Tuesday, 5 January 2016

Europe’s disintegration could be biggest threat of 2016

In World Economy News 05/01/2016

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At the cusp of the new year, we face a world in which geopolitical and geo-economic risks are multiplying. Most of the Middle East is ablaze, stoking speculation that a long Sunni-Shia war (like Europe’s Thirty Years’ War between Catholics and Protestants) could be at hand. China’s rise is fueling a wide range of territorial disputes in Asia and challenging America’s strategic leadership in the region. And Russia’s invasion of Ukraine has apparently become a semi-frozen conflict, but one that could reignite at any time.
There is also the chance of another epidemic, as outbreaks of SARS, MERS, Ebola, and other infectious diseases have shown in recent years. Cyber warfare is a looming threat as well, and nonstate actors and groups are creating conflict and chaos from the Middle East to North and Sub-Saharan Africa. Last, but certainly not least, climate change is already causing significant damage, with extreme weather events becoming more frequent and lethal.
Yet it is Europe that may turn out to be the ground zero of geopolitics in 2016.
For starters, a Greek exit from the eurozone may have been only postponed, not prevented, as pension and other structural reforms put the country on a collision course with its European creditors. “Grexit,” in turn, could be the beginning of the end of the euro EURUSD, -0.3867% and monetary union EURUSD, -0.3867% as investors would wonder which member — possibly even a core country (for example, Finland) — will be the next to leave.
If Grexit does occur, the United Kingdom’s exit from the EU may become more likely. Compared to a year ago, the probability of “Brexit” has increased, for several reasons. The recent terrorist attacks in Europe have made the U.K. even more isolationist, as has the migration crisis. Under Jeremy Corbyn’s leadership, Labour is more Euroskeptic. And Prime Minister David Cameron has painted himself into a corner by demanding EU reforms that even the Germans — who are sympathetic to the U.K. — cannot accept. To many in Britain, the EU looks like a sinking ship.
If Brexit were to occur, other dominos would fall. Scotland might decide to leave the U.K., leading to the breakup of Britain. This could inspire other separatist movements — perhaps starting in Catalonia — to push even more forcefully for independence. And the EU’s Nordic members may decide that with the U.K. gone, they, too, would be better off leaving.
As for terrorism, the sheer number of homegrown jihadists means that the question for Europe is not whether another attack will occur, but when and where. And repeated attacks could sharply reduce business and consumer confidence and stall Europe’s fragile economic recovery.
Those who argue that the migration crisis also poses an existential threat to Europe are right. But the issue is not the million newcomers entering Europe in 2015. It is the 20 million more who are displaced, desperate, and seeking to escape violence, civil war, state failure, desertification, and economic collapse in large parts of the Middle East and Africa. If Europe is unable to find a coordinated solution to this problem and enforce a common external border, the Schengen Agreement will collapse and internal borders between the EU member states will reappear.
Meanwhile, austerity and reform fatigue on the eurozone periphery — and among noneurozone EU members such as Hungary and Poland — is clashing with bailout fatigue in the core. Populist parties of the left and right — with their shared hostility to free trade, migration, Muslims, and globalization — are becoming more popular throughout Europe.
Syriza is in power in Greece; a leftist coalition is in office in Portugal; and the Spanish election could lead to significant political and policy uncertainty. Virulent antimigrant, anti-Muslim parties are becoming more popular in Europe’s core, including the Netherlands, Denmark, Finland, and Sweden. In France, the far-right National Front came close to winning power in several regions earlier this month, and its leader, Marine Le Pen, may do well in the 2017 presidential election.
In Italy, moreover, Prime Minister Matteo Renzi is under attack by two antieuro populist parties that have risen in opinion polls. And Chancellor Angela Merkel’s leadership is now under threat in Germany, following her courageous but controversial decision to allow almost a million asylum-seekers to enter the country.
In short, the distance between what Europe needs and what Europeans want is growing, and that gap could spell deep trouble in 2016.
The eurozone and the EU are facing multiple threats, all of which call for a collective response. But what we are seeing is its member states increasingly adopting a national approach, thus undermining the possibility of Europe-wide solutions (the migration crisis is a tragic case in point).
Europe needs more cooperation, integration, risk sharing, and solidarity. Instead, Europeans appear to be embracing nationalism, balkanization, divergence, and disintegration.

Source: MarketWatch