European Fissures Becoming More Apparent

As discord trumps cooperation, political divisions threaten the future of the European Union.

Bureaucrats in Brussels are growing increasingly anxious as anti-establishment movements gather momentum on the heels of Donald Trump’s election victory. Over the weekend, the European Union called an emergency meeting of members to discuss a strategy for dealing with Trump’s triumph. However, the result was a clear display of the group’s waning influence. Several nations refused to buy into the fear-mongering perspective presented by the EU leadership, opting to not participate.

As EU leaders ponder how we arrived at our current disposition, the rise of the right-wing and anti-EU elements across Europe should give them cause for concern. Nationalist movements are gaining traction across Europe, with the United Kingdom just the tip of the iceberg.  Italy’s upcoming referendum could pave the way for its own exit, especially if Prime Minister Matteo Renzi is handed a stinging defeat.  The growing political divide could not only harm the euro, but also spell the end of the trade bloc in all its glory.

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Anti-Establishment Movements Gaining Momentum

With attention mostly focused on the outcome of the US election, European leaders are once again missing the forest for the trees.  Years of austerity-driven policies alongside initiatives that effectively thwarted national sovereignty are feeling a much more pronounced backlash from European citizens. The Brexit was just the tip of the iceberg. Other countries such as France, Italy, the Netherlands, and even Ireland are experiencing similar trends in sentiment that could unwind the pan-European unity project.

Unfortunately for the Brussels-based technocrats that run the European Union, Trump’s rise to power presents a serious threat to their incumbency.  The election of Trump in many ways represents these bureaucrats’ worst nightmare: democracy. The European Union and its unelected leadership have often given themselves far-reaching powers that reduce the democratic choices of sovereign states.  One of the most obvious examples is the failed immigration strategy designed to deal with migrants from the Middle East and North Africa.

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Instead of giving nations the right to choose who immigrates, the European Union stripped sovereignty and handed down quotas.  This not only drew the ire of local populations, but also contributed to the traction of populist movements sprouting up across the European Union.  Voters are concerned that the EU’s meddling in sovereign affairs may be the template for a super-state entity.  The result has been a rapid rise in of rightist movements, echoing developments in the UK and the United States.  People thought Brexit was impossible.  The election of Trump was unthinkable.  However, as these two outsized examples show that discontent with the entrenched political elite is growing.

The Euro at Risk

The main result of these recent “impossible” developments is an EU technocracy with a target on its back.  Should one nation after another line up to exit, the fragile equilibrium the European Central Bank has recently reached could rapidly unravel.  After years of accommodating policy to support the member economies, the ECB is finally showing results.  However, political discord threatens to derail those precious gains.  More nations calling for the exit could severely dent the institution’s achievements as policy solidarity proves elusive.

The euro area, while largely an economic zone, also has strong backing on a political level.  However, failed political policies are largely to blame for the current economic problems.  Austerity as an economic policy simply does not work, with Greece being the strongest piece of evidence.  While ECB President Mario Draghi has called repeatedly for fiscal stimulus to accompany monetary stimulus, his voice has fallen on deaf ears politically.  Instead of working to fix restrictive budgetary principles outlined in the eurozone agreement, politicians went down the cost-cutting road.

During a period of weak economic activity, high structural unemployment, and falling inflation, austerity was the worst possible outcome.  Austerity kept a lid on growth, largely failed to tackle joblessness, and led to rampant disinflationary and deflationary trends in major economies.  While the ECB’s aggressive strategy of negative interest rates and asset purchases helped thwart a greater deflationary spiral for the economic union, political dissonance could rapidly unwind those gains.  More exit threats from France, Italy, and even Ireland could create a less desirable atmosphere for businesses across Europe, sending the euro sliding.

Looking Ahead

If the euro area struggles to retain its political relevance, the likely outcome would be greater euro losses over the medium-term.  With discord trumping cooperation at the present juncture, greater political divisions threaten the future of the European Union.  Populism is sweeping across the European continent.  If Brussels is unable to reverse its failures of the last decade, the very fabric holding Europe together will be under threat.  The growing possibility of more right-wing governments could present a sizable challenges to the European Union’s strategy.  Unless they take the opportunity to pivot and heed the calls of populists, the European Union and the euro currency may well be headed towards the dustbin of history.

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