EU’S east-west schism ‘is greater threat than Brexit’

Hun­gary’s nu­clear deal and Poland’s re­form bill il­lus­trate di­vide at heart of the EU,

The Sunday Telegraph - Money & Business - - Front page - By Anna Isaac

A GROW­ING po­lit­i­cal gulf be­tween cen­tral Europe and western EU pow­ers rep­re­sents a far greater risk to the Euro­pean project than Brexit, ac­cord­ing to economists.

A fo­cus on Brexit has led mar­kets and politi­cians to grow “com­pla­cent” about the rise of the far Right and Euroscep­tic po­lit­i­cal move­ments in Poland, Hun­gary and Aus­tria, they say.

“The risk of fis­sures in the Euro­pean Union, par­tic­u­larly on its east­ern flank, are a big­ger worry than Brexit. There’s a grow­ing sense that Brexit is an is­sue that’s man­age­able,” Chris Beauchamp, chief mar­ket an­a­lyst of IG Group, said.

Ian Ste­wart, chief econ­o­mist at Deloitte, voiced sim­i­lar con­cerns for the EU as too much fo­cus is given to “Brexit and pro­tec­tion­ism from Trump’s ad­min­is­tra­tion”. Economists may be “too com­pla­cent”, he added, about in­sti­tu­tional risks for Europe pre­sented by widen­ing di­vides be­tween some cen- tral and east­ern gov­ern­ments, and vi- sions such as that ex­pressed by French pres­i­dent Macron of closer po­lit­i­cal and eco­nomic in­te­gra­tion.

This comes after Brus­sels trig­gered Ar­ti­cle 7 against Poland – a pun­ish­ment that can lead to states be­ing stripped of their vot­ing rights in EU in­sti­tu­tions – in re­sponse to le­gal changes in the coun­try, which some say threaten the in­de­pen­dence of its ju­di­ciary. Hun­gary, which op­poses ef­forts to push through the Ar­ti­cle 7 process, is likely to face a sim­i­lar rep­ri­mand due to ac­tions in its higher ed­u­ca­tion sec­tor.

US midterm elec­tions could also present headaches, should they be mostly won by the Democrats, Mr Beauchamp warned. Such a swing could jeop­ar­dise ma­jor con­struc­tion plans to be an­nounced by the Trump ad­min­is­tra­tion in early Jan­uary, po­ten­tially caus­ing mar­ket wob­bles for ma­jor con­struc­tion firms such as Cater­pil­lar and Ashtead.

In March 2017, after three years, the Euro­pean Com­mis­sion gave Hun­gary the go-ahead to ex­pand its Soviet-era nu­clear power sta­tion at Paks, 75 miles from its cap­i­tal, Bu­dapest. The deal with Rus­sia was worth €12.5bn (£11bn), for which the Krem­lin of­fered 100pc of the fi­nanc­ing re­quired. Hun­gar­ian prime min­is­ter Vik­tor Or­ban and Rus­sian pres­i­dent Vladimir Putin set­tled the deal in per­son.

This deal – a tac­ti­cal de­feat in the long-run­ning bat­tle in the EC to make its mem­ber states less de­pen­dent on Rus­sian en­ergy – is not the “nu­clear op­tion” that dom­i­nates the head­lines. In­stead, eyes have turned to Poland as the schism be­tween the harder-right gov­ern­ments of cen­tral and east­ern Euro­pean na­tions and Western Europe’s more lib­er­ally gov­erned France and Ger­many grows deeper.

Poland’s ju­di­cial re­form bill threat­ens the in­de­pen­dence of the ju­di­ciary, and goes against the prin­ci­ples of sep­a­ra­tion of pow­ers re­quired by EU mem­ber­ship, ac­cord­ing to Brus­sels. Don­ald Tusk, pres­i­dent of the EU Coun­cil, even suggested the bill was de­vised to fol­low a “Krem­lin plan”. It made for an un­com­fort­able state visit for Theresa May, as she sought to bal­ance build­ing re­la­tion­ships with the Pol­ish regime, with main­tain­ing pos­i­tive mo­men­tum in Brexit ne­go­ti­a­tions.

This tale of two nu­clear mo­ments: Hun­gary’s power sta­tion and the trig­ger­ing of Ar­ti­cle 7 of the EU Treaty, which could ul­ti­mately strip Poland of its vot­ing rights in Brus­sels, rep­re­sent more sig­nif­i­cant threats to the in­tegrity of the Euro­pean project than Brexit, some economists ar­gue. “The risk of fis­sures in the EU, par­tic­u­larly on its east­ern flank, are a big­ger worry than Brexit. There’s a grow­ing sense that Brexit is an is­sue that’s man­age­able. The far big­ger is­sue in the EU is if they try to come down too hard on Poland,” says Chris Beauchamp, chief mar­ket an­a­lyst at IG Group.

These splits, Beauchamp ar­gues, are wor­ry­ing signs that should oc­cupy the at­ten­tion of EU lead­ers “quite a lot [more],” than the UK’S im­mi­nent de­par­ture. Trade alone will not solve these EU east-v-west rows and nei­ther will the healthy lev­els of eco­nomic growth, it seems. The cen­tral and east­ern states of the EU have been par­tic­u­larly the es­ti­mates 4.2pc EU28 in Poland this that strong year. in and 2017 Swiss per­form­ers 3.7pc GDP bank in grew Hun­gary, UBS among by but has not that trans­lated shared eco­nomic into po­lit­i­cal pros­per­ity unity.

“It’s dif­fi­cult to say how far it might spi­ral out of con­trol – whether a big­ger spat will de­velop and Poland will dig in or fall in line. They feel very backed into a cor­ner by the rest of the EU,” Beauchamp says.

Mi­gra­tion and asy­lum has been the great­est is­sue strain­ing re­la­tion­ships be­tween new EU mem­ber states and the western old-guard. “Pol­i­tics has raped Euro­pean law and val­ues,” Peter

Sz­i­j­jarto, Hun­gary’s for­eign min­is­ter, told a news con­fer­ence in Septem­ber, after the Euro­pean Court of Jus­tice dis­missed Hun­gary and Slo­vakia’s le­gal chal­lenge to the asy­lum seeker quota sys­tem. How­ever, these ex­ist­ing cracks may come to a head in 2018, not be­cause of mi­gra­tion, or even elec­tions, but be­cause of EU spend­ing plans.

In Hun­gary, the in­cum­bent gov­ern­ing party, Fidesz, is lead­ing in the polls, mak­ing a third term for the party a near-cer­tainty in 2018, ac­cord­ing to Gy­orgy Ko­vacs, chief econ­o­mist at UBS. Highly frag­mented op­po­si­tion par­ties pose lit­tle threat

– they failed in a col­lab­o­ra­tive at­tempt to beat Fidesz in a by­elec­tion this year.

The Czech Repub­lic’s pres­i­den­tial elec­tion, which is likely to re­turn Mi­los Ze­man, is gen­eral less sig­nif­i­cant elec­tions, than which its saw Oc­to­ber Euroscep­tic bil­lion­aire An­drej Babis sweep to power. And Italy’s gen­eral elec­tion in March is un­likely to re­sult in a pop­ulist Euroscep­tic gov­ern­ment fol­low­ing elec­toral re­forms. In­stead, the most prob­a­ble out­come is a coali­tion, ac­cord­ing to David Owen, chief Euro­pean fi­nan­cial econ­o­mist at in­vest­ment firm Jef­feries. “A few months ago peo­ple were fo­cused on a sce­nario when the Five Star Move­ment in Italy would hold power. Now we’re in a sce­nario where there should be some sta­bil­ity in Italy. It’s a very dif­fer­ent sit­u­a­tion,” Owen says. While elec­tions next year have be­come pre­dictable or less risky, the UK’S de­par­ture from the EU leaves a bud­getary night­mare in its wake – and that is a prob­lem when it comes to ad­dress­ing the is­sue of cen­tral and east­ern state co­he­sion. A study that ex­am­ined the im­pact of Brexit, from the EU’S re­gional depart­ment, DG Re­gio, re­vealed that slash­ing the EU bud­get by an equiv­a­lent amount to the UK’S con­tri­bu­tion (12.5pc, post-re­bate) would mean that only those poorer EU states – with GDP per capita of be­low 75pc of the EU av­er­age would re­ceive so-called co­he­sion funds. These funds con­sti­tute a third of the EU’S bud­get and are aimed at “re­duc­ing dis­par­i­ties be­tween the var­i­ous re­gions and the back­ward­ness of the least-favoured re­gions” ac­cord­ing to EU law. Such a change would be a sig­nif­i­cant blow to richer states.

This is the highly pres­sured sit­u­a­tion in which Gün­ther Oet­tinger, Euro­pean com­mis­sioner for the bud­get, will have to de­ter­mine by May 2018 how, post-brexit, the next seven-year bud­get will be al­lo­cated. “This is when Western Europe will have an op­por­tu­nity to step up against the east­ern and cen­tral states. Ev­ery mem­ber coun­try is do­ing their own cal­cu­la­tions on this,” a se­nior City econ­o­mist told The Sun­day Tele­graph.

Rus­sian nu­clear deals aside, in 2018 Hun­gary is likely to face a sim­i­lar pro­ce­dure – the trig­ger­ing of Ar­ti­cle 7 – as Poland. Brus­sels has al­ready taken it to court over what it re­gards as a clam­p­down on free­doms in higher ed­u­ca­tion. It is there­fore un­sur­pris­ing that Hun­gary is threat­en­ing to veto the EU’S at­tempt to pun­ish Poland. These are po­lit­i­cal machi­na­tions that will ramp up in the run-up to May’s bud­get pro­pos­als. “2017 has been all about the per­ceived re­duc­tion of risk in Europe – three ma­jor elec­tions were won by main­stream can­di­dates. The longer term chal­lenges haven’t re­ally changed very much,” says Ian Ste­wart, chief econ­o­mist at Deloitte.

He does not think the “very real dif­fer­ences of opin­ion” will lead Hun­gary or Poland to break away en­tirely, how­ever. More likely is, as Valéry Gis­card d’es­taing, former French pres­i­dent, has suggested: one group of ever-closer near fed­er­al­i­sa­tion in­clud­ing Ger­many and France, and an outer group in­volv­ing cen­tral and east­ern EU states.

“The real ques­tion for the EU is not Brexit, but the fu­ture di­rec­tion of the EU it­self,” Ste­wart says. There’s a “mud­dle-on so­lu­tion” with a di­luted ver­sion of ever-closer union.

Be­yond the EU, there are the US midterms to con­sider: a Demo­crat win over­all in midterms could put the Trump ad­min­is­tra­tion’s in­fra­struc­ture plans, due for re­lease in Jan­uary, in jeop­ardy. But mar­kets and pol­i­cy­mak­ers would do well to ex­am­ine the gov­ern­ing bod­ies of the EU, Ste­wart warns. “Ev­ery­one’s very wor­ried about risks that are in front of them: Brexit and pro­tec­tion­ism from Trump’s ad­min­is­tra­tion. We may be be­ing a lit­tle too com­pla­cent about the in­sti­tu­tional risks for Europe,” he says.

‘It’s dif­fi­cult to say how far it might spi­ral out of con­trol. Poland feels very backed into a cor­ner by the EU’

Protests against Hun­gary’s prime min­is­ter Vik­tor Or­ban, and be­low, Vladimir Putin

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