European Union

  • European Union
    Global Economics Monthly: December 2015
    Bottom Line: The European Union (EU) faces rising populist pressure, reflecting long-term challenges to economic policymaking that can only partly be addressed by a cyclical recovery and debt relief. By strengthening the credibility of economic policy and the region’s resilience to shocks, better policy coordination and a faster path to economic union would go far toward securing a better economic future for Europe and addressing some underlying causes of populism. Economic populism is rising in Europe across both creditor and debtor countries, with winds of change blowing from left and right on the economic policy spectrum. The new left-wing government in Portugal will likely unwind many of the EU-supported economic policies of the past several years, while Poland’s new right-wing government is calling for diminished involvement in Europe’s economic unification agenda. Elsewhere, both left-wing and right-wing populist parties, such as Syriza of Greece and the National Front of France, have won elections and political influence at national and European levels by running on a platform of reduced austerity and less European integration. A portion of the surge in economic populism is cyclical, the result of a deep and protracted recession and debt crisis that has exposed the limits of policymakers’ ability to produce durable growth. Economic activity in Europe has fallen far below what had been expected just a few short years ago (see figure 1). Both the long-term loss of output and disappointment over expectations of recovery are common features of recessions. But there are more structural and long-lasting forces underlying the rise of populism, including a rapidly aging population coupled with a fragmented labor market that makes the absorption of immigrants challenging, pressures on wages from globalization, and structural unemployment as the result of domestic market distortions. All contribute to a loss of confidence in the process of European integration and its foundational economic assumptions (including free movement of labor and migration). Failure to reverse these trends adds to a more pessimistic view of the future in Europe that undermines the credibility of mainstream economic policies and the governments that implement them. Governments are bending in the face of these winds, loosening budgets and talking more about debt relief. In 2016, fiscal policy in the monetary union looks set to be mildly stimulative, as countries put off commitments to meet EU deficit targets in the face of slow growth and new security demands. On the whole, these developments are healthy for growth, though not without a cost in terms of higher debt levels and a renewed concern about sovereign and corporate creditworthiness when not coupled with additional debt relief. But such changes are unlikely to restore broad public confidence in the European experiment. Recent polling highlights the continued low levels of confidence across the continent in European economic institutions and their leaders.  FIGURE 1. EUROZONE: VARIOUS POTENTIAL AND ACTUAL OUTPUT PATHS Source: European Commission, Directorate-General for Economic and Financial Affairs. The Threat to European Integration In Europe, as elsewhere, economic populism goes beyond a debate over expansionary policies to encompass political ideology and rhetoric that divides society between “the people” and “the elite,” and argues that politics should serve the former. Across Europe, distrust of mainstream institutions, policies, and policymakers is rising, often fueled by pessimism about the future. More specifically, European populism integrates elements of nationalism and euroscepticism to caution that further EU integration, propelled by national and foreign elites, threatens national sovereignty and ultimately people’s well-being. Populism in Europe is becoming persistent, reflecting the depth of Europe’s economic crisis and the manner in which the early years of the euro created unrealistic expectations for the future, particularly in the periphery. The Syriza party and its often antagonistic relationship with Greece’s creditors destabilized the bailout talk this past summer, and Greece’s exit from the eurozone (“Grexit”) remains a high probability. But populism is on the rise in creditor as well as debtor countries, including in economies growing relatively quickly (e.g., Germany and the United Kingdom) as well as those suffering protracted contractions (e.g., Greece, Finland, and Spain). The majority of these populist parties, both left and right, oppose European monetary union and further integration. Some do support free trade, but many oppose the Transatlantic Trade and Investment Partnership (TTIP), as the negotiation is conducted by the European Union rather than national governments. Moreover, most of these parties argue strongly for tighter immigration restrictions on non-EU countries. Although these parties’ differences make cooperation at a pan-European level difficult, it creates a hostile environment to further liberalization and market-oriented reform.  Economic Populism and Crisis Preparedness   Economists have long recognized the existence of populist economic policy cycles, drawing on the experience of emerging markets. One popular formulation refers to “an approach to economics that emphasizes growth and income redistribution and deemphasizes the risks of inflation and deficit finance, external constraints, and the reaction of economic agents to aggressive non-market policies.” This literature, often anchored on the experience of Latin America, argues that macroeconomic populism results in overly expansionary policies. In many economic models, economic populism is reflected in a policy cycle of excessive credit creation, overvalued exchange rates, and external deficits, followed by crises. In lieu of slow growth and bailout fatigue in the region, many populist economic policies converge in the skepticism over, and even rejection of, austerity and neoliberal economic reforms. These are the very policies, such as labor market deregulation and privatization, that are often prescribed to European debtor countries by the International Monetary Fund (IMF) and EU. Populism appeals because it promises simple solutions to complex problems. For European voters in debtor countries like Greece and Portugal, who have suffered from falling living standards with no end in sight, the resounding rejection of austerity seems the simplest, yet most viable, option. However, economic populism is not limited to an anti-austerity stance. Since his election as prime minister of Hungary in 2010, Viktor Orban has pursued financial nationalism, which asserts monetary sovereignty, undermines central bank independence, favors national financial institutions, and rejects international official creditors like the IMF. Economic populism may result in unsound policy choices by oversimplifying economic realities and isolating such countries from the global economy. What's Next Populism is on the rise and has proven resilient to the modest economic recovery now underway in Europe. In some respects, these pressures have resulted in a modest easing of economic policies to support growth. But that near-term perspective downplays the longer-term risks that result from weakened governments and their more limited ability to respond to future economic shocks. The tragic Paris attack last month is a watershed event for European policymakers, which will place additional demands on them to coordinate responses to shared challenges including non-EU immigration, which many populist parties oppose. Following the incident, Prime Minister Orban stated that the current refugee settlement system will spread terrorism, and later argued that the EU should overhaul its founding treaties. From this perspective, the current debate over whether Europe needs more demand (as many periphery country policymakers would argue) or more austerity (a common view in creditor countries) misses the point. Europe needs more of both. If European governments want to move forward with the integration project, they need to keep populism at bay through cyclical measures including debt relief, moderate austerity and more public investment, and growth promotion. They also need to promote a more complete banking and fiscal union in order to bolster confidence in the longer-term sustainability of the euro project. Still, such measures are necessary but not sufficient. Macroeconomic policies cannot be the entire solution. A comprehensive approach to addressing the substantial political, social, and economic challenges facing Europe is needed to fully address the underlying causes of today’s populism.  Looking Ahead: Kahn's take on the news on the horizon Greece receives bailout loan Greece received the next tranche (two billion euros) of its EU loan package, but saw its parliamentary majority slip ahead of tough negotiations on pension reform, debt relief, and a new IMF program, which are likely to be delayed well into 2016.  Argentina elects Mauricio Macri Argentina’s new center-right president is likely to roll back the populist policies of his predecessors and implement more market-friendly measures to help Argentina attract foreign investment and return to international capital market.  Federal Reserve may raise interest rates The minutes from the Federal Open Market Committee’s October meeting suggest an interest-rate increase is possible in December. Even so, if inflation remains low and below the Fed's target, the pace of rate increase will be gradual. 
  • Global
    The World Next Week: September 10, 2015
    Podcast
    U.S. Congress debates the Iran deal; the EU holds an emergency summit on the migrant crisis and the U.S. Federal Reserve meets to discuss interest rates. 
  • Global
    The World Next Week: October 23, 2014
    Podcast
    Parliamentary elections take place in Ukraine; Brazil holds a presidential run-off election; and regulators release stress test results for banks in the European Union.
  • Global
    The World Next Week: April 24, 2014
    Podcast
    Iraq holds parliamentary elections; South Africa marks the twentieth anniversary of the end of apartheid; and the EU observes the tenth anniversary of its largest expansion.
  • Global
    The World Next Week: April 10, 2014
    Podcast
    Algeria holds presidential elections; U.S. taxpayers mark Tax Day; and Ukraine prepares for talks with Russia, the United States, and the EU.
  • Global
    The World Next Week: March 27, 2014
    Podcast
    NATO foreign ministers meet in Brussels; the EU meets to discuss chronic diseases; and Syria removes more chemical weapons.
  • Global
    The World Next Week: March 20, 2014
    Podcast
    World powers convene in The Hague for a nuclear summit; the Group of Seven discusses Ukraine; EU-U.S. trade talks resume in Brussels; and President Barack Obama travels to Italy and Saudi Arabia.
  • Europe and Eurasia
    The European Union’s Eastern Partnership
    The most recent crisis in Ukraine has invited closer scrutiny of the European Union’s approach to its Eastern neighbors.
  • Development
    Poland’s Economic Model
    Poland has maintained economic growth despite the global financial crisis and eurozone woes, while asserting itself as a leading advocate for greater European integration.
  • Turkey
    Erdogan and Merkel: Almost Auf Wiedersehen
    Last week brought some seemingly good news for Turkey’s long moribund effort to join the European Union. At a joint press conference in Berlin with Turkish Prime Minister Recep Tayyip Erdogan, German Chancellor Angela Merkel declared that "The EU is an honest negotiating partner" and that Brussels would pursue Turkey’s membership in "good faith." In a way, there was reason for Turks to celebrate Merkel’s forward leaning statements.  Both she and former French president, Nicolas Sarkozy, have been the most vocal and public proponents of what they call a "privileged partnership" for Turkey in lieu of full EU membership, which is a nice way of saying the status quo.  Merkel’s willingness to energize the accession process is no doubt more apparent than real, however.  European opposition to Turkey’s membership in one of the world’s most exclusive clubs is pretty wide and deep even among European leaders who give lip service to the notion. It goes without saying that Turkey isn’t ready for EU membership.  Ankara still needs to address a host of political problems including human rights issues, freedom of the press, the quality of the judicial system, and the generalized backsliding on the ambitious democratic reforms the Justice and Development Party began in 2003.  There is also, of course, the state of relations between the Republic of Cyprus--an EU member--and Turkey, which has tens of thousands of troops on the island protecting the  orphaned and illegitimate Turkish Republic of Northern Cyprus.  Resolving these issues will be daunting and require political leadership, but one can imagine ways in which they can be solved. No, the problems with Turkey’s EU membership are not technical-political-foreign policy related, but rather are directly related to the Europeans’ fundamental inability to agree on what "Europe" is and what it means to be "European." If the EU is geographic, co-terminus with predominantly Christian countries, Turkey’s bid for membership continues only because Brussels doesn’t want to be tagged as anti-Muslim and the Turks don’t want to let the Europeans off the hook for promises that were made to the Turks about integration with Europe dating as far back as the 1964 Ankara Agreement.  If, however, Europe is based on a set of common ideas, norms, and principles about rule of law, transparency, tolerance, and consensual politics then Turkey could clearly be an EU member one day. My sense is that when a lot of Europeans pull their covers up at night, they regard the European Union in geographic terms and recoil at the idea that Europe could one day border Iraq, Syria, and Iran.  Moreover, imagine your average Frenchman or German who think of themselves and their countries as the most important members of the largest economic bloc in the world. It must be jarring that one day they may wake up to find that 75 million Turks have joined the Union and now have the largest representation in the European parliament, the biggest military, and most dynamic economy in Europe. That thought can’t sit well and Turkey’s membership is clearly political freight European chauvinism is not likely to bear any time soon. Chancellor Merkel and Prime Minister Erdogan have clearly decided to let Turkey’s minister for EU Affairs, Egemen Bagis, continue burning jet fuel in his quixotic mission rather than let some of these well-known, but rarely spoken ugly truths out in the open.
  • European Union
    The Potential Twilight of the European Union
    This essay assesses the causes and consequences of the renationalization of politics in the European Union. Editor's Note: This essay is part of the collection Crisis in the Eurozone. Introduction The European Union's (EU) trillion-dollar loan package succeeded in quelling the financial maelstrom spawned by Greek debt. Nonetheless, the financial crisis has taken a painful toll on many EU members, and high national debts and the uncertain health of the continent's banks may mean more trouble ahead. Although these economic woes have of late captured the headlines, they pale in comparison with a more serious malady: Europe's historic experiment in political union is faltering. As the poisonous politics that delayed the EU's rescue of the eurozone revealed, Europe is experiencing a renationalization of political life. The project of European integration, which has steadily advanced since the bitter years after World War II, has been thrown into reverse as its members claw back from the union the traditional powers of national sovereignty. And the causes run much deeper than the ongoing financial crisis, suggesting they are here to stay. Generational change, a backlash against globalization, and the absence of a compelling vision of Europe's place in the world may well mean that the European Union is running out of steam. The EU's uncertain future has enormous stakes for Americans as well as Europeans. Europe remains the United States' go-to partner on every front—from stewardship of the global economy to curbing global warming to bringing stability to Afghanistan. With U.S. debt soaring and Americans tiring of the wars in Iraq and Afghanistan, Washington could certainly use a collective EU capable of shouldering greater global burdens. Instead, the renationalization of the EU threatens to consign its twenty-seven individual member states to geopolitical irrelevance. The recent backsliding, if it continues, has the potential to compromise one of the most significant and unlikely accomplishments of the twentieth century—an integrated Europe at peace with itself, seeking to project power as a cohesive whole. The Comeback of the Nation Germany has been the economic and political engine behind European integration, motivated by its obsession with banishing the national rivalries that long subjected Europe to great power war. But Berlin's recent reluctance to come to the rescue of Greece—Chancellor Angela Merkel resisted the bailout for months—constituted a breach of the spirit of common welfare that is the hallmark of a collective Europe. Only after the Greek crisis threatened to engulf the eurozone did Merkel override strong popular opposition and approve the loan. Voters in local elections in North Rhine-Westphalia promptly punished her party for doing so, delivering the Christian Democrats their most severe defeat in the postwar era. Such stinginess on economic matters is only the tip of the iceberg. The bigger problem is that German enthusiasm for the EU seems to be fast disappearing. In one of the few signs of life in the European project, member states last December embraced the Lisbon Treaty, endowing the union with a new presidential post, a foreign policy czar, and its own diplomatic service. But Berlin then played a leading role in selecting as the EU's new president and foreign policy chief Herman van Rompuy and Catherine Ashton—two low-profile individuals who would pose little threat to the visibility and authority of national leaders. Even the courts are putting the brakes on the power of EU institutions. Last year, the German Constitutional Court issued a ruling strengthening the sway of the national parliament over EU legislation. As Der Spiegel commented, the ruling "threatens future steps toward European integration." This renationalization of politics has been occurring across the EU. A stark sign of trouble on the horizon came in 2005, when Dutch and French voters rejected the European Constitutional Treaty, which would have consolidated the EU's legal and political character. The Lisbon Treaty, a watered-down version, was then rejected by the Irish in 2008. The Irish changed their minds in 2009, but only after ensuring that the treaty would not jeopardize national control of taxation and military neutrality. British voters in May brought to power a coalition dominated by the Conservative Party, which is well known for its Europhobia. Although constrained by their partnership with the pro-EU Liberal Democrats, the Conservatives last year showed their true colors by withdrawing from the European People's Party—the main center-right bloc in the European Parliament—to join a far-right bloc that is a bastion of antipathy toward the EU. Meanwhile, right-wing populism is on the upswing in many EU member states. It is the product primarily of a backlash against immigration (particularly of Muslims), not against European integration. Nevertheless, this hard-edged nationalism aims not only at minorities but also at the loss of autonomy that accompanies political union. Hungary's Jobbik Party, which borders on xenophobic, won forty-seven seats in elections earlier this year—up from zero in 2006. Even in the historically tolerant Netherlands, the far-right Party of Freedom recently won over 15 percent of the vote, giving it only seven fewer seats than the leading party. If these obstacles to a stable union were not sobering enough, in July the EU's presidency rotated to Belgium—a country whose Dutch-speaking Flemish citizens and French-speaking Walloons are so divided that, long after elections in June, a workable governing coalition has yet to emerge. It speaks volumes that the country now guiding the European project suffers exactly the kind of nationalist antagonism that the EU was created to eliminate. The Causes of Renationalization This striking renationalization of European politics is the product first and foremost of generational change. For Europeans who came of age during World War II or the Cold War, the EU enjoys a sacred status; it is Europe's escape from its bloody past. Not so for younger Europeans, who have no past from which they seek escape. A recent poll revealed that French citizens over fifty-five are twice as likely to see the EU as a guarantee of peace as those under thirty-six. Whereas new European leaders tend to assess the value of the EU through a cold calculation of costs and benefits, their predecessors viewed the European project as an article of faith. It is no surprise that matters of European integration no longer animate national politics as they used to. Meanwhile, the competitive demands of the global marketplace, coupled with the financial crisis, are putting severe strains on Europe's comfortable welfare state. As EU members struggle to bring down mountainous debt, retirement ages are rising and benefits dwindling. Although European integration does more to improve than impede economic performance, the EU is often the scapegoat for economic hardship. In France, for example, anti-Europe campaigns have focused their ire on the EU's "Anglo-Saxon" assault on social welfare and on the "Polish plumber" who takes local jobs due to the EU's open labor market. Finally, the EU's rapid enlargement to the east and south has further sapped it of life. Absent the cozy and familiar feel the smaller union had before the Berlin Wall fell, its original members in Western Europe have turned inward. And the new members from Central Europe, who have enjoyed full sovereignty only since the collapse of communism, are none too keen to give it away again—even to consensual institutions in Brussels rather than autocratic ones in Moscow. As Poland's late president Lech Kaczynski asserted soon after taking office in 2005, "What interests the Poles is the future of Poland and not that of the EU." A cautious weariness also stems from European participation in the wars in Iraq and Afghanistan, missions for which popular support has been sparse. In Germany, roughly two-thirds of the public opposes the presence of German troops in Afghanistan, and the Dutch have already withdrawn their troops. Such widespread aversion to far-flung commitments rests uneasily with the Lisbon Treaty, which is intended in part to give the EU more geopolitical heft. Indeed, projecting Europe's voice on the global stage is one of the union's raisons d'être. But this vision has no constituency; wars in distant lands, coupled with plunging defense expenditures stemming from the economic downturn, are tempering the European appetite for greater geopolitical responsibility. After all, member states have never shown much enthusiasm for extending the EU's authority over security issues, instead jealously guarding their sovereignty on matters of defense. Buying Time The EU has thus far reacted to this stunning loss of momentum by entering a holding pattern. As a leading member of the European Parliament recently explained, "The EU is now just trying to keep the machine going. The hope is to buy enough time for new leaders to emerge who will reclaim the project." Buying time may be the best the EU can do for now, but its slide is poised to continue, with costs even for those outside Europe. The Obama administration has already expressed frustration with an EU whose geopolitical profile is waning. As Defense Secretary Robert M. Gates complained in February 2010 to a gathering of North Atlantic Treaty Organization (NATO) officials, "The demilitarization of Europe—where large swaths of the general public and political class are averse to military force and the risks that go with it—has gone from a blessing in the twentieth century to an impediment to achieving real security and lasting peace in the twenty-first." As the United States tries to dig itself out of debt and give its armed forces a breather, it will increasingly judge its allies by what they bring to the table. In Europe's case, the offering is small and shrinking. When other unions stumbled, they suffered bloodshed. The United States enjoyed over seven decades of prosperous federation after 1789, only to descend into civil war in 1861. Yugoslavia suffered a similar fate in the 1990s—and is now gone for good. Europe is hardly headed back to war; its nations have lost their taste for armed rivalries. Instead, less dramatically but no less definitively, European politics will become less European and more national, until the EU becomes a union in name only. This may seem no great loss to some, but in a world that sorely needs the EU's aggregate will, wealth, and muscle, a fragmented and introverted Europe would constitute a historical setback. Six decades ago, Jean Monnet, Robert Schuman, and Konrad Adenauer were Europe's founding fathers. Today, the EU needs a new generation of leaders who can breathe life into a project that is perilously close to expiring. For now, they are nowhere to be found.