Europe: Is the sun setting on a tottering union?
Europe has been through the wringer in recent years as economic crises, financial turmoil and political upheaval have left the region in a deeply troubled state. All the forces of cohesion which have pulled Europe together in the last two decades seem to be falling apart and leaving the European Union, the euro zone and the euro in a much more precarious state.
Differences of economic performance, clashes over policy and the refugee crisis seem to be at the heart of the problem right now. Rather than pulling together, Europe seems to be going in different directions, with tensions building between the prosperous and poorer nations. Without great change, the risks of political and economic fragmentation are growing.
This is not just coming from the usual suspects. The distressed nations of Europe are still in deep trouble, struggling with high unemployment, low productivity, mountainous debts and burgeoning budget deficits. Anti-austerity sentiment is building in countries like Greece, Spain and Portugal and could quickly turn against European stability.
READ MORE: British government in ‘civil war’ over Brexit, as anti-EU minister who quit speaks out
They are not the only countries threatening to slip their European moorings. Even Europe’s main anchor of stability is starting to see more uncertainty starting to creep in. Germany is right in the thick of it right now.
As Europe’s powerhouse economy, Germany is one of the richest nations in the world. The economy remains pumped up on negative interest rates and quantitative easing (QE) steroids. German exporters are thriving thanks to the weak euro, with Germany ranked as the world’s biggest trade surplus nation. The government is flush with money and the budget balance is in surplus, a rarity among major industrial economies.
The trouble is, Germany still seems loath to share its economic success with its European partners. Fighting a rearguard action inside the European Central Bank, Germany is doggedly opposed to more monetary stimulus for fear of igniting inflation risks. Neither is Germany inclined to share its economic wealth through a common European fiscal policy. That is a definite political non-starter.
All Germany’s European partners can do is look on with envy and hope some of its economic success rubs off on their domestic recoveries. However, the European Commission hopes for 1.9 per cent EU GDP growth this year and 2 per cent in 2017 is far too slow to cure Europe’s high unemployment and intractable debt woes.
Of course Germany has come up trumps on helping to strike bailouts for Greece, Spain, Portugal, Ireland and Cyprus during the euro zone’s epic financial crisis. But it has come at a heavy price in terms of growing political anger over the financial burden on German taxpayers.
Germany’s role in Europe’s refugee crisis has also deeply divided public opinion. Opposition to Chancellor Angela Merkel’s open-door policy is starting to make its mark on domestic politics, with the far-right Alternative for Germany (AfD) party gaining stronger support. If the anti-establishment vote continues to build, it could pose a serious challenge to Germany’s traditional Europhile leanings, upsetting Europe’s political status quo in the process.
Europe’s growing refugee crisis could bring the euro zone to tipping point if Germany lurches to the right and becomes more introspective and less tolerant to external difficulties. Europe’s financial crisis is far from over and still needs German benevolence to tide Europe through deeply troubled times.
Greece is not out of the woods yet and still needs careful mentoring in the next few years under sympathetic EU supervision. Spain and Ireland seem to be getting onto a stronger growth footing, but this could all go pear-shaped very quickly if the global economy suffers a hard landing. Meanwhile, Italy’s lacklustre economy, its embattled banking sector and the country’s public debt nightmare
could easily become Europe’s next big crisis.
READ MORE: Germany at centre of EU’s economic quagmire
European markets have got themselves into a state of false consciousness. They appear to be keeping their heads above water, but there are deep problems lurking under the surface. There are very good reasons why much of the German government debt curve is steeped in negative yields. It is down to deep-rooted fear and acute demand for safe-haven insurance.
European yield spreads to Germany have settled down to an uneasy calm in recent months but still warrant close attention. European de-convergence pressures could break out again very soon.
In the next few months, the watchword must be caution as Europe hurtles towards a critical date with destiny on June 23. Britain’s referendum on EU membership could shake European unity to the core.
David Brown is the chief executive of New View Economics
