Shelter from the storm in Europe
Leaders must act now to minimise the risks, lest they find their covers inadequate to the extreme weather that could lie ahead
Dark clouds are hovering over Europe’s economic future, as three distinct tempests gather: The Greek crisis, Russia’s incursion in Ukraine, and the rise of populist political parties. Though each poses a considerable threat, Europe, aided by the recent cyclical pickup, is in a position to address them individually, without risking more than a temporary set of disruptions. Should they converge into a kind of “perfect storm”, however, a return to sunny days will become extremely difficult to foresee any time soon.
As it stands, the three storms are at different stages of formation. The Greek crisis, having been building for years, is blowing the hardest. Beyond the potential for the first Eurozone exit, Greece could be at risk of becoming a failed state — an outcome that would pose a multi-dimensional threat to the rest of Europe. Mitigating the adverse humanitarian consequences (associated with cross-border migration), and geopolitical impact of this storm would be no easy feat.
The second storm, rolling in from the European Union’s (EU) east, is the costly military conflict in Ukraine’s Donbas region. The crisis in eastern Ukraine has been contained only partly by the Minsk II ceasefire agreement and reflects the deepest rupture in the West’s relationship with Russia since the Soviet Union’s collapse.
Further Russian interference in Ukraine — directly and/or through separatist proxies in Donbas — would present the West with a stark choice. It would either have to tighten sanctions on Russia, potentially tipping western Europe into recession as Russia responds with countersanctions, or accommodate the Kremlin’s expansionist ambitions and jeopardize other countries with Russian-speaking minorities (including the EU’s Baltic members).
The third storm — political tumult brought about by the rise of populist political movements — poses yet another serious threat. Energised by broad voter dissatisfaction, particularly in struggling economies, these political movements tend to focus on a handful of issues, opposing, say, immigrants, austerity, or the EU — essentially whoever they can scapegoat for their countries’ troubles.
Already, Greek voters handed the far-left antiausterity Syriza party a sweeping victory in January. France’s far-right National Front is currently second in opinions polls. The anti-immigration Danish People’s Party finished second in the country’s just-concluded general election, with 22 per cent of the vote. And, in Spain, the leftist anti-austerity Podemos commands double-digit support.
These parties’ extremist tendencies and narrow platforms are limiting governments’ policy flexibility by driving relatively moderate parties and politicians to adopt more radical positions. It was concern about the United Kingdom Independence Party’s capacity to erode the Conservatives’ political base that pushed Prime Minister David Cameron to commit to a referendum on the country’s continued EU membership.
Regional crisis-management
With three storms looming, Europe’s leaders must act fast to ensure that they can dissipate each before it merges with the others and cope effectively with whatever disruptions they cause. The good news is that regional crisis-management tools have lately been strengthened considerably, especially since the summer of 2012, when the euro came very close to collapsing.
Indeed, not only are new institutional circuit breakers, such as the European Financial Stability Facility, in place; existing bodies have also been made more flexible and thus more effective. Moreover, the European Central Bank (ECB) is engaged in a large-scale asset-purchasing initiative that could be easily and rapidly expanded. And countries like Ireland, Portugal and Spain have, through hard and painful work, reduced their vulnerability to contagion from nearby crises.
Fortunately, the possibility of such a perfect storm is more a risk than a baseline at this point. Nonetheless, given the extent of its destructive potential, it warrants serious attention by policymakers. Securing Europe’s economic future in this context will require, first and foremost, a renewed commitment to regional integration efforts. Likewise, on the national level, pro-growth economic-reform initiatives need to be revitalised. This would ease the policy burden on the ECB, which is currently being forced to pursue multiple ambitious objectives that far exceed its capacity to deliver sustainably good outcomes regarding growth, employment, inflation, and financial stability.
Europe’s leaders must act now to minimise the risks, lest they find their shelters inadequate to the extreme weather that could lie ahead.