|
|
|
|
Population (million) |
GDP US $ , trillions |
|
EU 27 |
447.0 |
16.6 |
|
Small Applicants |
23.8 |
0.2 |
|
Ukraine |
33.2 |
0.2 |
|
TOTAL |
504.0 |
17.0 |
|
Memo: |
|
|
|
Turkey |
86.3 |
1.1 |
|
UK |
68.1 |
3.3 |
|
USA |
335.1 |
26.7 |
Source: IMF (data as at 2022)
(Small Applicants: Albania, Bosnia and Herzegovina, Georgia, Kosovo, Moldova, Montenegro, North Macedonia, Serbia)
How big might the European Union be in 10 years’ time? My chart (above) is assuming that all the countries who are applicants in one form or another will be members at the end of this 10 year period.
And what you see immediately - just looking at the populations - is the sheer scale of the European Union already. If you add in all those small applicants, none of which amount to very much in terms of population except Serbia (which has very specific problems) and the Ukraine, which may have a population of 33 million at the moment – on IMF data - we'll get to get up to a potential total population of the EU in 10 years’ time of about 500 million, which is very substantially above that of the US at 335 million. (This is based on 2022 data and is not extrapolating population changes.)
I have put their Turkey as a `memo item’. Turkey, as you'll see, has a population of 86 million - compared with Germany's 84 million. If Turkey were to join, they would be the single largest number of members of the European Parliament and therefore a very significant part of the Union’s legislature. Will the population of Europe - the EU - vote for that? I'll leave you to contemplate it.
Anyway, let's go to the GDP data and think about the implications. We have already the EU 27 about 17 trillion. (These are in dollars, rather than euro.) The GDP of all the small applicants (including Ukraine) put together is, frankly, little more than a rounding error.
That may be the case now, and in 10 years’ time. But in 20 years’ time? After a couple of decades of EU membership, we may begin to see the same dynamic as happened during the accession of the Eastern European countries. They had very rapid growth. So there could be substantial growth potential for the EU from admitting these new members.
Again, I've shown Turkey - not a very large country, but quite significant. The salient point here is that the US - despite it being significantly smaller in population - is a much bigger GDP, even when you've taken in all these other countries. When you're talking about relative economic power, the US still remains the pre-eminent power.
I should just say we've talked quite a bit about Russia and Iran earlier. The Russian population is around about 140 million – though numbers vary. So that's a quarter of the potential EU population in 10 years’ time. And that's why Russia has a real problem with Western Europe. They are very small in population though a very large country with a very big area. but they're a very small population compared to the whole of the totality of Europe. And if you talk about GDP.. I haven't looked up Russian GDP as I am not sure the numbers are really worth thinking about. But the EU’s GDP will probably be 10 times that of Russia. So the ability to maintain this war footing for years on end strongly favours the EU's industrial power to produce more munitions versus the capacity of the small Russian economy.
I shall now move on to my next section: the role of the Euro. David Grace talked in his comments - and I noted it carefully - about Jean Monet’s principle of having a small, narrow joint policy in one area - and then widen it. The euro is just such an area, though there are others. But the Euro is certainly the one which has spilt over and widened dramatically – exactly as intended, as I hope to demonstrate in the next few minutes.
Internationally, the Euro still lags a long way behind the power of the US dollar. If you're talking about bond issues, dollar issuance is three times that of the EU. Very interestingly and recently, the currency developments have changed. I looked at the ECB data on this and I was really surprised to see the sudden fall off in the last couple of years of the role of the dollar. One might say a lot of countries have suddenly realised that having holding dollars puts them into the power of the American judicial/ regulatory/political system. So they may be less willing to hold dollars. Anyway, that may be something that develops over the years to come.
The other point about the international markets is to look at government bonds as they are the benchmark for bond markets. The American government bond market is about 20 trillion (in euros). We only talk about trillions in bond finance nowadays! The European government market is about 10 trillion. However, and most importantly when you're looking at the benchmark of liquidity in international markets, short-term markets are dominant. The euro area’s short-term bills are about 600 billion (or 0.6 trillion) whereas the corresponding American market is 5 trillion. So 10 times that of the euro area. That's one of the reasons why the dollar has such a lock on the global financial system. It is a problem that the EU has to address if it wishes to achieve its stated goal of boosting the international role of the euro.
The other problem that the EU has is that there's much greater bank intermediation in the financial system than there is in the US. But let's just switch now to just to Europe and look at the scale of the banking assets. They are about 40 trillion - so that's three times GDP. Those assets are financed with about 18 trillion of deposits, and the rest is bonds and equity and so on. Therefore, the deposit base - at 18 trillion - is not far off twice the size of the government bond market. When you're talking about banking union, which people talk about at great length, you're really talking about the European deposit insurance scheme - EDIS to its friends. It would finish up having an exposure - if it were to guarantee all the retail bank deposits in the eurozone – of about twice the size of the obligation of the governments.
If you were to mutualise government bonds, Germany - with a GDP of 3 trillion - is a bit hesitant to say the least, about undertaking the role of guarantor to all these financial assets. This risk is a fundamental problem for the euro and I can easily understand the German’s reticence about it. So that's all I want to say on the size of capital markets.
Now we know how big the euro is globally but how small it is relative to the dollar markets. How do you join it? Will these new countries I've talked about want to join the euro? Well, there is one thing we should be very clear about. I was on the committee which designed the changeover to the euro and we very deliberately insisted on removing all the old notes and coins and replacing them with a single new set. Once you've become a member of the euro, in practice that single money makes it virtually impossible to leave. I could enlarge on that.
The only way you can leave the euro is to leave the EU. And then you've done “Brexit”! When Brendan Donnelly talked earlier about the ratchet effect, euro membership is an example of that effect: joining the Euro is a one-way trip.
It is very noticeable that the many of the new Eastern European countries butt right up to Russia. Immediately they joined the European Union, they directed their policies to enable them to join the euro. And they did that because the Euro is a core policy of the EU. The more you become part of the core policies, the more you're integrated into Europe and thus defended against Russian influence. Not all of them have done that - we know there are a number who haven't: Bulgaria, Czech Hungary, Romania and Poland. Nor Sweden. I'm going to highlight Croatia, of course, - a new country in the EU and immediately joined the euro at the beginning of this year.
I've read a number of commentaries about how the UK could fudge this question of our own, eventual membership. I didn't think that's possible for a new member and we were really thinking about the UK `joining the EU’ – not `re-joining’ so we will have to join the euro.
The ECB and Commission are mandated to write a convergence every two on all the countries who are not part of the euro. And yet all these countries signed the Treaty which committed them to joining it when they could. The ECB report is a mere 200 pages so I didn't read all of it immediately. But it's very detailed review of the performance of each country. There are no `ifs or buts’ or woolly statements. The ECB goes through every detail. We all know the 3% deficit rule, the debt ratio must be approaching 60% of GDP; inflation must be low and there must be demonstrated currency stability. That means joining the ERM. Long term interest rates must have converged, central bank legislation must give independence and, critically, there must be sustainable convergence. Have you `converged’ on all those factors? Can you sustain it? Do you have a set of legislative instruments, and a legislature that is committed to sustaining convergence? Unless the Commission and ECB give the `thumbs up’ on all these factors, it will be very difficult for the Heads of State to admit a country. At some future stage, the UK would have to pass these tests – without an exemption.
Euro membership is an interesting question for Poland after its recent election. Will we now see the largest non-member of the euro begin to change its attitude and start trying to shape all aspects of policy with a view to joining the euro? I pose the question but I'm not going to try and answer it… not this year but maybe shortly!
So that's how to join the euro.
My next point is about the necessity of the single market in money and finance. Everyone here will probably remember Conservative UK Commissioner Lord Cockfield as the man who proposed the Single Market in 1985. I also think everyone here takes it for granted that that the basic achievement of the Single Market in 1992 was the biggest triumph of Mrs. Thatcher's European policy. There are lots of ironies here!
If you're going to have a barrier-free market for 500 million people in due course, say at the end of the 10 years, then we should be able to compete industrially with China, with America etc. This concept is nothing more than re-stating one of the founding visions of Winston Churchill. In his great speeches in the 1940s after the Second World War, he made it very clear this barrier-free market, right the way across Europe should be an essential part of the vision that created the Single Market.
Once the Customs Union had been achieved en route to the Single Market, it became clear that open markets wouldn't survive competitive devaluations. Go back to the 1980s and look at the “Snake” and all these other mechanisms that tried to keep European currencies together. But they kept moving apart and competitive devaluations were a complete threat to the existence of the Single Market.
That was the genesis of creating the euro. That's where it came from. Once you've stopped competitive devaluations, then perhaps you should move to stopping competitive financial services which offer cut-rate bank loans or giving riskier loans. Allow your banks to be riskier and boost your economy at the expense of your rivals! That's all very well but eventually you finish up with a set of risky banks. History has shown us repeatedly (and recently) that they do fail. Who will bail them out? Who will bail out the depositors? That takes us straight back to that question of €18 trillion of bank deposits in the EU.
Such questions had to be answered after the Great Financial Crash of 2007/8 – resulting in a complete reshaping and revision of the entire financial services regulatory legislation. This process is still ongoing. Just read the recent State of the Union speech by Commission President von der Leyen. She hopes to finish another 20-odd pieces of legislation within this Parliament. This is a massive integrative driving force. Make no mistake about it – the single financial market is a massive soft power and will be even more so as the Euro becomes a global currency.
I'm going to close by commenting about the greening of the EU economy. The EU’s role in taking a leading, dynamic position in this key global process is very noteworthy. The EU began to develop a plan to do this in 2018 and the current Commission has taken that forward. The EU set about a very `root and branch’ process by saying that companies are going to have to report their sustainability footprint. Then investors the equities who buy their equity or bonds, and the banks who lend to these companies will have to take account of their sustainability footprint. The banks must answer the question: Is it green lending or not? The plan is to put the squeeze on the supply of finance to non-green entities from both sides of their financing. On the other hand, financing green activities becomes easier!
To me, this is a very sound approach. Two weeks ago, yes, two weeks ago, Commissioner McGuinness told the European Parliament (roughly) “right we/you have now just passed the green bond standard. That completes this phase of our green legislative agenda. What next?” As an aside for Brexit: We – the UK - said we're going to be a global leader in green finance and, next year, we hope to have a consultation on `it’. But the EU has already done `it’ and put `it’ into practice.
With that, thank you for your attention.
*****