Europe’s Lost Decade

Europe’s role in world affairs over the next five years will be determined more by how it has handled the euro crisis and challenges to European integration than by its external environment or bureaucratic efforts to forge a common foreign and security policy. During the past five years, analysts have concluded that Europe faces three possible futures. The euro could collapse, Europe could take a great leap towards fiscal and political integration or the continent could ‘muddle through’. In 2012 and 2013, the verdict came in. It is very unlikely that the eurozone will collapse in the next few years and a major leap forward in integration is off the table. We are left with muddling through. But this third scenario has served as a catch-all to describe everything except collapse and unity. Very little work has been done to explore what it actually means. Muddling how? Through to what?

The term is something of a misnomer because it incorrectly suggests that Europe is making its way out of its predicament, however inefficiently. The evidence provides no such assurance. Based on current policy and its likely effects, we are looking at a lost European decade of economic stagnation – low growth, high unemployment, zombie banks and vulnerability to exogenous shocks – which will sap Europe’s strength, heighten political tensions about the future of the eurozone and European Union, and cause Europe to play a diminished role in world affairs. To escape this scenario, Europeans must dismiss muddling through as an acceptable alternative to collapse. Instead, it should be recognised for, and treated as, what it is: one of two worst-case scenarios that should be avoided, if at all possible. European policymakers must consider radical steps to escape a lost decade, and the United States should assist Europe in this endeavour.

This essay explains why the greater unification and collapse scenarios have failed to materialise, and identifies the characteristics of a prolonged period of stagnation. It considers the impact of stagnation on European integration, the implications for Europe’s global role and what must be done to escape a lost decade.

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Editor’s note: “Europe’s Lost Decade,” by Thomas Wright received the 2013 Palliser Essay Prize, an annual award in honor of Sir Michael Palliser (1922–2012), former chairman of the council and vice-president of the International Institute for Strategic Studies.