Mandeville Lecture
By Guy Verhofstadt,
Former Prime Minister of Belgium
'The United States of Europe'
Standing here, greatly honoured by the invitation, I am reminded of Desiderius Erasmus, the intellectual Prince of the Netherlands at the time when our low countries in the early 16th century were still united. And of Spinoza, Mandeville’s Dutch predecessor.
Talking about pragmatic or utilitarian views: ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest’, said Adam Smith in 1776 in his The Wealth of Nations. This might have been a quote from the much earlier Mandeville, sometimes nicknamed Man-devil by his adversaries. Because Mandeville as a political philosopher accepted people for what they were, not as they were supposed to be. In the spirit of Machiavelli, as early as in de 16th century, but sharpened by the first signs of the industrial revolution, two centuries later. It is Mandeville’s European profile that strikes me in particular. Born from French parents in Rotterdam, but mostly active as a physician in England. Truly a European citizen ‘avant la-lettre’ who considered borders less important than ideas.
Four years ago I published a book with the then somewhat provoking title: The United States of Europe. Over the past decades some important steps have been made towards a more united Europe, culminating in the European constitution that became the Lisbon Declaration. The constitution was really necessary to take up the challenges Europe was, and still is, facing. These are challenges of such a magnitude that they cannot be taken up by a single nation.
- First, the much-discussed globalization, perhaps the most striking phenomenon of the past twenty years. It is still partial and incomplete, and we should remedy this. As long as political globalization does not follow the economic and financial globalization, I fear globalization will bite the dust.
- A second challenge is the worldwide gap between the poor and the rich. I refer to the United Nations’ Millennium goals. Halving poverty in the world by the year 2015, next to other measures to fight hunger, promote literacy and to guarantee sustainable development.
- A third challenge, which we cannot shy away from, can be summarized as the climate change. The most conspicuous front of a large number of global ecological challenges. In order to call it to a halt, or to undo its consequences, the European Commission has boldly announced the unprecedented 3x20 aims. Before the year 2020 a 20% reduction of greenhouse gases emissions, supply of 20% of our energy from renewable sources, and 20% more efficient use of energy.
- Fourth, in the very short term we will be struck by ageing. In all European countries, but other countries will follow shortly, percentages of the over-60s will have doubled by the year 2050. The ‘burden’ will be two-tiered, I’m afraid. For one, ageing of the population has a strong impact on our pension systems. And then, health resources consumption at older age is much higher than that at active age.
On top of this the world was confronted last year with a global financial and economic crisis. One of severe impact. The IMF foresees a 1.3% recession, the OESO even 2.7%. The gross domestic product will drop as well, by 4% in the US and the Euro zone to by 6.6% in Japan. The worst statistics since 1945. Expected budget deficits are dramatic, too. From 2.8% for the Netherlands, 3.5% for Belgium, to as much as 12% for the US. It reminds me of the early 1980s when I as the responsible minister had to counteract a towering deficit with draconic cuts. And then there is the soaring unemployment, to an extent only precedented in the 1930s: the Great Depression.
Although hardly mentioned, the third world is no doubt the biggest victim. Perhaps fifty million people will sink deeper in extreme poverty, will have to do with less than two dollars a day. As a consequence, the infant mortality rate will double. Four hundred thousand children, a chilling figure.
So when will it end, how far to go to the bottom, or have we passed the bottom? Optimists, whose numbers are dwindling, foresee a revival in 2010. Yet it dawns upon us that it may continue until 2011, perhaps 2012. Remember Japan in the early 1990s where we saw almost exactly the same situation with a real estate bubble. But, as Nobel Prize winner Paul Krugman said: “bubbles always burst”, like Holland’s tulip bulb bubble a long time ago. Japan’s real estate bubble burst as a matter of course, but now, almost twenty years later, its economy has not yet fully recovered – in spite of all remedies attempted.
Like Japan then, Europe today has no consistent answer. Each country has its own answer and action plan. Strikingly, there is no global solution for the European bank sector that could restore faith in the financial markets. The same holds true for the recovery plans.
Protectionism is entirely at odds with each fibre of the European project, with each European logic. European prosperity is built on the very conquering of any protectionism because we have learned from history. The way out of the crisis would seem to be not less Europe and more nationalism, but rather more Europe and less protectionism. In other words, Europe is not the problem, but the very solution.
Let’s not forget Europe’s great potential, even bigger than that of other powers like the US, Japan or the BRIC-countries. And we have the euro; it saved us and now must serve as a lever to haul the word economy out of the swamp. Still we can see hovering a large black thundercloud over Europe’s recovery. It is the banks of course. And opposed to what many people think, it is the European bank sector rather than the American one. In America the leverage, the ratio between assets and liabilities is one in thirty, in Europe one in fifty. Yes, that’s correct: for each euro they own, the European banks have borrowed no less than fifty euros.
This problem should be solved first to restore faith. National solutions will not work however. A realistic option is the institution of one financial regulator on a European level: one “European Financial Supervisor”. Not only controlling the European financial markets, but also implementing new standards, formulating new norms. Even introducing new ethics. Why must we have quality control of dairy products, vegetables and meat, and not of financial products? The United States has realized all this meanwhile: President Obama a few days ago announced he would institute one single Supervisor for America.
The second necessity is recapitalization of the European bank sector in three steps. One, achieving full transparency over the forty major European banks. What would be their losses if this deep recession should persist? Next, classifying them into three groups on the basis of “stress tests” and recapitalize those that need government aid to cover possible losses. It will cost! And then, the “toxic” bank products must be cleared off. In all banks, for the chain is as strong as the weakest link. There are many solutions to this problem. In my book I have proposed a variant to the Geitner-plan in the United States: setting up a so-called European bad bank incorporating all toxic products. Thus clearing all other banks at one go. Not to be paid by the taxpayer, but rather by the then profitable ‘clean’ banks. Once again, I am convinced that these three measures are conditional to Europe’s resurrection at the short term and to avoid a Japanese ill-fated scenario.
But even then we have not yet won the battle. New economic foundations must be laid, for which we need a large-scale European action- and investment plan. A Europlan. To date there is no such plan. What we have is some national initiatives topped by some funding by the European Commission and the European Investment Bank. In total no more than 1.5% of the gross domestic product, versus 6% provided for in the Obama-plan in the United States. Four times as much.
So we need to invest – profitably and durably – to build up a new forward-looking European economy. First of all a non-fossil economy; essential to deal with the climate change. Second, the Europlan must boldly tackle the mobility infarction, preferably by accelerating the Trans-European Networks (TENs) in three crucial sectors: transport, telecommunication and energy. Third, the Europlan should firmly invest in the ageing issue. And finally, rolling out new IT- and ICT-networks. Of course, questions can be raised. Is it a realistic plan? Will it be backed up politically? And who will pay?
The Europlan and the recapitalization of in the next two or three years will require up to a thousand times one thousand million (10 to the power of 12) euros. The member states cannot afford this. The only alternative is the international capital market through the issuing of euro-bonds. There is a great demand for such bonds. Investors worldwide now turn to the Unites States, so we are missing out on enormous sums of money. Let’s issue them quickly, to the amount of a thousand times one thousand million. Only a small share in the global bonds market, but it will enable us to let the European economy make a big leap forwards.
Politically I’m afraid that neither the Commission nor the Council could set things in motion in the next few months. For lack of spirit, for lack of back up, but mainly for lack of “sense of urgency”. I assure you – based on IMF predictions –that in two years time China, Russia, India, and the United States will have climbed out of the crisis. Whereas we, like Japan in the 1990s, will still be in the mud because we failed to take the urgent measures I sketched before.
Then there is my plea for a European army that worldwide will help to keep peace. And my plea for a European president who will be the face of the entire Union. And also my plea for a genuine minister of Foreign Affairs, representing all of us in the Security Council. Who on our behalf will defend our principles and values in tomorrow’s world. And who will be able to re-instate Europe in the role it deserves. I do not doubt that this is the future, that this is the Europe we are heading for. One question remains, however. How long must we wait? I think we need not wait all too long, for reality is bound to force us. Force us to convert reality into hope, into decisiveness, in a project of the future. This project has one name only: Europe. A forward-looking Europe, a Europe with a clear vision. A Europe of which Mandeville, Spinoza and Erasmus would be proud indeed.
