Looming problems on the EU’s event horizon

Published on Newsroom.co.nz (Wellington), 16 April 2019

Last week, we all saw the first-ever image of a black hole scientists have been able to create. Once sucked into a black hole, you get pulled apart into smithereens while time stands still. It is probably how the British Government feels right now.

The black hole also offers the ‘event horizon’ – a physics term that could well have been invented to describe the European Union.

The EU is the event horizon of Brexit. The EU looks into the British apocalypse and cannot see any movement. But it is not too far from disaster itself.

Apart from Brexit, the EU faces two major challenges: politics and the economy. The rest is fine.

To start with the politics, the EU has turned the elections to the European Parliament in May into a semi-farce after extending Brexit to 31 October. Britain will now be invited to send MEPs to the Parliament even though Britain is still (officially at least) planning to leave the EU. And the EU will accept British MEPs even though the EU is resigned to (and perhaps even looking forward to) Britain’s departure.

Under these circumstances, what election outcome might one expect? Well, Britain is surely not going to send a bunch of happy Europhiles to Brussels and Strasbourg next month. Quite the contrary, we can expect the election of non-mainstream politicians to the European Parliament.

That in itself would not be such a big deal – fewer than 10 percent of all members of the European Parliament are British. However, Britain’s participation will also change the political arithmetic in other EU member states. It will be hard to explain to the French, Dutch or German electorates why the UK should still participate in European elections when both sides do not want it.

The result of this political impasse will be more euro scepticism – and a strengthening of populism. The postponement of Brexit was just what Marine Le Pen and the German Alternative für Deutschland needed to spice up their far-right election campaigns.

It is now conceivable that the next European Parliament could have as much as a third of its members coming from populist, extremist and euro sceptical parties. This would make it more difficult to find majorities in the House – and require unusual alliances between the established forces in the centre-left, the centre-right and the liberals.

If that were the EU’s only problem on its event horizon, that would be manageable. However, there are more serious issues to worry about. Italy, for instance.

Since Italy’s left-and-right populist Government took office last year, it has been at war with the European Commission over its budget plans. This conflict is ongoing, even though Rome seemed to budge late last year. Recent growth figures (or shall we call it ‘stagnation’) indicate a resurgent of budget conflicts in Italy once more.

The real problem is now not so much just about Italy’s compliance with European mandates. It is how much time international capital markets will give Italy to sort out itself. On its current trajectory, Italy’s already substantial debt mountain will grow more quickly because of its economic stagnation. Ratings agencies and investors are watching this with unease. As we have seen in previous economic crises, there can come a point – all of a sudden – when what was just acceptable yesterday will become the trigger of a financial crisis tomorrow.

Italy is testing where this trigger point lies but it is not just conceivable but maybe even likely that Rome will find it this year.

So we have two substantial crises circling the EU’s event horizon: Political instability brought about by the European Parliament elections, and economic instability potentially triggered by Italy moving into a sovereign debt cum banking crisis. Or even both because they could well erupt simultaneously.

While the EU has been gazing into the timeless Brexit black hole, the next crisis could thus be just as severe. We can already see it on the event horizon.

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