Edinburgh fiddles while Europe burns

THE Edinburgh summit faces a general crisis of Europe, a crisis that has the potential to destroy the European Community and leave Europe as a backwater of the world economy and of the world power structure. The summit leaders will not address this crisis, which they refuse to recognise. They will concentrate on what are essentially side issues.

The crisis of Europe is quite simple. The EC has lost the momentum gained by post-war recovery and the development of a single European market. Europe is now a high-cost, high-exchange-rate, high-tax, high- welfare, technologically obsolescent, partly corrupt, undynamic, low-investment, low-growth, over-regulated, high-unemployment, non-competitive economy based on a rapidly ageing population. A great gap has opened up between the growth rates of Europe and Asia, and between the technological advance of Europe and the US. The decline of Europe is already generating social and political disorder and has the potential of bringing fascist parties to power. Europe has no solution to the Serbian war.

Not surprisingly, almost all the European governments are unpopular. The Gallup poll published in last Friday's Daily Telegraph suggests that the British government is about as unpopular as any previous government ever has been, but President Francois Mitterrand and the French government manages to be even more so. Italy is in a state of political deliquescence, the Spanish government has lost the respect of its people, while Chancellor Helmut Kohl has made the gravest possible economic mistakes and is moving to the end of his period of power.

Almost all the European countries are in a cyclical depression. Britain went into depression in 1990 and has stayed there. Germany, supposed to be the locomotive of Europe, has run out of steam. German industrial production has fallen by 1.5 per cent this year and is expected to fall by a further 3 per cent in 1993. Unemployment is rising throughout the Community, and will continue to rise in 1993 and 1994. It is already above 10 per cent in Britain, France, Spain and Italy.

Yet it is not this cyclical depression that should cause the real anxiety but the long-term decline in competitiveness. The main European industries are still those that were established in the first half of the century, not those that can be expected to expand most rapidly in the next. The EC, taken as a whole, is neither high-technology, nor low-cost; it is middle-technology and high-cost. That must be a formula for economic decline.

Germany had a remarkable post- war recovery. They have a wonderful Sixties economy, with beautifully engineered motor cars, dishwashers, machine tools and telephone exchanges, and capacity in a variety of basic chemicals, many of which were discovered by 19th-century German professors. But how long will the German machine-tool industry last? What is the future of Daimler-Benz? Of course, the British respect the Germans; they made a better job of the post-war recovery than we did. But there is nothing in the German economy to alarm the Japanese, let alone to challenge the new factories of south China. Not only in Germany, but in Europe as a whole, we are failing to compete with Asian nations which are investing in advanced technologies to be worked at much lower costs.

Beyond the problems of depression and the shift of industrial growth to Asia, there is Europe's terrifying demographic crisis. We look unpleasantly like the Europe of the late Roman period. The declining population of the late Roman Empire tried to preserve a high standard of living inside its Continental frontiers, while outside the tribes were growing in number. Sooner or later the boundaries were destined to collapse. Rome, too, was over-bureaucratised, over-regulated and over-taxed.

The EC has a declining population. Only in Ireland is the birth-rate at the replacement level of 2.1 per woman. West Germany in the late Eighties had the lowest percentage of population under 15 of any state in the United Nations. Italy and Spain have a reproductive rate of 1.3, which means that their population will be starting to collapse early in the next century. Many people are so concerned about world population growth that they welcome European population decline. In fact, rapid growth and rapid decline present equally disastrous consequences and are equally hard to manage.

Europe has some of the highest welfare expenditures in the world. As the population ages, the cost of health and pensions increases. By the next century there will be an overload on all the welfare and pension systems of the EC, producing a general overload on public expenditure. Europe's overhead of non-productive people is destined to rise, while the proportion of overhead in the developing Asian economies will remain much lower than ours. Europe Inc. will look like General Motors does today. Asia Inc. will not.

How should the European leaders deal with this challenge? They must recognise it for what it is. If the Community is to be stable and prosperous in the later Nineties and next century, Europe must be a fully competitive economy. We cannot afford to operate on technologies less advanced than the American and Japanese. We must keep ahead of the developing Asian countries, whose labour costs are often only about 2 per cent of ours.

Europe cannot afford to maintain an exchange rate that gives an artificial cost advantage to the rest of the world. The German exchange rate, thanks to the Bundesbank, is now absurdly high, particularly relative to Japan, the most competitive exporter in the world.

Europe cannot afford an ever-expanding welfare system based on high taxation, high government expenditure and large public deficits. We are no longer the richest group of nations in the world, able to afford to live in the world equivalent of the Ritz. Yet that is how the European governments are handling Europe's finances.

Europe cannot afford a regulatory system that is already oppressive and made more so week by week as Brussels churns out a succession of directives. Most of Europe's photocopiers are made in Japan. They may well be the deadliest weapon of Japanese competition, since they make possible the endless repetition of regulations.

Europe cannot afford the Maastricht approach to a single currency. The exchange rate mechanism has put Europe at the head of the world's cost structures for the past 13 years, and a single currency would be calculated to push that high-cost process further. Every European nation would lose its flexibility and ability to adapt, and would have to deflate in a period of world depression in order to achieve the dubious state of high-cost grace.

Europe cannot afford to be a high- unemployment economy, wasting human resources, embittering those without jobs. The economic costs are too high, the budget costs are too high, the personal costs are too high, the political costs are too high. The fascist movements of Europe, the scowling skinheads in Germany, are recruited by unemployment as they could not be by any other appeal.

A competitive, enterprising, lightly regulated, open, low-cost Europe is conceivable. These were the targets set by the conservative movements of the Seventies in Britain and America, and partially achieved in the Eighties. They will not be the themes of Edinburgh because they are not the aims of the current European governments. So much the worse for them, and for us.