The EU: A failed ex­per­i­ment?

The Euro­pean Union is in trou­ble. Brexit, Italy and Greece threaten the sta­bil­ity of the world’s largest trade bloc. Na­tion­al­is­tic rhetoric is the order of the day, and in 2017 right-wing politi­cians in key coun­tries, in­clud­ing France, will be vy­ing for p

Finweek English Edition - - THE PES­SIMIST’S GUIDE: EURO­PEAN UNION - ed­i­to­rial@fin­ By Jana Ja­cobs

the Euro­pean Union (EU): the ideal of in­te­grat­ing Europe’s coun­tries in an ef­fort to counter the na­tion­al­ism that saw the con­ti­nent rav­aged by two dev­as­tat­ing World Wars. A vi­sion that would re­alise the free move­ment of goods, ser­vices and peo­ple.

Fast-for­ward to to­day and it seems that the ideal that was the EU is dis­in­te­grat­ing. Anti-glob­al­i­sa­tion sen­ti­ment is rife, pop­ulism is tak­ing hold, and an­ti­im­mi­gra­tion poli­cies are in­creas­ingly form­ing part of po­lit­i­cal agen­das.

Al­ready, Hun­gary and Poland are gov­erned by ul­tra­na­tion­al­ist par­ties, and in 2016 Brexit hap­pened. As the year drew to a close it be­came ever more ap­par­ent that many other con­ti­nen­tal Euro­pean coun­tries are tend­ing to­wards a more na­tion­al­is­tic sen­ti­ment.

In De­cem­ber, Italy’s prime min­is­ter, Mat­teo Renzi, re­signed af­ter ci­ti­zens voted over­whelm­ingly against his pro­posed con­sti­tu­tional re­form, send­ing mar­kets reel­ing, and likely bring­ing for­ward the 2018 elec­tion to 2017, Philip Saun­ders, co-head of multi-as­set at In­vestec As­set Man­age­ment, tells fin­week.

The Five Star Move­ment (M5S), which ac­cord­ing to polls is the most pop­u­lar op­po­si­tion party in Italy, has been press­ing for this. “If this is the case, we would ex­pect the M5S to be the largest party. They have also said that they could form a coali­tion with the North­ern League, hav­ing dis­missed this orig­i­nally. If they win there is likely to be a ref­er­en­dum on the euro with a ma­te­rial chance of a vote to exit,” says Saun­ders.

Al­though Aus­tria did not vote for far-right wing can­di­date Nor­bert Hofer in the same month, 2017 has other piv­otal elec­tions in store, in­clud­ing in Ger­many, France and the Nether­lands. In the case of France, one of the EU’s key pil­lars, if right-wing can­di­date Ma­rine Le Pen were to be­come pres­i­dent in May 2017, “it is go­ing to be pretty dif­fi­cult to sus­tain the euro in its cur­rent form”, says Saun­ders.

The prob­lem with the EU

Ac­cord­ing to Arthur Kamp, in­vest­ment econ­o­mist at San­lam In­vest­ments, the sig­nif­i­cant growth in sup­port for na­tion­al­ism in coun­tries in­clud­ing Greece, France, the UK and Italy has hap­pened within a rel­a­tively short space of time – the last five years. “It seems as though vot­ers feel ‘dis­en­fran­chised’ amidst stag­nant real in­comes and grow­ing in­come in­equal­ity.”

Sounds a lot like the rea­sons that got Don­ald Trump elected…

Not quite

“The US re­ac­tion to poor growth and glob­al­i­sa­tion is also go­ing on in the euro­zone, but the EU has the added fac­tor of a sin­gle cur­rency,” says Saun­ders. “I think the prob­lem with the EU is the euro. It’s a fixed-ex­change rate regime and that means that there is this di­ver­gence in per­for­mance.”

In­di­vid­ual coun­tries are not able to al­low their ex­change rates to float in order to help ad­dress macroe­co­nomic im­bal­ances and there is an ab­sence of a fis­cal union, ex­plains Kamp.

Greece is a prime ex­am­ple of this, “where im­bal­ances de­vel­oped to the point where the re­quired ad­just­ment to fis­cal pol­icy is ex­traor­di­nar­ily oner­ous. All of this im­plies the prob­a­bil­ity of dis­in­te­gra­tion (or at least par­tial dis­in­te­gra­tion) of the euro area at some point is not nil – even though the counter ar­gu­ment is that the costs of dis­in­te­gra­tion are so great so as not to be fea­si­ble,” holds Kamp.

Saun­ders be­lieves that one of the key risk fac­tors go­ing for­ward is that Greece will fi­nally be ejected from the euro­zone. “It’s been kept on life sup­port, but ul­ti­mately we have reached the end of the road.”

Al­though Brexit is on the agenda, the UK is not part of the euro­zone, which ef­fec­tively means Greece will set the prece­dent for leav­ing the cur­rency. And as long as this is on the cards, the trend of un­cer­tainty in the EU will con­tinue, lead­ing to per­sis­tent mar­ket spec­u­la­tion around an un­rav­el­ling euro, says Saun­ders.

The im­pli­ca­tions of a di­vided EU are dire, in terms of global trade re­la­tions and eco­nomic growth, as well as mi­nor­ity rights (read: anti-im­mi­gra­tion poli­cies).

“Of course we should not for­get that we al­ready have au­thor­i­tar­ian right-wing gov­ern­ments in place in Rus­sia and Turkey. It is hard to imag­ine the UN Se­cu­rity Coun­cil with rep­re­sen­ta­tives of Putin, Trump, and Le Pen tak­ing three of the per­ma­nent seats,” says Yan­nik Thiem, as­so­ciate pro­fes­sor in phi­los­o­phy at Vil­lanova Univer­sity in the US.

And in terms of trade, “If the man­date from the elec­torate is job pro­tec­tion and im­mi­gra­tion con­trol, then a drift to­wards in­ward-look­ing eco­nomic de­vel­op­ment and greater pro­tec­tion­ism is likely. This would chal­lenge the unity of the EU, which is based on treaties en­dors­ing the ex­act op­po­site, namely free move­ment of goods and peo­ple be­tween coun­tries,” says Kamp.

Mat­teo Renzi Out­go­ing prime min­is­ter of Italy

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