China and India's steady growth in productivity and mechanization and the resulting increased trade competition, the European economy has followed the growth boom in the emerging economies over the last decade with a net job creation of 18 million. Globalization turns out to be a striking example of the "lump of labor" fallacy -- the mistaken notion that there are only a fixed number of jobs to go around in the global economy. A hundred million new jobs in the developing world have not cost Europe a single job on aggregate. Instead, Asian competition has been good for Europe. European companies have responded to the new competitive pressure by looking for new areas of specialization, both in manufacturing and especially in the services sector. Purely in terms of our aggregate prosperity, preserving globalization makes economic sense.
Globalization is, however, about to enter a new political phase. The economic effects of globalization have been felt for decades in Europe through increased pressure on businesses, decline in local manufacturing, and a steady downward pressure on import prices. This process has nevertheless been one that has been broadly conducted on European (and American) terms. It has been driven by Western investment and capital, and structured to supply Western demand. We are seeing the first signs of how that will change.
Company acquisitions and inward investment from the emerging world are beginning to bring home to Europeans precisely what globalization means in terms of the growing economic weight of Russia, China, and India. You might call this "the Tata effect" -- after the Indian car manufacturer that produced the world's cheapest automobile in 2008, the same year that it took ownership of the prestigious British car manufacturer, Jaguar. These are the surface signs of a fundamental change. The global economic architecture is being fundamentally restructured. Economic power has been dispersed globally away from its concentration in the Atlantic world. While nothing in this process is inevitable, it is safe to say that political power is now following a similar shift.
This will likely provoke considerable anxiety in Europe, as well as in the United States, not least because it will compound political anxiety about the effects of rapid economic change. The aggregate benefits of economic globalization for Europe do not conceal the technological changes and the competitive pressure applied to labor-intensive manufacturing that have forced painful adjustments on many in Europe. We are now competing harder for both our domestic and export markets. Old economic certainties have been eroded and as individuals we live in a much less predictable economic system.
This general anxiety is reinforced by the perceived failure of financial markets to manage risk responsibly, together with spiraling and speculative food and energy prices. It is also deepened by the fact that some of the largest of these new players in the global economy are state capitalists on the Russian and Chinese model. Although there is little reason to believe that these models are sustainable beyond the earliest phases of export-led growth (they are in fact obstacles to the development of sound capital markets and diversified economies), many in Europe nevertheless argue that Europe's liberal, rules-based, hands-off approach is naïve. The political pressure is likely to grow to contain the rise of these states or to shelter the European economy from them. Either course would mean putting Europe's current economic internationalism into reverse.
Does Economic Internationalism Matter?
European -- and American -- attempts to counter or contain this shift would not only be an unconscionable suppression of the development of half of the world's population, they would even be against a pragmatic reading of European interests. Europe's economic prosperity is rooted deeply in global economic demand and trade with a growing global market. Suppressing the growth of that demand would be counterproductive -- not just for us, but also for those further down the development ladder who can benefit from exporting to these growing markets in much the same way that the current emerging economies have done by exporting to ours. The European economic interest, in other words, is not simply the sum of what happens within our borders. We are a supply chain economy, and policies that try and shut Europe off from imports or from competitive pressure will raise our costs and therefore damage the very European economic interests they intend to serve.
No Threat to the Safety Net
This is not simply a question of our economic interests. The destabilizing global effects of a stall or crash in growth in the developing world, especially in China, would make the world a poorer and profoundly less secure place. Even attempts to simply shelter the European economy from the rise of these economies could have the same effect because growth in the emerging world is still largely driven by demand in, and exports to, the developed world. By disengaging from the global economy we would be pulling up the ladder that much of the world is still using to climb out of poverty.
Globalization is not perfect, nor is it a panacea. It has its environmental, social, and economic costs, all of which demand political and practical attention. But an international economic order based on progressive liberalization and governed by multilateral rules, first under the General Agreement on Tariffs and Trade (GATT) and then the World Trade Organization (WTO), has provided a stable and equitable framework for economic cooperation and trade between states that has allowed an unprecedented expansion of global prosperity. It has reduced global economic inequality in ways that were unimaginable only two generations ago. For the last twenty years, Europe's economic internationalism -- above all its openness to trade with the developing world -- has without doubt made a greater contribution to global poverty reduction than all its aid or debt relief combined. Globalization could work better but that does not mean that we would be better off without it.
A return to economic nationalism in Europe -- picking winners in industrial policy, or preserving food security through subsidized farming, or protecting individual jobs from import competition -- would be a mistake. We have to protect European companies and workers against unfair trade that results from the economic nationalism of others. But we must also distinguish unfair competition from the legitimate exercise of comparative advantage, especially by the developing world. We need to have confidence in the market economy model and the transparent, liberal institutions that support it.
Preserving this openness and economic internationalism in Europe in the face of such a radical reordering of the global economy will require a new political approach, and new policy prescriptions. Europeans will need to be reassured that their interests are being defended, even as the global political and economic landscape is reshaped around them. That means a pragmatic new approach to the role of the state in an open economy, and a new and vital rationale for the European Union itself.
Preserving Europe's Economic Internationalism
It is not enough simply to defend economic internationalism in Europe in abstract terms. We need to show that it is a pragmatic policy choice based on the best outcomes, not on free-market ideology. This means recognizing that behind some of the most pervasive anxieties about economic internationalism lie legitimate concerns. The most basic is that there is no single prescription for developing countries to engage with the global economy, only solutions that reflect an individual economy's capacities and development needs.
The credit crisis and the problem of rising food prices both demonstrate the need to preserve an open market that is regulated to prevent market failures. In the case of financial markets there needs to be better policing of risks. In food trade, open markets need to be accompanied by active intervention to boost or sustain the productive capacity of farmers in poor countries. Economic internationalism is a recipe book that encourages improvisation, not a single set of instructions.
For most Europeans their deepest concerns about economic internationalism relate to its impact on their personal economic security. Wide public support for economic internationalism in Europe will be determined by the perception that the gains are being equitably shared, that the needs of the "losers" from rapid economic change are being recognized. The debate as to precisely how or if global economic competition is widening inequality in European societies currently offers us no clear answers. But that inequality, combined with sluggish middle class wage growth and the fact that the returns to capital have outstripped returns to labor over the last decade has many middle and working class Europeans looking for a scapegoat. That scapegoat is likely to be globalization. Unless we can link the economic interests of middle and working class Europeans to the progressive enrichment of the developing world they will discount those gains for others in favor of what they see as their own more immediate interests.
The only way to prevent this is to spread the benefits of globalization more effectively in our own societies. Globalization has progressively reduced the inequality between countries in the global economy. It would be both an irony and a tragedy if we allowed that rebalancing to be undone because we lacked the political will to tackle widening inequality within our own economies.
But globalization and global economic competition make such activism impossible, right? Wrong, according to the evidence. Data from the Organization for Economic Cooperation and Development shows clearly that over the last 20 years smart, flexible social welfare systems and high levels of spending on basic public goods can have no negative effect on national income growth -- and can boost it. Some of the most economically competitive societies in the world -- the Scandinavian countries in particular -- are not only among the most globalized, but also maintain high levels of public spending and active safety nets. Scandinavia and the United States are part of the same global economy. But they have made very different political choices about how to distribute the economic benefits that have come with it. It is not surprising that their political cultures also show divergent levels of comfort with globalization: only one in ten Swedes believe that their country's openness to globalization is a bad thing, compared to 50 percent of Americans.
By collectivizing some of the biggest economic risks in individual lives -- unemployment and health care in particular -- and promoting sufficient redistribution to ensure a minimum of social equality, effective social models can create a society much better equipped to handle rapid economic change. The most effective models favor flexibility in labor markets, but protect individual workers with wage insurance as they move between jobs. They fund high quality education right down to the level of general education and support retraining. This is the social contract that globalization requires to be politically sustainable.
Projectionism Instead of Protectionism
This suggests that although Europeans are proud of their social models they ought not to be complacent. While most European social models meet some of these criteria, many still strengthen the position of labor market insiders over outsiders, make it difficult to expand businesses, and provide little encouragement for women or older people to enter or remain in the workforce. It is too easy for some to misrepresent the argument for strong activist states as an argument for direct market controls, import barriers, and national ownership or direction of industry. The state has a fundamental role in European society in ensuring that greater economic change does not imply greater insecurity. However, protective states do not have to be protectionist ones.
The European Union in the Global Age
Rethinking government in Europe will need to go further than national political systems. It seems inevitable that as we respond to globalization the nature of governance likely to change. With our more atomized social lives, a greater degree of countervailing local community government makes obvious sense. Because we are no longer building communities on static local identities defined by birth and origin, we should be investing more in building them through local political engagement and public participation. Localism is not the rejection of globalization. It is a rational response and counterpart to it. But we must also recognize the logic of moving some of our government upwards and outwards. This is where the utility of the European Union becomes compelling. At age 50, the European Union is making the transition from an inward-looking political confederation to an outward-looking global actor. It is the vital multiplier of European influence that allows Europeans to engage with, and shape, globalization.
This capacity will become crucial as the global political landscape is reshaped in the years ahead. The next decade will see multilateral institutions like the WTO, the United Nations, and the Bretton Woods architecture adapted to the changing realities of Asian and Latin American power. One of the fundamental challenges of the next decade for Europe and the United States, which have underwritten these institutions for 60 years, will be to engage the rising powers in their maintenance and credibility. The rising powers have a strong incentive in seeing their interests defended through a rules-based multilateral system, but they will only accept custody of this system if they feel that its governance reflects their growing power. If emerging economies are currently skeptical of institutions like the G-8, the UN Security Council and the International Monetary Fund it is because these mechanisms remain essentially rooted in the "Atlantic" postwar world.
Accepting that this will have to change may diminish the relative influence of the Atlantic world, but only in a way that reflects a deeper reality. Moreover, anchoring the rising powers in a liberal, rules-based multilateral system more evenly shares the burden of managing that system. Institutions like the WTO also provide a way of holding the rising powers to their international commitments in trade and other areas. Sustained engagement with the global economy will inevitably apply continued pressure for economic and political reform.
It is not just this wider shift in which Europe needs a voice. The next decade will see African development politics reshaped by the growing influence and engagement of China. The same debate about development models will take place in societies across the Middle East and Central Asia. The pressure for international solutions to climate change and energy and water security will increase. These are realignments and debates in which Europe has profound and legitimate interests. To be present in any of them, and to keep others engaged, it will be necessary for Europeans to speak as a single union. To negotiate effectively with continental partners on the scale of China, Russia, or the United States, we need a continental voice of our own. As the largest export market for more than a hundred countries in the global economy the European Union has a huge capacity to influence global standards on everything from carbon emissions and green technology to food and product safety. But to set those standards at a European level, and to then promote them internationally, we need an effective European Union.
The conception of the European Union as a protected political and economic community might have made limited sense when Europe was rebuilding its industrial capacity and food production from scratch and most of the world's markets were cut off by autarky. It makes no sense now. Globalization will put intense pressure on any insular notion of Europeanism that is not focused on effective economic and political projection in the world. An effective European Union needs efficient European institutions at its center, which is why the Lisbon reform treaty matters. If ratified, the treaty will equip the European Union's institutions to represent Europeans more effectively and coherently in the world. It is not a fundamental reform, but it is an essential one. It is not a blind leap into deeper integration: where it proposes further integration it does so as a means of enabling the European Union to act more effectively in the collective interest where European states have agreed to do so -- a projectionist Europe rather than a protectionist one.
An Opportunity for Europe
Europeans have a much greater capacity to shape and benefit from globalization and the resurgence of the East and South than they often recognize. While they can no longer dictate the contours of global economic change, Europeans retain the ability to shape it in a way that reflects their interests and values. The flip side of this power, at least while the developing world remains a weak source of domestic demand and dependent on export-led growth, is Europe's ability to significantly reverse high levels of economic internationalism. Otherwise, if a retreat from globalization were mirrored by a similar retreat in the United States, Europe's political or economic interests would suffer.
Europe is not a "submerging" economy or society. While this new political phase of globalization will test European nerves, it is also an opportunity for a more equitable global order and an effective redistribution of the burdens of managing the multilateral system. Europeans should grasp it. In order to do that they need to preserve their commitment to economic internationalism. That will only be possible if European governments act pragmatically and effectively to address the insecurity that Europeans feel about a more open global order by redesigning the European social compact for the 21st century and ensuring that the benefits of engagement with the global economy are not just maximized but equitably shared. This will only be possible if Europeans act and speak as one through a renewed and effective European Union.
Peter Mandelson is the former EU commissioner for external trade and currently serves as Britain's Business Secretary.