Rebooting the European Union

Muhammad Mahmood | Published: July 15, 2017 19:38:10 | Updated: October 17, 2017 14:38:11

The rising anti-European Union (EU) sentiment, largely spearheaded by  populist political leaders  in a number of EU member countries  is being challenged by newly elected French President Emmanuel Macron along with German Chancellor Angela Merkel. They are now in the process of trying to put on track the struggling EU. Since its inception the EU has been viewed as the cornerstone of European stability and prosperity. Over time the number of EU member countries has grown from six to 28 [Brexit has yet to take effect]. It has created a single market of 500 million consumers. But the EU is facing challenges in many fronts. Its growing political, social and economic problems are manifested in the resurgence of nationalism. There is no move towards dissolution of the union but there is a tendency now to ignore EU directives. For the EU to function properly it will have to reinvent itself. Such factors are complicating the EU's ability to deal with multitude internal and external challenges.
Since the Global Financial Crisis (GFC) of 2007-08, the EU appears to be moving from one crisis to another crisis and that has distracted it from focusing on the long-term structural issues. However, the EU is now currently engrossed in how to deal with a number of pressing issues facing it. These issues include the EU economy, security, migration and Brexit. How the EU deals with these issues in the immediate future will determine how the continent itself will fare in the decades to come.
On the economic front, the Greek debt crisis is lingering and there is no sign of it being resolved soon, and secondly, there is a looming Italian banking crisis resulting from a very high level of non-performing loans accounting for close to 20 per cent of all loans. France is faced with very slow growth, continuing creep up in unemployment, especially youth unemployment, fiscal position is marked by chronic deficit spending - mostly structural in nature and rising public debt. The austerity programme brought in by Mr Hollande has not yielded much result and now President Macron is promising more of the same.  Meanwhile, the long-term outlook for the Eurozone remains uncertain due to seeming inability of its two core members, France and Italy, to implement meaningful sustainable and growth-promoting reforms. Countries, such as Spain and Portugal are also facing difficult economic situation with very high levels of unemployment. Germany's declining exports this year is another factor contributing to the economic woes of the EU having implications for all other member countries.
The Euro, considered as the crowning success of the European Integration process, is now struggling. No one is optimistic about the Eurozone's prospects. Many leading economists highlighted its design flaws at the time of its founding but their warnings were not heeded. The most prominent among them is Joseph Stiglitz. Now those fundamental design laws have come to haunt Eurozone leaders as reflected in recent debt crises not only in Greece but many other Eurozone member countries are also struggling with very high levels of public debt.  With the institutional framework in place, the Eurozone is inadequately equipped to deal with the crises. And there lies the core of the problem - it lacks economic and fiscal policy discipline and also lacks credible mechanism to respond to crises as and when they emerge.
Now, Europe is faced with large flows of refugees from war-torn countries such as Iraq, Afghanistan, Syria, Libya and also from other North and Sub-Saharan African countries.  Most of these refugees are not coming to Europe for a better economic life, but they are in fear of their lives. They are just looking for a safe place to take refuge. It is estimated that Syrian civil war alone cost 300,000 civilian lives. Many European countries, such as the UK, France and Italy were actively involved with the USA in destroying these countries just for the sake of regime change.  And the aftermath is this huge refugee influx into Europe. It must be borne in mind that a far larger number of refugees have taken shelter in other middle-Eastern countries.  The EU still could not work out how the burden of refugees is to be shared among its member countries. Control on the movement of people across border, if persists, will eventually interfere with the movement of goods across Europe.
While the EU is grappling with a whole host of problems, it now also must deal with Brexit. Prime Minister Theresa May is fully committed to Brexit but the recent British general election result has seriously weakened her negotiation position on the terms of Brexit.  Her government is weak and divided and lacks a clear and unified strategy for what it wants to achieve in the future UK-EU relationship. However, it must be borne in mind that overwhelming majority of the voters in the last British election voted for two mainstream parties who stood for Brexit during the election. So there is no difference of opinion between the government and the opposition on Brexit.
The challenge to the cohesion of the EU is coming from member countries. Political parties, previously considered as mainstream parties, are being challenged by populist forces focusing on anti-immigration, anti-trade and anti-EU issues. The traditional left-right political divide disappeared quite some time ago and was replaced by a centre; but that centre is in the process of being replaced by a new political divide along the lines of open or closed societies.  
The newly elected French President Emmanuel Macron, whose political power base has further been strengthened by an overwhelming majority gained in the recent French parliamentary election, and German Chancellor Angela Merkel are now joining together  not only to challenge anti-EU populist movements but also to put the struggling EU on track. Chancellor Merkel herself is facing an election in September this year and opinion polls suggest she will retain her position quite comfortably. But the reform track is not all that smooth; both France and Germany have considerable differences to bridge on the reform process. Before France can lecture other countries, it must have to put its finance in order. Furthermore, Macron's reform agenda, such as setting up a budget for 28 (likely to be  27) EU countries with a parliament and its own finance minister sent alarm bell ringing in Berlin. German Finance Minister Wolfgang Schaeuble clearly pointed out that would require treaty changes, a very unrealistic proposal in the current political climate in the EU. Underlying the German fear is that this may become a conduit to mutualise debt making Germany to foot the bill for the laggards. One German newspaper even dubbed Macron as a "very expensive friend''.   However, Macron reassured that he had no intention to go for euro bonds or mutualising Eurozone debt.
But whatever the form the EU reform process takes, that will require the resolution of Brexit so that the remaining 27 member countries can set about their own future. Brexit will take up time and energy but under the changed circumstances resulting from the British general election, Germany and France may take a much stiffer position. However, in whichever way the EU evolves in the years ahead will have significant implications for the rest of the world.
The writer is an independent economic and political analyst.


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