Much ink has been spilled on the future of the U.S.-European Union relationship after the electoral successes of the “isolationist” Republicans and the anti-Iraq intervention German Chancellor Gerhard Schroeder, but developments elsewhere are increasingly raising the question: On a 20 year view, does Europe really matter any more?

Two factors suggest that Europe will be relatively much less important in 2025 than it is today, to which fact policymakers had better start accustoming themselves. First, European economic growth per capita is relatively slow, slower than that in the United States and far slower than that in most of Asia. Second, demographic trends for Europe are exceptionally unfavorable, so that in 2025 European population will be both heavily weighted towards the old and unproductive, and a considerably smaller share of the world total than it is today.

There are three elements in determining what share an economy has in the world’s production. First, its population — if this is increasing by say 2 percent per annum, and the economy is healthy and not banging up against bottlenecks, the economy can be expected to grow in importance. Crucially, if population is declining, as, most spectacularly, is Russia’s, then the economy can be expected to decline as a proportion of a growing world.

In this area, Europe’s future is gloomy; between 2000 and 2025, Germany’s problem is projected by the United Nations to decline by 3.8 percent, Italy’s by 9.0 percent, Spain’s by 6.2 percent and even new entrant Poland’s by 3.6 percent, while only France and the United Kingdom of the major countries show growth, by 5.7 percent and 3.1 percent respectively. Compare that to the United Nation’s projection for U.S. population growth of 22.7 percent over the same period, or indeed China’s growth projection of 15.4 percent or India’s of 35.0 percent, both of course from a vastly larger base.

Second, the economy’s growth rate per capita is of crucial importance. Here again, Europe lags behind; the rate of productivity growth (which drives per capita gross domestic product growth) in the major European economies has consistently lagged behind that of the United States in the past two decades. Even during the boom period of 1995-2001, labor productivity growth in the EU averaged 1.3 percent per annum, compared to 2.5 percent in the United States, according to EU statistics.

There are a number of factors that contribute to this lag in EU productivity growth, among the most important of which are of course excessive unionization, the difficulties of entrepreneurship, and the inexorable growth of the public sector. However, over the 2000-2025 period, which will include what is likely to be a lengthy current downturn, it is reasonable at most to expect productivity growth of 1.3 percent per annum in the EU, compared to 2.0 percent in the United States. In India, on the other hand, productivity is currently growing at more than 4 percent per annum, and in China (on admittedly doubtful figures) allegedly at close to 7 percent per annum. Other Asian countries, too, have high rates of productivity growth; Japan’s over the 1990-2000 decade was more than 3 percent per annum, South Korea’s close to 5 percent.

The third factor affecting growth trends is the rising of wealth in poor countries and consequent shrinking of the gap between such countries’ actual gross domestic product and purchasing power parity, or PPP, GDP. In general, poor countries have very much higher PPP GDPs than their actual GDPs. This is because domestic goods and services, requiring large amounts of low cost domestic labor and few foreign inputs, are generally extremely cheap in such countries compared to their cost in wealthier countries (having bought opera tickets in Sofia, Bulgaria for 50 cents each in the early ’90s, I can vouch for the reality of this effect.) This gap narrows as the countries become richer, and as the openness to international trade increases, both for the country as a whole and, especially, for its remoter, more rural areas.

Currently, for example, China’s GDP, at $1.06 trillion in 2000, is little over a fifth of its PPP GDP of $4.95 trillion, while India’s GDP of $454.8 billion is less than a fifth of its PPP GDP of $2.38 trillion.

The actual GDP figures are more relevant in international comparisons, because they express a country’s purchasing power in terms of international goods, and its ability to service foreign debt. However, as the country gets richer, its exchange rate will tend to appreciate in real terms, so that its GDP in dollar terms will appreciate more rapidly than its real GDP, approaching more closely to its PPP GDP. To see how great the effect might be, one can look at middle-income emerging markets, such as Malaysia, where the ratio between actual and PPP GDP was 2.6 times in 2000, South Korea, where it was 1.9 times, and Brazil, where it was 2.0 times. If China and India become relatively wealthier in the next 20 years, therefore, we can expect their ratio of PPP GDP to actual GDP to have shrunk considerably, perhaps to 2.0 times in the case of China and 2.5 times in the case of India.

Such a comparison, of course depends on the emerging markets of China and India continuing to emerge. There are a number of factors that might prevent them from doing so. In India, conflict with Pakistan, widespread unrest, or the return to power of the irredeemably statist Congress Party are all potential risks to continuing progress.

In China, I have stated repeatedly that I do not believe their official statistics, and that their banking system is a huge morass of bad debts that must someday cause a gigantic crisis as domestic savings are expropriated by the banking system (as happened in Argentina, albeit for somewhat different reasons.)

However, the instruction by retiring President Jiang Zemin to last weekend’s party Congress that private property is to be given equal constitutional status to state property is enormously important. At some stage, China ceases to be a Communist country experimenting with private property and becomes, like most emerging markets, a primarily private enterprise system held back by an overlarge and corrupt state. Once that point has been reached — and this decision, if implemented, may mark the “tipping point” in this respect — then ensuring further economic growth becomes simply a matter of reforming corruption and dismantling the state sector which, with stable and competent government, should not be too difficult.

Assume, then that China and India both grow at close to their potential between now and 2025, without more than temporary crises, i.e. 4 percent productivity growth per annum in India and say 5 percent in China. In that case, the geopolitical map of 2025, when economic strength is (very roughly) considered, looks very different from today.

The United States, today 31 percent of actual gross world product, will in 2025 represent 27.3 percent — a modest decline in relative importance. However Europe (including the 2004 and likely 2007 accession countries, but not Turkey or Russia) today 28.2 percent of GWP, a little less than the United States, will represent 17.3 percent. Growing shares of GWP will accrue to India, today 1.4 percent, which will represent 4.8 percent, China, today 3.4 percent, which will represent 13.7 percent and East Asia/Australasia, including Japan, today 19.6 percent, which will represent 22.8 percent.

East Asia, today only two-thirds as important as Europe, will be 20 percent more important.

India, today only 5 percent as important as Europe, will be 28 percent as important, and growing rapidly.

China, today 12 percent as important as Europe, will be 80 percent as important, and also growing rapidly.

East Asia, India and China are today together 14 percent less important economically than Europe alone. In 2025 they will be 140 percent more important, with their domination increasing yearly.

This is a staggering change, whose implications are by no means fully taken into account in anybody’s foreign policy. It does however explain some of the more puzzling features of recent European policy.

Schroeder’s refusal to back U.S. policy on Iraq becomes explicable as a natural reluctance of a decreasingly important country to exercise its muscle on the world stage. Former French President (and EU constitutional convention chairman) Valery Giscard D’Estaing’s outburst against potential Turkish membership of the EU becomes explicable, as a wish to keep the EU religiously homogenous in a powerful and potentially hostile world. EU protectionism and bureaucratic obstruction become signs of weakness and self-doubt, not strength and self-confidence.

For those outside the EU bureaucracy, there are also some implications of this. For Britain, the EU in future may be a less attractive club than North American Free Trade Agreement, or even than complete independence — why link oneself inextricably to decline?

For the United States, the Chinese, Indian and East Asian relationships are the ones to cultivate; they will be increasingly important in future.

For Turkey, becoming an Asian powerhouse, and intensifying links to India, China and the more successful Islamic countries, makes far more sense than trying to join a club that doesn’t want you.

For young Chinese, Indian and East Asian immigrants, or potential immigrants to the West — better stay home; over your 40-year career you may well make more money there.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.