Clifford Chance

Clifford Chance panel at Davos discusses geo-political and economic forces fundamentally changing our world

At this year's World Economic Forum meeting in Davos, Clifford Chance hosted a high-level panel discussion focusing on the challenges and opportunities facing the world as it undergoes fundamental change, driven by the response to the global financial crisis and the rise of the developing economies.

Speakers at the event, 'East v West: Re-Shaping the World', included Stephen King, HSBC Group Chief Economist and Dr. Xiang Bing, Founding Dean at the Cheung Kong Graduate School of Business, as well as Michel Petite from Clifford Chance.

Malcolm Sweeting, Clifford Chance Senior Partner and chair of the event, commented, "The position of Europe and to a lesser extent the US in a World being transformed by the rise of the developing economies is a critical areas of consideration for any organisation with international interests and features high in our discussions with clients.  It was a robust, challenging and thought provoking debate of the issues, even if there was ultimately no clear consensus."

Michel Petite, formerly a Director-General of the Legal Service of the European Commission, spoke about the major challenges facing Europe and gave his thoughts on how the current picture might evolve.  The full text of his speech is below.

"Good afternoon, Ladies and Gentlemen. 

What are the main constraints which affect Europe's place in the world? And what are the odds that Europe will overcome them?

Europe is economically suffering from two major challenges.  The first affects an element at the heart of its construction: its single currency.

From the time of its conception in 1992, it was well acknowledged that the euro was an asymmetrical construction, strongly built on the monetary side, but very thin on economics.

The case was made for stronger coordination of the economic policies of its Member participants time and again by Jacques Delors, without any  success: for political reasons.  The Member States were not ready, twenty years ago, to have any binding guidance on their economic orientation, nor to agree to any solidarity between themselves.

Thus the famous "no bail out clause" between State participants. And the system had to rely on a pretty blunt and simplistic discipline - including sanctions - over national deficits, in the hope that these sanctions would never have to be exercised.

The rest is history: the first countries to breach the deficit rule in 2003 were Germany and France, the sanctions were not imposed, and the credibility of the system had not really recovered when the banking crisis turned into the sovereign debt crisis which Europe now faces.

Its major flagship, the Euro, having been tested by the market, Europe faces a fundamental short-term challenge to restore its credibility.

Taking a step back, we can now see how this is being engineered:

• First, through a political commitment by the Euro-States to stand by the Euro at all costs; to leave no doubt about the irreversibility of the Euro; "whatever it takes", said the European Central Bank.
  
  All possible permutations of exits of one or other country from the Euro, the pros and cons of which are masterly discussed in the economic press, are rejected out of hand for the political reason that it would represent a lethal blow to the fabric of the Union.
  
• Second, by putting in place what was not acceptable in 1992: proper coordination of national economic orientations, through ex-ante scrutiny of each State's budget; and the route to solidarity between countries' finances have been found, through the creation of institutional stability funds.
  
  Typically, the "no bail out clause" of the European Union Treaty has been made more permissive, through a formal amendment to this text.

True, Europe has a pace of its own, sometimes painfully slow, and usually step by step; so the picture is not always clear. But there are (good) reasons for this:

• Political motivations, where national public opinions or national elections in any of the 17 Euro-States have to be considered, when it comes to the approval of very sensitive policies;
  
• And, legal reasons, where Treaty limitations and national Constitutions must be taken into account.

In retrospect, considering the dangerous economic backdrop which in many European places fuels populism and nationalism, what is being achieved among the Euro-States is spectacular, unthinkable as recently as a couple of years ago.

Of course, it is the crisis which forced Member States to take action. This raises a haunting question: if the crisis now progressively recedes, will the ambitious objectives that Euro-States have set themselves survive, or recede accordingly?

The other economic struggle in Europe is the lack of growth, and its corollaries in terms of employment and social sustainability. Among many parameters, one, which appears recurrently in all analyses, is the need for structural reforms of the labour market in a number of major Member States in order to regain competitiveness.

Some reforms are under way. Here also, the Union can help promote them; sometimes force them: it was striking that in the list of conditions signed by a country like Greece for its financial support, many consisted in removing obstacles to trade or opening protected professions. These were straightforward infringements of EU law, which had been there all along.

This suggests that a more aggressive policy of properly enforcing the rules on the internal market, could make a difference.

So can Europe's international trade policy.  This is being reviewed to take account of the shift towards Asia: major bilateral trade agreements have been signed or are under way with key actors in Asia and with emerging countries, with a new emphasis on access to key resources, and on indirect obstacles to trade and investments, including in relation to public procurement.

In this respect, an ambitious Transatlantic Trade agreement with the US – that is an agreement which would cover far more than just goods - could be a breakthrough event. It could provide a benchmark for many other trade agreements.

So, Europe's "soft power" still fares well in a world where power and influence is more a matter of economics than weaponry, as the BRICS, with China in the lead, show. This is probably why it makes more sense for the countries of Europe to work together, and improve their working together. This is probably also why neighbouring countries are still candidates to accession.

Could the UK de-stabilise the European Union project? Seen from the continent, it is mainly an internal problem for the UK. But concern is growing that it could get out of control, and – to quote Charles Grant from the Centre for European Reform (CER) – that the UK could "sleepwalk out of the Union".

Nobody outside UK wants the UK to leave. Apparently, it wants to stay in the single market, environment, and the Foreign and Security Policy. It has already opted out of the eurozone and the Schengen agreement. It has the right to opt out from the important and expanding area of Justice and Home Affairs. Many wonder what is left for the UK to leave.

At the same time, it is true that the increasing political and economic integration of the eurozone is altering the relationship between the 17 ins and the 10 outs, and pushing the UK to the fringes.

On the one hand, it would seem that for the UK to take the status of Norway or Switzerland is not ideal: it would have to apply internal market rules, on which it would have lost almost any say on the arrangements, and lost the capacity to enforce these rules on other Member States. On the other hand, the Union cannot accept a "pick and choose" policy of opt-ins or outs, which would open a Pandora's box for similar requests from other countries.

The UK's present questioning could be a departure from the country's centuries old policy of always having a say in the affairs of the continent.

It creates strategic uncertainty for the Union: can it have a Foreign and Security Policy without the UK? But primarily for the UK itself, as is shown by the US call for "a strong UK in a strong EU", and by the increasing concern of British business about the degree of attractiveness of the UK, outside the Union.

As you see, Europe is as usual embroiled in its own internal labyrinth of problems. That is not surprising for countries which experienced so much heavy history in their still recent pasts. Believers in Europe hope that the crisis will help achieve political integration which would have been impossible otherwise, and that the Union will re-emerge stronger on the world stage. At the same time, never will the European Union construction have been dancing so close to the edge of a cliff."