A continent on the brink

Published in Newsroom Pro (Wellington), 18 December 2018

After the tumultuous years of the Euro crisis (2010–15), Europe seemed to have returned to more normal conditions. Gone were the riots in Athens, the stock market rollercoasters and the immediate threat of monetary union collapse.

But the calm after the storm is turning out to be more like an interlude before an even bigger storm. No matter where you look, there are signs of trouble to come. Let’s look at some.

The biggest cause for concern, at least in the short term, is Brexit. British Prime Minister Theresa May and the European Commission have turned the United Kingdom’s exit from the European Union into a maze without an escape path.

Brexit has become such a complicated mess that you would have to be foolhardy to try a forecast. If May receives a few serious concessions from Brussels (unlikely), she might get the withdrawal agreement through Parliament after all (more unlikely). If she fails in Parliament (likely), the Labour opposition might move a no-confidence vote (likely) which May could well lose (possible). We could then see an election (speculative) and the election of Jeremy Corbyn as Britain’s next socialist Prime Minister (who knows?).

Alternatively, a second Brexit referendum might be called (unlikely) the outcome of which would be unpredictable.

Besides causing political headaches, the Brexit chaos will have economic implications. Britain crashing out of the EU on 29 March would lead to short-term disruptions. But any adjustments between Britain and the EU on WTO rules would take time and could disrupt European supply chains for weeks and months.

Trouble across the channel

While all eyes are on Britain, the rest of the European Union is not without its miseries. Over the past weeks, French President Emmanuel Macron went from saviour to mere mortal in a transition that has now become the new normal for French presidents.

Both of Macron’s predecessors had started with the exact same promises of reviving the French economy, albeit from opposite ends of the political spectrum. The conservative Nicolas Sarkozy (2007–12) ran into trouble when he reformed the country’s pension and caused general strikes. His popularity never recovered. Socialist President François Hollande (2012–17) started with high expectations, but he left office as the most unpopular President France has ever had.

And now Macron. In 2017, he did not just win the Presidency. His new political movement La République En Marche! swept away the whole political order. The Economist magazine’s cover even showed him walking on water.

Macron started off with bold reform talks, not just for France but for the EU as well. But his calls for stronger fiscal European integration found little positive resonance elsewhere, least of all in Berlin. And his domestic reform agenda, incomplete as it was, triggered the social unrest gilets jaunes, the yellow vests.

According to an IPSOS poll, satisfaction with Macron is down to 20 percent. That is still 16 percentage points higher than where Hollande finished his presidency, but for a President who has not even completed his second year in office, this is an abysmal number.

As Macron is trying to recover, he has now called off some tax increases and announced new welfare spending. Whether this will placate the protesters is not clear. But it will increase France’s budget deficit beyond the 3 percent mark which the EU demands from eurozone members. France had predicted a 2.8 percent budget deficit for 2019. But that was before Macron resorted to panic spending to save his presidency.

Macron’s spending spree will be a worry for the European Commission. Just as they are dealing with the populist Italian government’s reckless spending plans, they will now have to do the same with France. Except France is led by an avowed Europhile – and except that France is France (and thus normal political rules don’t apply). How could the Commission admonish or punish Italy if it lets Macron get away with his deficit breaches?

Yet there is a political reason the EU might decide not to be too harsh with either Italy or France, and that is the elections to the European Parliament in May next year. The elections could see a Europe-wide shift to populist and extremist parties, many of which are emphatically anti-EU. If the EU Commission confronted the French and Italian governments over their increases in welfare spending, it would give nationalists and populists more ammunition for their election campaigns. And that is why the EU might keep quieter than usual, at least for now.

Meanwhile, the European Parliament elections could also be a watershed moment for Germany. Chancellor Angela Merkel is now on her way out, and her CDU party has elected a successor as chair. Merkel is still leading a government with the Social Democrats SPD as coalition partners, but they have felt suffocated in the coalition from the start.

If the European elections result in another abysmal election for the once proud SPD, the party might well pull the plug and leave the coalition government. Germany might then either see a new coalition formed in Berlin or go straight to the polls to elect a new Parliament. Either way, it would bring Angela Merkel’s chancellorship to an end.

While all these political developments have the potential to destabilise the continent, Europe is also entering dangerous economic territory with slowing economic growth. Despite that, the European Central Bank (ECB) is finishing its quantitative easing programme, so the continent will have to learn to live without constant injections of fresh cash from the new year onwards.

With assets now equivalent to 42 percent of Europe’s GDP on its books, the ECB had to stop its bond purchasing programme. There is a limit to the papers a central bank can reasonably buy. But this shift will be problematic, especially for Italy whose banking sector has been kept afloat by ECB interventions.

These are just some of Europe’s political and economic challenges for 2019. One could add to the list the illiberal democracies in some central and Eastern European countries. Or Europe’s complicated relations with Turkey, Russia or the US. And, of course, dealing with refugees and migration remains an ongoing challenge for the continent.

No matter where you look, Europe is facing serious challenges. The past two or three years after the end of the Greek crisis were a welcome respite for the troubled continent. But the next storm is not far away and it is likely to be worse than the ones before.

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