EU’s three big problems all linked
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.
If Britain does quit the EU, what is known as a “Brexit,” Europe’s power and ability to stand up to Moscow would be diminished. The UK is, along with France, the EU’s strongest military power. It is also active in diplomacy. Following a Brexit, the EU would be even more dominated by Germany’s non-interventionist predilections.
British eurosceptics say this argument is nonsense because Europe’s security has always rested on the American-led NATO alliance, which holds a summit this week in Wales, not on the EU. What’s more, EU foreign and security policy has been an embarrassment – as the weak responses to the Ukraine, Iraqi and Syrian crises show.
While there is some truth in these points, they are exaggerated. Even though NATO is the principal guarantee of Europe’s security, the EU plays a subsidiary role in diplomacy. And although the EU hasn’t achieved that much in foreign policy, because of the need to coordinate the views of 28 countries, it is slowly getting its act together.
Brexit would undermine European foreign policy in two ways. First, it would be even harder to coordinate a common position if the British prime minister was no longer sitting round the table with his EU counterparts on a regular basis. Second, it would send a powerful signal both to friends and potential foes that Europe was fragmenting. That would mean its voice was taken even less seriously.
To deal with this triple challenge, Europe’s leaders are going to have to raise their game substantially.
Mario Draghi, president of the European Central Bank, sketched out what needs to be done to revive the euro zone economy at his speech last month in Jackson Hole: looser monetary policy; and less fiscal austerity, provided governments engage in long-term structural reforms.
It is less clear that Draghi intends to follow words with rapid action. But this is not a time to delay. The ECB governing council meets this week. It should launch an ambitious programme of government bond-buying (so-called quantitative easing).
The two biggest problem countries, Italy and France, also need to accelerate their structural reforms. There are some positive signs. Matteo Renzi last week took measures to reform Italy’s dysfunctional civil justice system, which is a big drag on the economy. Meanwhile, Francois Hollande reshuffled France’s government, kicking out hard-line socialists who had been arguing against reform. But it is still unclear whether either man fully appreciates the urgency of the situation.
The EU needs to understand that there’s a limit to what it can do to combat Russian aggression in Ukraine. But it also needs to realise that it has to make Russia hurt via sanctions. This means being willing to take an economic hit itself. Otherwise, Vladimir Putin may conclude he can bully countries inside the EU.
Closer to home, the EU needs to reform itself to become less bureaucratic and become more competitive, principally by completing the single market in services and capital. This wouldn’t just be good for growth in the long run; it would also give Britain more good reasons to stay in the EU.
One of Tusk’s first comments after being chosen as president of the European Council, a job that involves coordinating the positions of different EU governments, was that he would personally address Britain’s concerns. While that’s encouraging, it won’t be easy, given the euroscepticsm raging in Cameron’s ruling Conservative party.
The EU has a tough time ahead of it.