Liberal Europe in danger, can it ride out the storm?
It seems certain that 2019 will be a year of uncertainty in Europe. It has all the markings for intense disruption and a host of challenges. The economy, for one, could face headwinds; Europe’s storied, traditional auto industry could face fundamental changes; and its politics, which is far from cohesive, could be lot more chaotic. Europe’s economy started slowing down in the last half of 2018. At this pace, it could even lead to a flat-lined growth in coming months. Moreover, the fiscal policies of the European Central Bank (ECB) that helped absorb bonds and bad debt are set to expire, and as headwinds strengthen in the global economy, some analysts see a foreboding atmosphere. How the challenges are met will determine how Europe will weather this storm.
ECB Chairman Mario Draghi will leave the position in October after serving his five-year term. The personality and philosophy of his replacement could greatly affect economies and market sentiment in Europe.
Europe also faces structural problems in some traditional industries, particularly the auto industry so crucial to Germany. Fallout from the Dieselgate scandal at Volkswagen and the arrest of Carlos Ghosn at Renault Nissan raised the stress level in an industry undergoing forced change. Electric cars are here to stay and increasingly setting the pace toward the future.
In such a capital-intensive sector, traditional carmakers are hard pressed to retool with the right technology and catch with wave. The auto industry will be a drag on Germany’s economy, which is now variously projected to grow from 1.5 to 1.7 per cent in the coming year as overcapacity and unsold cars plague some of Europe’s most important brands.
Overall the IMF has now downgraded its forecast for growth in the EU from 2.2 per cent to 2 per cent.
And that plays out amid the backdrop of a troubled global economy. Rising trade tensions between the world’s two biggest economies, the US and China, could well stifle demand, trade and business worldwide. Continued unpredictable behaviour by US President Donald Trump could also bring on tariffs and scrapped trade deals aimed at Europe. Unsettled financial markets could add more stress, bursting the fragile recovery in some sectors and countries.
And the politics of Europe will hardly pour oil on troubled waters. Brexit, rising Eurosceptic parties and election of a new EU parliament add to the host of uncertainties that the continent faces. Whether it is a hard or soft Brexit, the UK’s withdrawal from the EU will cause disruption along many lines, both within the country itself and a wider Europe. The status of respective citizens in the UK and EU, agreements on trade and deeply embedded cooperative programmes will all have to be untangled.
Impacts from the rise of anti-establishment parties will also be keenly felt in the coming year. In the largest economy Germany, respected Chancellor Angela Merkel is in the twilight of her long career as both the rightwing AfD and leftist Greens gain popularity. In Italy, an unlikely coalition between the anti-establishment Five Star Movement and pro-business League seems to be taking a firmer grip on the country, with outspoken League leader Matteo Salvini the most popular politician today.
France was inflamed by a series of protests late in 2018, showing deep rifts in the country that will continue in the year ahead. Many citizens say grand plans espoused by French President Emmanuel Macron since he took power in 2017 are out of step with realities on the ground. The grassroots gilets jaunes – or yellow jacket – movement started in rural France to protest a fuel tax increase and has spread to other regions and issues, protesting a way of life they say forces them to live month-to-month.
With Macron climbing down from his lofty position and acquiescing to protest demands, and Merkel preparing to retire in Germany, the European Union is losing two bulwarks of traditional liberal democratic policies and an ever-more ambitious EU.
EU parliamentary elections in May will manifest how much Europe has changed. The governing body will be smaller due to the withdrawal of Britain and will likely include significant numbers who do not believe further integration of countries and renewed regulation by EU headquarters in Brussels are the articles of faith they once were.
After the EU threatened Italy with sanctions over its budget deficit, France was then permitted its own deficit in violation of EU guidelines as Macron agreed to gilets jaunes demands. Look for more disputation over budgets as countries become more assertive about their sovereign right to set policies.
A leaner EU bureaucracy might be welcome, but a weaker EU is not. In a time when Trump seems set on abandoning agreements, including those with Western Europe, many wonder what force will act as a counterbalance to Russia.
Russian President Vladimir Putin makes no secret of his mission to strengthen his country. Many analysts say it’s also no secret that part of the effort is sowing discord in Western democracies.
How well the EU can meet its challenges will certainly be a litmus test on its constitution. If the foundation is strong enough, it can safely withstand the winds of change ahead.
Russian President Vladimir Putin makes no secret of his mission to strengthen his country. Many analysts say it’s also no secret that part of the effort is sowing discord in Western democracies.