The gospel of growth has fallen into the hands of the devil
Mario Draghi’s report claims that Europe lags behind the US and China in growth rates. Should we sacrifice our quality of life to grow faster?
Dimitar Sabev, Economic Life (Bulgaria), 12 September 2024
Europe has done many things over the years in the name of economic growth. As early as the late 1950s, the northern countries adopted a policy of tolerating immigration, opening their doors to millions of workers from the South – Italy, Spain, Yugoslavia, Turkey, Africa – and their families. Serious works of economic history make the reason clear: migrants bring growth with them. And Europe wanted it.
After the early 1980s, again in the name of growth, many of the achievements of European social democracy were dismantled. By privatising infrastructure assets, disempowering trade unions and transferring public services to private contractors, the economy was ‘given a boost’ and gross domestic product grew. The effects of this growth on social harmony and quality of life are less popular.
The fall of the communist regime provided a solid free lunch. But by the turn of the century, the Old Continent was hungry again – and began to look outside its borders for growth. The waves of EU enlargement in 2004 and 2007 were not much different from providing new sources of labour and new markets for the old members. Globalisation, i.e. the outsourcing of manufacturing to regions with cheap labour and the flooding of unstrengthened economies with Western manufactured goods, combined with Western capital dictates, also played its part.
Finally, in an effort to provide cheap energy for their growth machines, European leaders have embraced, and kissed up to, all manner of resource-rich dictatorships. Russia, Libya, Azerbaijan, etc., were declared “scoundrels but ours,” and while oil, gas, and briefcases of millions moved northwestward, there was a return to the south and east of a not to say approval, but at least tacit acceptance of brutal regimes.
Why is Europe striving for growth? First, because of the great political and economic role of the European banking sector: where there is credit, there must be growth. Second, because of its more developed social policy and activism. Some say that without economic growth, i.e. sufficient profits for capital, the people of Europe will have to say goodbye to their social privileges. But there are two sides to the coin: also in order to keep people from encroaching on the profits of Big Capital, the diameter of the ‘cake’ must be constantly increased.
There is a third explanation for Europe’s growth mania. The piece of land between the Atlantic, the Mediterranean and the Arctic Ocean, propped up by Russia and Turkey, does not exist in isolation in this world. Even the United States, that European derivative and natural ally, does not want an equal competitor in the face of a united Europe. What about the Arabs, the Russians or China? In a world where everyone is rushing to grow up like a pimply pubescent, if you stand still, you look doomed.
What is the European Commission’s Green Deal, if not exactly a ‘deal’? What is at stake is that tired European industrial enterprises will be able to renew their production capacity with new investment, including public funding – perfectly legally, regardless of the restrictions on state aid imposed by the World Trade Organisation. Because the aim is noble: tackling the climate crisis and decarbonisation.
That is why green growth is talked about so assiduously, while all the warnings of the post-growth school of science, that in the living world any organism or population grows only up to a certain point, are swept under the carpet. If you want to get ahead quickly in the economics profession these days, head for “green growth.”
It is against this political and intellectual backdrop that Mario Draghi’s report on the future of European competitiveness emerged, shortly after a European election that failed for the status quo. There is a great deal of talk in this lengthy text, but the fact that the words ‘growth’ and ‘increase’ appear exactly 34 times in the 5-page preface written by Draghi himself makes it clear enough what its real purpose is.
In fact, no one is hiding this objective. The 77-year-old Draghi, who was head of the Bank of Italy for five years, served two terms as president of the European Central Bank and even spent a year and a half as Italy’s windy prime minister, states at the very beginning of his report: ‘Europe has been worried about its growth slowdown since the turn of the century… Yes, Europe’s need for growth is growing…’.
We said above that credit and economic growth are inseparable, so this view expressed by a senior banker is not surprising. But it is important to note two areas that can easily go unnoticed, where Draghi’s logic does not stand up to critical scrutiny. Equally important is how the Draghi report will be interpreted – something quite different from what is written in it.
Draghi is pouring criticism on the current situation of the European Union. The old continent has lagged far behind the US in terms of labour productivity growth – which has deprived EU households of an improvement in living standards in recent decades. At present, labour productivity in the EU was only 80% of that in the US – and in this particular example, the ‘EU’ does not mean the union of 27 countries, but only the core of 11.
The low productivity was mainly due to the EU lagging behind in digital technology – and was a major reason for the emerging gap in GDP per capita between the US and the EU. While in 2002 this gap was 15% in nominal terms and 31% in purchasing power parity terms, by 2023 it had grown to 30% in nominal terms and 34% in real terms. In other words, the US today has 34% more purchasing power per capita than the EU.
Such a gap is impressive and requires a policy response. But a closer look makes one doubt that the gap between the US and the EU is that big. Draghi himself acknowledges that inequality in the US greatly exceeds that in the EU: if 30% of income goes to the top 10% of the EU population, in the US the share is around 40%. That is, the per capita figures do not so much express a “loss of living standards for European households” as a lack of extraordinary wealth like that of Bezos and Musk. Is this really Europe’s trouble – a shortage of techno-psychopath billionaires?
Let us continue this line of reasoning with Draghi’s own arguments: he himself points out that lower inequality in the EU is accompanied by higher life expectancy and lower infant mortality compared to the US and China, as well as more robust health, education, environmental protection and public governance. Eight of the top ten countries in the rule of law rankings are in the EU.
That does not sound bad, but more importantly, these results have been achieved at the very time when both the US and China are outpacing the EU in growth rates. If growth were really so important for ‘household living standards’, both the US and China would have been moving towards European levels of social welfare over the last two decades. The reality is different: despite slower growth, Europe retains its enviable social structure, while the faster-growing US and China remain a social Wild West and Wild East respectively.
It is not growth but the institutions of society that determine the quality of life. Countless times in history, growth has detracted from household quality of life rather than enhancing it. The Odessa-born Harvard professor of economic history Alexander Gershenkron summarizes, in reference to Bulgaria: “Very high rates of growth almost inevitably require excessive sacrifices by the population.” Let us remember it.
The second area in which Draghi does not take his analysis to its logical conclusion concerns EU foreign trade. It has long been a major source of growth on the Old Continent. But times are changing and the world’s foreign economic policy is inexorably becoming a race between equals. This, in turn, will deprive European business of a number of advantages inherited from the colonial and neo-colonial period with its Third World.
The EU’s intellectual elite has not yet grasped the fact that if the EU continues to guard itself against Chinese and any other commercial penetration, it will no longer be able to rely on growth in external markets. Protecting itself from imports of cheap Chinese electric cars means less and less exports of European luxury and machinery to China. The same applies to Africa, South-East Asia, South America: if it persists in subsidising farmers and protecting car manufacturers, the EU will have to give up a significant part of its GDP from exports.
Draghi is a highly qualified and responsible professional. His report, which is technically brilliant, raises important issues of organisation and management and gives a serious impetus to the discussion on the future of the European economy. For example, Draghi develops the concept of a common, synchronised industrial policy – forgotten for decades because of the neoliberal slumber into which European nations had sunk. He again raises the issue of issuing common European financial instruments.
Defence procurement directed at European companies (one cannot help thinking of the Bulgarian case of the choice between the F-16 and the Gripen) is another mechanism that would help European innovators. Draghi points out that the so-called green transition targets are impossible to achieve without public (!) funding of hundreds of billions of euros every year – that is why the EU’s common bonds are needed.
But despite all this, which is a big step forward, Draghi remains a man of his time and a representative of his guild: a leading European banker, part of the post-war growth generation. Most of the things that Draghi recommends we do need to be done, but far from “reviving growth”, it is to preserve the quality of European life. And these are not the same things, despite the fact that the established school of economics wants to present them in exactly this way.
We come to perhaps the most fundamental point: that what the report says may be exactly the opposite of how the report will be interpreted and used. In his text, Draghi stresses that the march to higher GDP must not come at the expense of compromising the EU’s low-carbon strategy. But influential conservative readers want no such conclusion. They want proof that green policies have gone too far. They want arguments for dismantling the European social model. They want deregulation of capital. They want lower taxation and weaker labour laws.
Draghi gives them none of this in his report – but what is stopping them from taking it for themselves?
Naseem Taleb, the author of the Black Swans concept, is an over-successful writer, statistician and stock market player who can hardly be accused of naivety or eco-leftist leanings. In one of his recent tweets, with his inherent crudeness, Taleb stated, “All these dumb comments about growth don’t realize that the structural problem is the properties of the S-curve. Saying “enough” is actually healthy.”
All life is born, grows, and if lucky, reaches a phase of maturity. How is the human economy and society different? Hasn’t the pandemic taught us that we cannot escape our biological selves? Another problem: credit, by definition, necessitates economic growth. And today’s economy, especially the European economy, is steeped in debt.
Photo: (source: Cross-border Talks)
Subscribe to Cross-border Talks’ YouTube channel! Follow the project’s Facebook and Twitter page! And here are the podcast’s Telegram channel and its Substack newsletter!
Like our work? Donate to Cross-Border Talks or buy us a coffee!
About The Author
