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The European Union (EU) is in the midst of a series of crises which include Brexit which has now become a certainty the with victory of Boris Johnson following the snap election in the United Kingdom (UK) held on December 12. The other pressing crises are Eurozone financial problems, an unprecedented EU fight still raging over who will pay for the UK share of the budget which accounts for 12 per cent of the total EU budget after Brexit, a dispirited Brussels bureaucracy, crisis in the south eastern flank, and last but not the least, the approaching economic slump. The EU is in crisis but it is not just one crisis but several overlapping crises.
Public discourse seems to offer little on the nature and implications of the crises that now face the EU. European integration was canvassed as the means to usher in an age of peace and prosperity. More importantly, it was seen as a means to make Europe capable of playing a leading role in world affairs. The Euro was seen as a way to make Europe more autonomous in conducting its monetary affairs. Both the EU and its single currency are now under serious stress.
The concern revolving around how to fund the EU budget cycle for 2021-27 has now been approved. Also the budget for 2020 was approved on November 27, but with Brexit looming, budgetary distress will further accentuate as Britain a net contributor leaves the EU. Many countries do not support an increase in the size of the budget nor do they support any increase in their contribution. This means Germany will have to take more financial burden to keep the integrated European project going. But there is serious opposition in Germany to undertaking more EU budgetary responsibility. The problem facing the EU budget is that it is not just a budgetary process but also a political exercise.
With the procedural wrangling standing in the way for the newly-appointed President of the European Commission Ursula Von der Leyen to assume her office was resolved, she took on the mantle of the European Commission on December 06 from her predecessor Jean Claude Juncker after a delay of one month. Meanwhile, the grand vision of further expanding the EU territory got a setback. Historically the country that has always been at the forefront of creating a United Europe, France, is having a second thought. It has vetoed to proceed with any discussion to admit Albania and North Macedonia.
Overall, the appetite for further expansion of the EU is receding and that, in turn, is causing concern that these countries are now likely to veer towards Russia which has already got Serbia into a customs union. Also Hungary, Poland and Czech Republic are now in control of populist extreme right-wing regimes with eurosceptic sentiments causing concerns for the EU's internal cohesion if not its stability. Victor Orban of Hungary has made his view in the parliament stating that the era of liberal democracy had come to an end and called for replacing it with 21st century Christian democracy.
The extreme right in Europe are now rebranding themselves as anti-neoliberal and that has put the European left into a defensive position. The left and left liberals are losing their ground to the extreme right populist movements in Europe. The influx of refugees from the Middle East and North Africa further increased the supply of oxygen for the ultra-right to trumpet their racist and xenophobic agenda and blame the efforts to settle them among EU member-countries for rising unemployment because they (refugees) steal jobs. Hungary remains in the forefront to pushback any such agenda to share the burden of refugees and almost aborted the refugee burden-sharing process. Also the liberal side of politics has started to counter ultra-right racism with their own variety of dog-whistle racism as the political ground is slowly slipping away from under their feet.
But the EU has always struggled to accommodate democratic politics of its member-countries because the EU itself has unrepresentative powerful institutions and they are not supported by the majority of citizens in elections and that give rise to lack of accountability. That results in democratic deficit how decisions are made in the EU. It is now suggested that solving the EU's democratic deficit would help revive democracy at the national level and help stem the tide of illiberal democracy taking a strong foothold in many member-countries.
Since the creation of the currency union without an accompanying political and fiscal union, the EU has been faced with numerous challenges, rendering it quite often unworkable. The whole host of political crises now facing the EU is now overshadowed by the crisis that began in the wake of the GFC (2007-2008 Global Financial Crisis), known as the Eurozone crisis which has grown into a crisis of a much greater magnitude and danger than what the EU has ever seen.
It remains a puzzle how a crisis that was made in the US ended up causing a deep and existential crisis for the EU, and particularly the Eurozone. The crisis hit Europe harder than the US rendering the euro more vulnerable. The answer lies in different policy responses to the crisis by the EU and the US. While the US took very robust easy money policy, event resorting to the printing press, the EU, rather Germany, was reluctant to do any such thing. The fiscal crisis led to an imposed convergence of what is described as austerity measures which means budgetary cuts.
Budgetary cuts at a time of economic distress can only lead to economic slowdown or even economic collapse like as happened in Greece. The singular focus on balancing the budget only aggravated the unfolding economic crisis in Europe. As Europe slides into a recessionary phase resulting from sweeping budgetary cuts, Germany, the dominant economy in Europe, has started to feel the pinch. It is estimated that 80 per cent of German trade surpluses come from its exports to other EU countries. As these EU countries recede into recession, German exports take a hit.
The European Central Bank (ECB) has been tasked to deal with the unfolding economic crisis. In the process the ECB is not only using its arsenal, the 'interest rate', but also has acquired "quasi - fiscal powers'' by resorting to quantitative easing (QE) to stimulate economic activity. This has in fact revolutionised the contemporary concept of governance. Mario Draghi, the former President of the ECB, clearly outlined what he would be doing - "whatever it takes'' to fulfil his mandate. That means he significantly expanded the ECB's remit to put Eurozone economies back on track not only cutting the interest rate but also buying sovereign bonds.
Other EU central banks have been doing the same. Their action saw the biggest transfer of wealth from the ordinary working people to the large asset holders. Despite all the efforts the Eurozone barely keeps its head just above the water. The ECB has been in negative interest rate range over the last five years and there is hardly any sign that EU economies are moving anywhere in rejuvenating their sluggish economies and undershooting the targeted inflation rate. The ECB has failed on the both score.
Though Mario Draghi is being hailed as the man who "saved the Euro'' through his 'unconventional monetary policies', he is leaving behind him Eurozone in a Japanese-style deflationary trap. The economic stagnation continues as global trading environment is causing decline in Eurozone manufacturing output which, in turn, is dampening investment. So the September ECB rate cut was justified on that ground as well as undershooting its inflation target. But continuing economic stagnation will keep lowering the Wicksellian natural rate of interest. As the saying goes, low interest rates beget low interest rates.
Monetary policy seems to have run its course and the new President of the ECB Christine Lagarde has called on governments to put more emphasis on fiscal stimulus. The Bank for International Settlements (BIS), the world's central banking watchdog, has also warned governments that there is little room left to cut interest rates. So politicians will need to lend "helping hands'' if necessary.
Muhammad Mahmood is an independent economic and political analyst.