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Globalisation: Ultimate Consequences for Europe

June 28, 2007

Anförande vid European Business Leaders' Convention i Helsingfors, Finland

 

The first wave of globalization - the one that ended in 1914 - had a distinctly European face. Britain ruled the waves, railroads conquered new continents and the telegraph seemed to create the ultimate interconnected world.

 

The second wave of globalization - that took its true beginning in 1945 - has an equally distinctive American face. And to a very large extent it isin a world economy dominated by this second wave that we are still living. The era from the T-Ford to the iPod.

 

But now it's the third wave - and increasingly we will see that it has an Asian face.

 

To a very large extent this is the story of the return of Asia.

 

We often forget that for a thousand of years or so before the Europeans in earnest started to burst onto the global stage in the early 19th century, approximately three fifths of the global economy was in Asia. It didn't really interact with the rest of the world - buts till it was there.

 

And now it is coming back. The rapid increase in the production of goods in China and the production of services in India are transforming the global economy. And this comes after the rise of Japan and of Korea.

 

Asia declined to a fifth of the global economy at the middle of the 20th century. It's now back to two fifths. And we can already look forward to it coming back to the three fifths were it all started.

 

This third wave of globalization is the result of the combination of profound political changes in combination with the profound revolution in science and technology that we are witnessing.

 

In political terms, it started in China in 1978 when we saw the de facto collapse of collectivized agriculture in China, continued in 1989 as we saw the collapse of the socialist system and the Soviet empire over half of Europe and gained further momentum with the reforms after the 1991 collapse of the paleosocialist policies of India.

 

Each of these cases initiated an increasingly radical new policy approach.

 

As a consequence, we now have the 40% of the population of the world that were previously isolated entering the global system of production and consumption.

 

It's a process which is gathering speed by the day and which, at the end of the day, will change almost everything almost everywhere.

 

If you add it up it means that approximately 1,5 billion people are entering the global workforce. This is roughly the same number as would have been the number of the total global workforce now had not the changes occurred in China, Russia and India.

 

It's not happening overnight. But if we assume that only 10% of them have by now been able to fully enter the global workforce, it's still a number that is approximately equal to the entire workforce of the United States.

 

Any day now, we will have half of global production coming from what we refer to as emerging economies. And suddenly, we are seeing companies from these countries starting to appear among the Fortune 500 - previously reserved for only Americans, Europeans and Japanese.

 

And the changes are perhaps even more dramatic on the consumption side.

 

Within a decade it is a reasonable assumption that approximately 80% of the global middle class will live in the countries we previously called developing. It's the new global middle class fromShanghai to Sao Paulo that will drive the new consumption patterns.

 

It's a new global economy - indeed it's a new world - that is emerging as this the third wave of globalization continues to accelerate.

 

So how is Europe doing in this rapidly emerging new world?

 

Well, if you listen to voices on the other side of the Atlantic it's all rather miserable. One often hears that Europe has too few babies and too many Muslims and that decline is unavoidable.

 

While it is true that our demography is a different one from the United States, and that the Muslim world and all its convulsions is our neighbor not only on the map but increasingly also across the street, I would argue that the picture isn't necessarily that bleak.

 

There is little doubt that globalization is one of the truly defining features of our times. But it's not any globalization. For most of the last part of the last century, the economies of Europe were catching up with the US economy.

 

It's really during the last two decades - and most clearly during the last one - that we have been losing ground versus the US economy. The reasons are by now rather clear. And I would say that there are two main reasons for this.

 

The first is that the US has a more flexible economy with a higher degree of competition and a greater readiness to change.

 

The second is that the US has been investing more in the new technologies, primarily then in the ICT sector.

 

And it's really the combination of these two factors that have made the difference.

 

The figures are indeed striking. While the US has invested approximately 4% of its GDP in the ICT sector during the last decade, the corresponding figure for the European economies is little more than 2%.

 

As a consequence, we have seen an increasing gap in labour productivity between the US and the European economies. And it is telling that this has been particularly pronounced in sectors where the US economy is more open to change and innovation that the European ones have been - whole sale, retail, the financial and service sectors.

 

This is the story up until now. But I would argue that we are beginning to see a change. And I would argue that we could do even better in the years to come - given the right policies.

 

Globalization is a new golden opportunity for Europe.

 

Across the European debate, you occasionally find a somewhat defensive attitude to globalization. But if you look at more fundamental factors you might argue that it is we Europeans that have been and remain the ultimate globalizers.

 

The modern history of Europe is the history of innovation, creativity, discovery and taking risks. While other civilizations often were inward-looking and static, the different powers of Europe time after time reached out to and sought to shape the outside world - from Alexander the Great over the Vikings to the Dutch, English and Scottish seafarers that ruled the waves, the shores and the ports of the world.

 

There has never been a Fortress Europe.

 

In fact, we are doing rather well in this new phase of globalization. If you look at export figures, and market shares, it turns out not only that Europe has been holding its ground during this period, but that we have in fact increased our market share marginally.

 

If the European Union today has a share of global exports around 19%, the corresponding figure of the United Statesis only marginally above 10%.

 

Today - as we have the largest integrated economy in the world - we are the world's by far largest traders - larger than the number two and the number three taken together.

 

Recently, we have seen economic figures improving somewhat across Europe. Up here in the Baltic area - the Top of Europe - we have bee doing remarkably well for years due not the least to the political changes of the 1990's. But now we see figures improving also in other economies.

 

Economists still differ on the causes and consequences, but for me it israther obvious that we are beginning to see the results of the transformation primarily of the corporate sector that is the result of the very marked increase in competitive pressures coming both from globalization and the enlargement of the European Union.

 

Enlargement is creating a new European economy. And firms are grasping its opportunities fast.

 

The world-wide R&D centre of Skype -world leader in VOIP - is located in Tallinn. Electrolux - world leader in white wares - is hardly exporting anything from Sweden any longer, but produces 5% of the industrial exports of Hungary. Slovakia is now producing more modern cars per capita than any other country in the world.

 

In recent years, direct investment flows from the old Europe of the 15 have been more than four times as high to the new Europe of the 10 as they have been to China and nearly 20 times as high asto India.

 

Be it in the shops and restaurants of London, in the car industries in Germany and France, in the banks of Italy or Austria, or in the telecommunications board rooms of Sweden or the United Kingdom - it's obvious that it is the opportunities of the new East that is the new reality, challenge and opportunity.

 

We are only in the beginning of this. You need fantasy more than classical forecasting to imagine where we are heading in the coming decades.

 

The Baltic countries are registering nearly Chinese-level growth rates, and will, on these trends, have climbed from Soviet poverty to European prosperity well within a generation.

 

And down by the Bosporus, Turkey has opened up its economy faster than almost any other country in the last two decades, and is now establishing itself as a new economic titan of the Southeast with growth rates that I believe will be above those of Russia during the coming decade.

 

And further to the East we find a Ukraine that - if it truly goes down the path of reform during the next decade or so - will have good possibilities of establishing itself as a manufacturing center to rival those of Asia.

 

Where Russia is heading remains to be seen. Recent trends towards increasing and arbitrary state control are certainly not encouraging, and will certainly slow down the transformation of the country's economy. But there is also an entrepreneurial talent in Russia that we must hope will be able to assert itself more in the years to come - in politics as well as in business.

 

Overall, what we are seeing is a new pattern, where instead of manufacturing moving to the East of Asia, we now have the possibility of manufacturing being integrated between the different parts of Europe in a pattern that is as new as it might be globally competitive.

 

It's a pattern we are also seeing in Asia and across the Pacific. On the back of my new iPod I can read that it is "designed in California and assembled in China".

 

The factories are in China, thus providing much needed employment opportunities there, but there is no doubt where Apple is creating the most value, and where accordingly also indirectly most of the jobs are created.

 

That's the way we'll see it here in Europe as well: designed in Sweden and manufactured in Serbia, designed in Estonia and manufactured in Ukraine.

 

It is imperative that we continue to deepen and widen the integrated European economy, thus increasing the pressure for change, and thus also increasing the global competitiveness of our economy.

 

This entails a further enlargement of the Union. After the 100 million people from Sofia to Tallinn, the next step should be the 100 million people of Southeastern Europe - the Western Balkans and Turkey. And in the longer perspective we must keep the door open to Ukraine.

 

Together, we are talking about approximately 150 million people - increasing the economic dynamism and political weight of the Union in the global economy and the international political system even further.

 

Apart from continuing to deepen and widen the single market, we clearly need a new commitment to the development of our human capital. It's been the innovative minds that have been Europe's greatest asset in the past - and this will be the case even more in the global economy of tomorrow.

 

Here we are clearly not doing enough - be that in basic education, in university education or in the resources that we are prepared to spend on R&D.

 

Not only in the United States, but also in Korea, approximately 30% of young people have a university education, while the corresponding figure for the European Union is 18%.

 

There are differences across the Union. Finland continues to score at the very top when it comes to what it manages to achieve with its education system, and that in spite of spending less than some other countries do. The United Kingdom continues to have two universities that are ranked among the top ten in the world. And a country like Sweden continues to look good when you look at the tables for spending on R&D.

 

But overall, it is very obvious that we have to do more.

 

The United States spends two to three times as much per student in its university system, and although money isn't everything it is obvious that it is something when it comes to attracting the best minds and the most talented brains of the world.

 

It is a striking fact that close to 40% of the scientists and engineers in the United States having doctorates are born abroad. The success of the United States is to a large extent the success of mobilizing a talent base well beyond its boundaries, also that of Europe.

 

But looking ahead we should note that our talent base is potentially much larger than that of the United States.

 

The population of the European Union will be more than twice as large. And although we clearly need to do more to improve our primary and secondary education it is obvious that we tend to do better here than they do over there.

 

This also applies to the new member states. As a matter of fact, they have a base in basic science, engineering and mathematics in their education systems often superior to what we used to have in the West of Europe.

 

I was asked to describe the "ultimate consequences" of globalization for Europe.

 

But since I don't really see any end to the accelerating globalization, I fail to see any ultimate consequences.

 

And I would argue that we should not see globalization as something that just has consequences - as if we were just the passive bystanders, waiting for things to happen.

 

As I have argued, we Europeans are the original globalizers, and our task today is to use all the new opportunities that it creates.

 

The record of Europe so far in this accelerating third phase of globalisation is somewhat better than for what we are credited. We are by far the world's leading exporter, trader and investor. We have the most open economies that you can find anywhere.

 

And if we continue as I have indicated - open up and broaden our economies, increase our investment in our human capital -most other things could well be in our long - term favour.

 

Demographic challenges will hit every part of the world -we are just among the early ones.

 

The interaction with the Muslim world might well overtime become a major new source of creativity.

 

And the fact that we are giving the world a new model of how old nations are working together, sharing sovereignty and opening up their societies might not be that bad either.

 

We have a global Europe - and a globally even more successful Europe is certainly within reach.

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