The EU’s post-Brexit paral­y­sis

Financial Mirror (Cyprus) - - FRONT PAGE - By Cedric Ge­mehl

It was billed as a show of post-Brexit unity of pur­pose. With­out the fractious Brits to ob­struct progress, lead­ers of the re­main­ing 27 mem­bers of the Euro­pean Union would come to­gether to af­firm their unshaken com­mit­ment to the goal of “ever-closer union”. Un­sur­pris­ingly, the re­al­ity of the week­end’s Bratislava gath­er­ing failed to live up to its billing. With­out the pres­ence of the ha­bit­u­ally ad­ver­sar­ial Bri­tish to unite them in an­tag­o­nism, the re­main­ing lead­ers were left look­ing, if any­thing, more di­vided than ever. Na­tional elec­toral cal­en­dars will con­tinue to dic­tate the po­si­tions of the ma­jor heads of govern­ment for at least the next 12 months, leav­ing their agen­das vis­i­bly at odds. As a re­sult, the chances of any moves to­wards the vi­sion of greater eco­nomic and fi­nan­cial union out­lined in last year’s Five Pres­i­dents’ Re­port are min­i­mal. More to the point—with mon­e­tary pol­icy ap­par­ently at the lim­its of its ef­fec­tive­ness— the EU’s dif­fer­ing na­tional po­lit­i­cal im­per­a­tives leave lit­tle room for any re­lax­ation of fis­cal pol­icy to sup­port eco­nomic growth.

With progress to­wards a full bank­ing union—com­plete with EU-wide de­posit in­sur­ance—a cap­i­tal mar­kets union, and a fis­cal union ruled out for the time be­ing, the as­sem­bled lead­ers were left seek­ing com­mon ground on which they could agree to ad­vance. Their so­lu­tion was to pro­mote moves to­wards greater se­cu­rity and de­fense co­op­er­a­tion. Fac­ing a com­mon ter­ror­ist threat, and with con­flicts con­tin­u­ing not far be­yond the EU’s eastern and south­ern bor­ders, Europe’s lead­ers see closer se­cu­rity in­te­gra­tion as a “mother­hood and ap­ple pie” is­sue, on which ev­ery­one should be able to agree. Yet although the Bri­tish will no longer be in the room to op­pose the cre­ation of a joint EU mil­i­tary force, which has long been a treasured ob­jec­tive of Euro­pean fed­er­al­ists, a “Schen­gen of de­fense” re­mains a dis­tant prospect, as none of the ma­jor play­ers are pre­pared to trans­fer the re­quired sovereignty to Brus­sels.

Of more im­me­di­ate im­por­tance to in­vestors is Europe’s elec­toral cal­en­dar. The ero­sion of the elec­toral share of both the CDU party of German chan­cel­lor An­gela Merkel and of her SPD coali­tion part­ners in the week­end’s Ber­lin state elec­tion, and in par­tic­u­lar the gains made by the right wing pop­ulist AfD party, only mag­nify the un­cer­tainty ahead of Ger­many’s gen­eral elec­tion in Septem­ber 2017. On top of that, France goes to the polls next April for a pres­i­den­tial elec­tion in which sup­port ap­pears to bleed­ing away from the cen­ter to­wards the ex­tremes. Spain has been with­out an ef­fec­tive govern­ment for nine months, and may be fac­ing its third gen­eral elec­tion in a year. And in Novem­ber Italy votes in a ref­er­en­dum on con­sti­tu­tional re­form in which a “No” vote could pre­cip­i­tate the res­ig­na­tion of prime min­is­ter Mat­teo Renzi, leav­ing Italy lead­er­less.

This timetable em­pha­sizes the di­ver­gence on fis­cal pol­icy be­tween Europe’s lead­ers as each at­tempts to court pop­u­lar sup­port among his or her do­mes­tic elec­torate and see off the chal­lenge from pop­ulist par­ties.

Rome is call­ing for more fis­cal trans­fers. Last week, the Ital­ian Min­istry of Fi­nance pressed its calls fur­ther, pub­lish­ing a pa­per propos­ing the in­tro­duc­tion of un­em­ploy­ment in­sur­ance at a pan-Euro­pean level.

Paris wants the EU to sign off on looser fis­cal pol­icy. After France has ex­ceeded the EU’s 3% of GDP limit on fis­cal deficits every year since 2007, con­tenders in next year’s pres­i­den­tial elec­tion are start­ing to call for the deficit limit to be re­laxed from 2017.

Ber­lin con­tin­ues to ad­vo­cate a fis­cal hard line, both do­mes­ti­cally and for its EU part­ners. Con­trary to the hopes of some ob­servers, the re­cent an­nounce­ment by fi­nance min­is­ter Wolf­gang Schauble of a EUR 2bn tax cut for next year and the prospect of a fur­ther 15bn in cuts to fol­low do not rep­re­sent a fis­cal U-turn. In­stead, the pro­posed cuts are in­tended as re­lief mea­sures for German work­ers who have found that re­cent wage in­creases have pushed them into higher tax brack­ets un­der Ger­many’s steeply pro­gres­sive tax­a­tion sys­tem. In short, the cuts are in­tended to off­set the in­ad­ver­tent tight­en­ing that saw Ber­lin run a 18.5bn sur­plus in the first half of 2016, rather than as a loos­en­ing of pol­icy.

All this leads to two con­clu­sions. The first is that even with­out the re­cal­ci­trant Bri­tish at the ta­ble, the EU will make no ma­te­rial progress on its de­clared agenda of eco­nomic and fi­nan­cial in­te­gra­tion un­til after next year’s elec­tions, and pos­si­bly not even then should pop­ulist Euroskep­tic par­ties make sub­stan­tial gains at the polls. The sec­ond con­clu­sion is that no sig­nif­i­cant fis­cal stim­u­lus is likely in 2017. The flex­i­bil­ity al­lowed by the Sta­bil­ity And Growth Pact has been ex­hausted and the po­lit­i­cal timetable pre­cludes any re­lax­ation of the rules in the near term (the ex­panded Juncker plan an­nounced last week is not a sub­sti­tute; its struc­ture lim­its its ef­fec­tive­ness. That leaves the Euro­pean Cen­tral Bank alone in the growth driv­ing seat, and as re­cent data has shown, the ECB’s pol­icy trac­tion ap­pears in­creas­ingly lim­ited.

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