Brexit – The End Of Europe (As We Know It)? by Dan Steinbock, Difference Group
As the Eurozone is amid secular stagnation, its old fiscal, monetary and banking challenges are escalating, along with new threats, including the Brexit, demise of Schengen, anti-EU opposition and geopolitical friction. According to Dan Steinbock, Brussels can no longer avoid hard political decisions for or against an integrated Europe, with or without the euro.
Since 2010, European leaders have been deferring the hard decisions. Occasionally, there have been political reasons for delays. Yet, times of crises cry for leadership.
Economically, procrastination has sustained the semblance of continuity in the short-term. Politically, it has maintained the status quo of “integration without common institutions”, which is unsustainable. Strategically, it has resulted in misguided military policies that threaten to undermine what is left of the unity of the region. Time is out and delays are no longer an option.
From cyclical contraction to secular stagnation
The numbers are not encouraging. While the Eurozone (EZ) is amid a fragile cyclical rebound, it is barely breathing as quarterly real GDP growth is at barely 0.3% and inflation close to zero. After half a decade of economic pain, the region will struggle for 1.5% growth. In the coming decade, that will slow close to 1%.
When the global financial crisis hit Europe, its core economies – Germany, France, the UK and Italy – relied on relatively generous social models for cushion, but structural challenges were deferred. In spring 2010, the European sovereign debt crisis was still seen as a liquidity issue and a banking crisis. As Brussels launched its €770 billion “shock and awe” rescue package, it was expected to stabilize the EZ.
However, Brussels and the core economies failed to provide adequate fiscal adjustment, which made mass unemployment a lot worse and continues to penalize confidence, demand and investment. Today, unemployment has decreased to 10.3% in the EZ (and to 8.9% in the EU, respectively). But underemployment remains prohibitively high and youth unemployment amounts to 23% in the EZ and is far higher in crisis countries, such as Greece (48%), Spain (45%) and Italy (39%). In the future, Europe must cope with a ‘lost generation.’
Initially, the small crisis economies (Greece, Portugal) were seen as “exceptions” because they were each less than 3% of the Eurozone GDP. As the crisis spread to Italy and Spain and the ailing economies accounted for almost 30% of the EZ economy, bailout packages were no longer a viable option. But while the urgency for structural reforms has increased dramatically, they continue to be deferred.
How has deleveraging succeeded? Well, it hasn’t, despite the rhetoric of austerity. As percentage of the EZ GDP, general government gross debt soared from 70% to 93% in 2013. It remains at threat levels in Greece (169%) and Portugal (130%) and excessively high in Italy (135%) and France (135%), even Spain (98%).
If Brussels had faced head-on its threats – fiscal, monetary, liquidity, banking and competitiveness challenges – in 2010, it would have been better positioned to do so. The EU was still stronger economically, more united politically and wary strategically. Now that it must face still new challenges, it is weaker economically, polarized politically and assertive strategically. And that does not bode well for the future.
New threats – The “Brexit”
In February, Prime Minister David Cameron struck a deal with EU ministers on revised terms for UK membership in the EU. The British referendum on whether to stay in the EU or to Brexit will be held on June 23. In media, the EU issue has been overwhelmed by domestic politics over the post-Cameron future. When London’s Mayor Boris Johnson gave his support to the Leave vote, he became Tory activists’ favorite to lead the Conservative party. Meanwhile, the UK pound plunged to a seven-year low against the dollar. If the Brexit advances, this is just taste of things to come. Even if the surprise resignation of Cameron’s Work and Pensions Secretary Iain Duncan Smith may have had more to do with his personal ambitions than anti- EU position, it did deal another major blow to Cameron.
British EU-critics argue that the UK is suffering from Brussels’s excessive business regulations and bailouts of financially fragile countries. In contrast, EU-supporters believe the UK benefits greatly from the ease of business to the huge EU market, the flow of young migrants to counter-balance the UK’s greying population and EU’s contribution to national security.
Cameron’s revised EU deal won adjustments to block security-risk migrants, limits of welfare benefits to EU migrant workers, and reimbursement for British contributions on future Eurozone bailouts. The negotiated economic benefits will also allow London to block amendments to new regulations. Last year the UK also won a court case against the ECB, which would have limited the clearing of EZ transactions to within the EZ (a disadvantage to British banks over German and French rivals.
Despite close polls, these positives will be used as evidence that the UK and the City can thrive only with the EU. But with the British referendum, Cameron opened the Pandora’s Box not just for a potential Brexit but to a major shakeup of the EU with the loss of a core economy, a major budget contributor, global financial hub and a defense dynamo. That has potential for a series of negative feedbacks within the EU.
Demise of Schengen
While it took 25 years to consolidate the Schengen agreement, which abolished the EU’s internal borders, the treaty has been severely compromised by a refugee crisis in less than a year. Its reassessment began amid the 2015 influx of some 1.2 million migrants, many of them from Syria. The re-think intensified after the Islamic State’s (IS) terror attack in Paris. As EU states began to re-impose temporary border controls, the EC proposed a major amendment to Schengen. As the refugee crisis has escalated, divisions among EU member states have intensified along the migrant routes causing a virtual domino effect.
After record number of migrants flooded southern Germany from Hungary, via Austria, Germany re-imposed its border controls with Austria. Austria began to limit road and rail traffic on its border with Hungary, which built a fence on its border with Serbia, as even Denmark and Sweden started to step up controls to reduce migrant inflows. When Copenhagen adopted the notorious “jewelry” bill to seize asylum seekers’ assets to cover their expenses, all gloves were off. Yet, member states may reinstate internal border controls for up to two years in “exceptional circumstances.”
As borders are closing within the Fortress Europe, the migrant bottlenecks – especially the Aegean Sea between Greece and Turkey – are at a boiling point, as reflected by EC President Donald Tusk’s recent plea: “Do not come to Europe! Do not risk your lives and your money!” It was a day when the founders of the EU turned in their graves. The old pretense of open and multicultural, democratic and peaceful Europe was gone. Instead, the new plan would see refugees being forcefully shipped back from Europe across straits patrolled by NATO warships, with Greece as its halfway house and Turkey as its waiting room.
According to an EC report, the reintroduction of border controls within the Schengen area could reduce EU economic output by €500 billion to