The Dangers of Western Complacency

Russia’s invasion of Ukraine has revived the Western alliance. After years of drift and self-doubt, the West has been reminded of its historic and institutional uniqueness by seeing the contrast between the atavistic revanchism of Vladimir Putin and the heroism of Ukraine’s defenders. Once again, our collective purpose looms large in minds of Western policymakers and citizens, shaken by images of Russian atrocities. It is the responsibility of the collective West to defend the institutions and ideas underpinning our societies against threats coming from the world’s autocrats.

However, there is a wrinkle in this story of Western renewal. Our ability to succeed, by projecting hard and soft power and by improving our resilience against autocratic aggression, requires economic resources. Yet, America is a low-growth region, and Europe even more so. Between 2000 and 2019, annual economic growth in the European Union averaged a miserable 1.4 percent. In Italy, real per capita incomes are lower today than they were in the mid-2000s. Public debt has soared, hovering at just below 100 percent of GDP in both Europe and the United States compared to 45 percent in China and less than 20 percent in Russia.

This problem is not a new one. Western economies have been on a path of relative—and in some cases absolute—economic decline for decades. Despite its successive enlargements, the relative weight of the European Union in the global economy has fallen from a peak of around 25 percent of the world’s real economic output in the early 1990s to less than 15 percent at the present time. The US share of the global real output has followed a downward path from a peak in the late 1990s. By 2050, some forecasts suggest, China will command roughly the same share of the world output as the EU and the US combined.

On metrics of entrepreneurial churn and dynamism, Europe in particular is slipping behind. In 2021, the EU was home to merely 40 “unicorns”—private companies worth more than $1 billion—valued jointly at $78 billion. In comparison, the joint valuation of the 19 unicorns hailing just from South Korea, Singapore, and Indonesia was $76 billion. And whereas six unicorns grew in Indonesia, none of them did in Italy, the EU’s third largest economy.

Economic dynamism matters. Effective, combat-ready militaries are expensive and hard to sustain in democratic societies that are not at war. The vows of European leaders to increase defense spending above a fixed fraction of GDP—say two percent—are less meaningful if Europe’s real economic output continues to be stagnant or shrinks. The Biden administration’s proposed Pentagon budget—set at $773 billion, or just below four percent of US GDP—seems enormous but may still be inadequate relative to the security challenges America is likely to face in the coming years.

If it is going to succeed in its competition with Russia and China, the West urgently needs a strategy to restore its own economic dynamism and raise the long-term path of its productivity and economic growth. That strategy starts at home. After all, that is precisely what has made the West a success to begin with. The Industrial Revolution and the hockey stick-like explosion in economic output which started first in England and northwestern Europe, and later spread to America and other Western offshoots, resulted from a specific mix of institutions, ideas, and culture that favored experimentation, innovation, and entrepreneurship.

Since at least the 1970s, however, the same economies have experienced a slowdown in productivity rates, translated into lower income growth. At least some of the reasons for this sclerosis have to do with the growth of regulatory burden across Western economies, entrenchment of interest groups preventing entry into certain industries, and the proliferation of new barriers to economic mobility.

Europeans already recognized the problem in 2000, when the Lisbon Strategy sought to turn the European Union by 2010 into “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.” Alas, by 2010, per capita incomes in the EU, expressed in purchasing power parity terms, lagged a good third behind those in the United States.

Similarly, the bloc’s spending on R&D barely budged. Today, there is still an annual 110-billion euro shortfall to reach the Lisbon Strategy target for R&D spending. Higher education is a mess, too. Since the UK left the EU, there is no university from the EU in rankings of the top-25 universities in the world. Among the top 50 universities in the world, there are seven times as many universities in Asia than in the EU. Big economies like Germany are struggling to attract computer and AI engineers. In the early 1990s, the European Commission successfully wrestled member states—including large ones such as Italy or France—into an economic opening up, privatization, and end to wasteful forms of state aid to domestic companies. Since then, progress has stalled and to this day the EU lacks a functioning internal market in services.

Memory-holed by European institutions, the Lisbon Strategy itself was superseded in the 2010s by a less ambitious competitiveness agenda: Europe 2020. Today, the bloc finds itself without any explicit pro-growth agenda at all, having subsumed all questions of economic dynamism to its decarbonization and greening agenda. Although tackling climate change is a worthy goal, simply wishing that a reducing fossil fuel consumption will automatically create new economic opportunities and additional employment and raise productivity rates does not make it so.

Structural barriers to economic growth vary from country to country. In the United Kingdom, outside of the EU, drastic land use restrictions limit the growth of cities and the entry of new firms onto the market, and effectively price low-income populations out of areas of economic opportunity. In the United States, as the Biden administration is learning the hard way, it is extremely costly to build (or repair) American infrastructure. In per mile terms, it is five times as expensive to extend an existing subway line in New York City than it is in Paris. The reasons are manifold, but they include the National Environmental Protection Act, which has dramatically increased the number of veto points in a position to stop new infrastructure projects, with few gains in environmental quality.

Add to this overly restrictive immigration policies that stop talent from coming to America and Europe. The West, after all, is still the best place to live. Yet, under rules prevailing in the United States and elsewhere, there is no automatic prospect for foreign graduates of elite universities to be able to stay and build their lives in the country, creating a perverse situation in which the West actively trains the elites of countries that we are competing against.

There is an international dimension to the problem, too. The West that matters is not a geographic entity. Rather, it is a set of ideas and institutions—a combination of democracy, effective checks and balances, protections of human rights, and a market economy with stable property rights and social safety nets. It is, to use terms coined by economists Daron Acemoglu and James Robinson, a collection of societies—from Canada through much of Europe to Pacific economies like Taiwan or Japan—governed by inclusive political and economic institutions.

In our competition with autocratic regimes, it should be a priority that such inclusive institutions extend beyond the historic strongholds of America and Europe. Not only should we be reforming multilateral trade rules to make sure our domestic institutions—or rules of the game—are protected, but we should be working hard to bring new allies and partners closer together through new trade pacts. Yet, such efforts are conspicuously absent in current thinking about trade in Brussels and Washington which is dominated by the narcissism of small differences.

Under the banners of “technological sovereignty” and “economic autonomy,” the EU is pursuing policies to decouple itself from the world economy—including from friendly allied economies. The EU’s new digital regulations damage the continent’s economic relation to America. The bloc’s carbon border adjustment mechanism (CBAM) will hurt trade with allies such as Turkey, Ukraine, and the United States. New trade agreements, such as the completed deal with Mercosur—an important partner region in the new geopolitics of trade—have been kicked into the long grass because of opposition from Paris and Vienna.

Likewise, the Biden administration’s agenda of a “middle-class foreign policy” remains disappointingly parochial. Under Trump, the United States withdrew from international trade negotiations with allies and partner countries, and it has not yet returned. Understandably, both the Trump and the Biden administrations have wanted to stand up to China and can find new partners in that quest both in Europe and in the Indo-Pacific. But that is no excuse for hitting your partners with new tariffs or for abandoning promising trade talks with allies. Nor is it an excuse for the country’s negligent approach to the World Trade Organisation, which does need reform but will continue to play an important role.

The neglect of economic partnerships that could deepen and widen the West undercuts the rising imperative of “decoupling”—be it to address our dependence on Russian energy or from technological and other vulnerabilities related to our reliance on Chinese manufacturing. Decoupling does carry economic costs. If Western economic nationalism becomes the relevant alternative to the status quo, our incomes, economic power, and eventually our technological and military edge are bound to suffer.

Russia’s war against Ukraine has awakened the West from its torpor but is not a reason for self-congratulation. The challenge is to use political leadership to harness the momentum and translate it into overdue change in our domestic and international policies that can help us succeed in the long game: defeating our autocratic adversaries through the forces of economic openness, embrace of technological change, and competition of ideas. We are not there yet.