The outgoing president of the European Council, Herman Van Rompuy, said at the weekend that his successor, Donald Tusk, currently Poland’s prime minister, faces three big challenges: the stagnating euro zone economy; the Ukraine/Russia crisis, which he described as the gravest threat to continental security since the Cold War; and the risk that Britain will quit the European Union. The problems are all linked.
Euro zone weakness is one reason the EU is reluctant to take action against Russia. GDP growth, already anemic, ground to a halt in the second quarter. The inflation rate has fallen again, to just 0.3 percent, and the unemployment rate is stuck at 11.5 percent.
With Italy in its third recession in recent years, Germany shrinking and France flat, this is no longer a crisis of what used to be called the “little PIGS” – Portugal, Ireland, Greece and Spain. It might be best to use a new acronym “FIG” to describe the travails of the big three.
The euro zone cannot easily withstand another shock. That helps explain why the EU is taking such a softly softly line to stepping up sanctions against Russia, despite what is now effectively an invasion of Ukraine. Measures that would really hurt Moscow – such as cutting it off from the global financial system or an embargo on gas purchases – would clobber the EU too. Even the minor sanctions that have so far been passed have had a surprisingly big effect on both the Russian and EU economies, because they have knocked confidence.
Meanwhile, the weak euro zone economy increases the risk that Britain will quit the EU. David Cameron plans to call a referendum on the issue by the end of 2017 provided he is re-elected prime minister next year. If the euro zone is then mired in recession or deflation, eurosceptics will find it easier to argue that the UK is shackled to a corpse and should cut itself free.