Those of us concerned with international trends have long become accustomed to being alert to political risk in Latin America, or in Africa, or in the Far East. But the time has come to start paying more attention to a part of the world that has been widely regarded as “safe,” where multinationals are used to operating in a relatively benign environment, namely the European Union. This is not to say that the EU is about to fall apart. But since the Maastricht Treaty the forces clawing at the fabric of its cohesion have never been quite as malignant as now. And history has a confounded habit of turning what used to be looked at as impossible into something merely improbable, which then becomes unlikely and finally winds up as an accomplished fact.
Waves Made By Brexit
To begin with, the continuing influence of Britain’s vote to leave the Union should not be underrated. It has made the issue of Irish reunification once again a subject of political debate, given that Northern Ireland, which is the only part of the U.K. to share a land border with the rest of the EU, will face serious economic and social challenges as a result of Brexit. At the very least, the development may bring the day closer on which the referendum is held that is provided for in the 1998 Good Friday Agreement. Plebiscites have their own dynamic. And the impending negotiations between Whitehall and Brussels could also raise bitter antagonisms within the EU between hardliners who want to make Brexit as painful as possible for the British and those who think that accommodation is a wiser and for both sides more beneficial course to choose.
As matters stand, the bloc may not be exactly “on the brink of a popular revolt,” as Slovakia’s Prime Minister Robert Fico puts it. But under the influence of populist parties, which have been on the rise from Poland to Austria and even Germany, Eurosceptic language has been creeping into the pronouncements of mainstream parties. And if today referenda were held in all the Union’s member countries, the odds are that several would follow the British example and vote for opting out.
The Refugee Crisis
The reasons are manifold. Worries about the non-ending refugee crisis are certainly high on the list. Voters across Europe have been voicing fears of crime, cultural change and unbearable burdens on their social services caused by the tide of refugees from Syria, Iraq, Afghanistan and the Maghreb and Sahel countries of Africa. In the East of the EU this has given wings to ethnic nationalists who have never been quite comfortable with the idea of liberal democracy. In the West it has boosted such anti-immigrant groups as the Freedom Party in Austria, Marine Le Pen’s National Front in France, and the Alternative Fuer Deutschland in Germany.
To underscore the seriousness of the matter and the intensity of the emotions stirred up: Just this month Luxembourg’s Foreign Minister Jean Asselborn insisted that Hungary should be “excluded temporarily or, if need be, forever” from the EU because its government has been building fences along its Southern border to gain at least a measure of control over the migration problem. Chancellor “Mutti” Merkel is paying heavily in Germany’s political arena, even within her own party, for the strong pro-refugee stance she has been taking. Clearly, the recent terrorist attacks have had an impact. Even so, people might be a bit more inclined to welcome immigrants if Europe’s economy made better progress. But real GDP across the bloc dipped in the second quarter after an uptick in the first, and growth will continue to leave much to be desired in the year ahead.
There is also a world-wide trend against globalization to be considered, which today is stronger than I have ever seen it in my lifetime. The ambitious Transatlantic Trade and Investment Partnership (TTIP), on which US and EU negotiators once hoped to conclude talks before the end of President Obama’s term, is likely to be an early victim of the mushrooming discontent with trade liberalization. Increasingly intense protectionism on both sides has given rise to myths that many take as hard truths. One such claim is that the deal would force EU governments to privatize public services. Another holds that it would fatally weaken EU environmental standards, while still another insists that it would kill off the European movie and other creative industries.
Not to be forgotten is that the European administration in Brussels has expanded explosively and is today widely regarded as an agglomeration of elitist bureaucrats who live high on the hog, are increasingly corrupt and have not the faintest understanding for the needs of the people they purport to govern. Aloof and disconnected they hand down one-size-fits-all rules to nation states with very different notions of local and European interests. National politicians ignore this schism at their risk. Mostly they choose not to do so, not with The Netherlands, Germany and France going to the polls next year.
Hard Tasks Ahead
The coming year will be particularly critical since there are several areas where leaders will have to decide whether they want to push for more or less integration. This will be clearly visible in the field of finance. In order to step up its efforts to forge a common EU capital market, Brussels will have to stick its fingers into highly sensitive areas such as national tax and insolvency laws. At the outset of this year, moreover, new EU rules came into force that not just enable but impel national financial authorities to deal with failing banks without heaping the cost on the shoulders of taxpayers. A Single Resolution Mechanism has been fashioned, on the heels of a major expansion of the European Central Bank’s powers to let it supervise all 5,500 Eurozone banks. But this created a stool with two legs.
It does need a third leg in the form of a common deposit insurance scheme, against which there is intense resistance in, for instance, Germany. Without this third leg, the Single Resolution Board will be a wobbly affair, especially in confrontations with countries where a large number of mom-and-pop investors stand to get hurt, as in Italy. Technically, one would have to assume that this and other complications, e.g., disparate bankruptcy laws, point to a need for more integration, at least for the members of the Eurozone, who share a currency. But this is easier said than done. It seems to go well beyond the boundaries of what is achievable in today’s political climate. Jean-Claude Juncker, the European Commission President, minced no words in his annual state of the union message when he complained bitterly that the bloc was in an “existential crisis.”
“Never before,” he said, have I seen such little common ground between our member states. So few areas where they agree to work together... Never before have I seen national governments so weakened by the forces of populism and paralyzed by the risk of defeat in the next election.” Indeed, not more than two decades ago Europe was a place of hope and great expectations. The Soviet Union had just caved in, the Berlin wall had been torn down, a peaceful divorce had separated the Czech Republic and Slovakia, there was tangible enthusiasm for the concepts of liberal democracy and market economy, and the EU was expanding.
What a contrast with today, as the EU is still struggling with an unresolved financial crisis, an unfinished monetary and banking union, negative real interest rates, sluggish investment, growing imbalances, falling real incomes in parts of the Union and a current-account BoP surplus being racked up by Germany tantamount to 9% of GDP. No wonder populists have a field day pushing nationalism, anti-globalization and xenophobia.
Most who take an objective view will agree that the EU needs more integration (albeit under better leadership) to make the Eurozone work. They also know that the moment of truth is no further away than the next banking crisis, which may well show that the Italian system is too big to fail, but also too big to rescue. Meanwhile, Premier Matteo Renzi has threatened to resign if he loses a constitutional referendum in December, creating political upheaval just as the Italian banking system is at its most vulnerable. And Angela Merkel, the Iron Lady of European politics, will continue to be hurt badly by her unpopular immigration policy.
This constellation will have unpredictable consequences. Two things can be said with near-certainty, though. One: The EU will make no real progress in any of the problem areas until after next year’s French and German elections. And two: Whatever happens then will have far-reaching economic and legal implications; EU countries now require much closer monitoring than they have been getting.