STOCKHOLM – With the United States crippled by Wall Street’s collapse, this should be Europe’s moment. Yet the European Union’s role in the world is weakening; it is listened to less today than it was 15 years ago.

As Singapore’s Kishore Mahbubani, a prominent Asian diplomat and academic, puts it, "Europeans are irrelevant to the world’s great issues, obsessed by internal process, culturally arrogant, craven in the face of the US, and blind to the rise of Asia.”

If Europe is to gain a more important role in global leadership, it must reverse its long-term economic decline. Consider the evidence of that decline:

• Ownership: After centuries in which European corporations dominated the developing world, the trend is reversing. Indian, Middle Eastern, and other investors are buying up European steel mills and carmakers. In coming years, watch out for China and Russia.

• Exchange rates: When the dollar slumped a year ago and eroded European competitiveness still further, both the European-led International Monetary Fund and the European Central Bank proved impotent.

Instead, European leaders flew cap in hand to China to ask for support. While the dollar has risen recently against the euro, Europeans did not influence this.

• Banks: When American and Swiss banks hit the wall, nobody approached Europe for support. Instead, bank leaders pleaded with the Middle East, Singapore, and China to throw a lifeline.

Once Europe’s own banks became infected, euroskeptic British leadership was needed to overcome French and German dithering. European institutions remained on the sidelines. 

Of course, Europe’s growing irrelevance is not entirely self-inflicted. Emerging-market countries have increased their share of the world economy, giving them a more important voice in international relations.

But it is not others that prevent euro-zone growth from climbing above 3%, or that are causing the EU-15’s share of the world economy to dwindle, from 19.5% of global GDP in 1994 to 16% last year.

Despite its Lisbon agenda, EU enlargement, and the coming of the euro, Europe’s overall economic performance has not improved because it has neglected many basic and everyday issues. Three examples come to mind.

First, the EU still spends far more of its resources subsidizing declining sectors than preparing for the future. Although research funding is rising, it accounts for just 4.7% of EU spending, compared to 31.7% for agriculture.

Second, Europe has failed to introduce an independent European Research Council to ensure that funding is allocated on the basis of scientific merit.

Too much of the money earmarked for research goes to prestige projects with limited or no connection to science, like Galileo or the European Institute of Technology.

Third, European resources are fragmented, and this hampers European competitiveness. The weak and diluted EU Takeover Directive, adopted after more than a decade of debate, fails to facilitate the cross-border mergers within Europe that are needed to build world champions.

And company-based social benefits in some leading European countries weaken corporate flexibility by locking in labor. Yet there are a number of areas of consensus where the EU can push ahead.

Enlargement has made far-away countries our neighbors. They need access to our markets, and we should not turn them away. We should expand the European single market in order to boost growth and avoid new divisions.

This means leveraging unglamorous tools like tariffs, industrial standards, market regulation, and cooperation in research and education in our relations with countries like Russia and Egypt, just as we have done with Norway and Switzerland.

Many citizens believe that European cooperation benefits only the privileged, and that workers and pensioners face higher taxes because cross-border integration has helped the rich find ways to avoid paying their fair share on interest and capital gains.

Common rules to eliminate cross-border tax evasion, and thus erase this perception, should become a priority. Participation in a common financial market should not be allowed for free riders who refuse to share information.

Cooperation with havens like Liechtenstein or Monaco should be ruled out unless they accept that within the common market all citizens must pay taxes where they live, according to the rules of that country.

Policy coherence within the EU must also be improved. The motivation to implement further reforms of the internal market has weakened, leading to a situation in which even decisions by EU leaders at their European Council meetings can go ignored.

Developments that are fundamental to European competitiveness, like an EU-wide patent, have proved impossible to achieve. The EU’s goal of spending 1% of GDP on research by 2010 will not be met by any member state.

Too often, special interests are allowed to overrule common European interests. Europe needs to curb subsidies for old and dying industries, and to invest the money saved in future-oriented sectors.

The last thing Europe needs is to reinforce unnecessary centralization. A dynamic and successful Europe is not a one-size-fits-all Europe, and European integration must not become a goal in itself, but a means to create sustainable prosperity.

Nor do we need cosmetic efforts to pursue EU-wide policies to combat the current crisis, when it is obvious that we have failed to act together.

Strengthening Europe means encouraging growth-enhancing policies, rather than focusing on who gets the most benefits from EU funds or institutions.

This is particularly important in the area of worker protection. Europe’s citizens are unlikely to support measures to strengthen the EU if this means that working conditions can no longer be decided locally.

Yet the European Court has fueled frustrations by undercutting local labor practices in notable recent cases concerning workers employed in Sweden and in Germany. 

Europe, to be blunt, must devote more energy in the years ahead to addressing its micro challenges rather than to promoting grand ideas. If we stick to that principle, the EU will have a much better chance of regaining global influence.

Leif Pagrotsky is a Swedish MP, vice president of Riksbank, and a former Minister of Industry and Trade and Minister of Education, Research, and Culture.

Copyright: Project Syndicate/Europe’s World, 2009.