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,
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