2017 - the year Europe’s fate hangs in the balance Korbinian Rüger is Treasurer and Head of Campaigns at the Project for Democratic Union The European project has never been under more pressure than now. The question is, “will it crack?” and for three reasons this year will likely provide an answer. First the USA can no longer be counted on to uphold the Western liberal order and Europe will need to prove whether it can emancipate itself from its bigger brother. Second, the EU’s second largest economy and biggest geopolitical and military power, the UK, will start the process of exiting the Union. Finally, the Union’s two most important remaining members, Germany and France, both hold general elections and in both countries nationalist forces seeking to destroy the EU are on the rise. All of this comes at a time when Europe is still in the grip of three intertwined crises. First, a twofold security crisis consisting of Russian aggression, threatening the EU’s eastern flank, and the Syrian war that has so blatantly laid bare Europe’s incompetence in security matters and is closely connected to one of the greatest terrorist threats Europe has ever faced. Partly emerging from this Middle Eastern challenge, the second crisis is the ‘refugee crisis’ that the EU in its current configuration has proven itself incapable of solving. The third crisis is the persisting economic (debt) crisis of the eurozone. This crisis will return to the front pages with full force this year as Greece faces yet another deadline in repaying part of its third bailout and creditors (especially Germany and the IMF) are conflicting over whether the country will ever be able to get back on its feet without substantial debt relief. To us at the PDU it is quite obvious that the IMF, who is insisting Greece needs a ‘hair-cut’, is on the right side of this argument. Germany and other eurozone creditors have persistently argued that Greece will be able to meet its repayment goals if only it implemented the fierce austerity measures that it agreed upon with its creditors. A recent study suggests that something close to the opposite may be true. The study shows that it is very likely that one of the main reasons for why Greece and other countries are having a much harder time to get out of the financial crisis than most other economies is the amount of austerity measures they had to endure. For instance, there is significant correlation between reductions in government spending (austerity) and lower long term real GDP. To end this Greek tragedy the austerity measures (some of which are necessary, by all means) need to be relaxed and accompanied by a substantial debt relief. The same goes for Italy. Here too, the government and banks have accrued huge amounts of debt they will never be able to repay. Unlike Greece, however, Italy’s economy is one of the biggest of the eurozone and of huge systemic importance. If Italy goes under, this could well be the end of the eurozone. These are the risks that we need to be talking about. However, this fact doesn’t seem to figure in the minds of some European leaders, partly because they have an almost pathological fear of debt relief. For Germany the problem with debt relief is that it sounds too much like ‘transfer union’, a term that lets Berlin shriek in horror. The question is why? Every economist worth her salt will tell you that currency unions like the eurozone will only ever be successful if accompanied by a fiscal union. Indeed, those were the ideas for further European integration advocated for by the very creators of the euro. Only with a common fiscal policy that takes account of the differences in competitiveness within the eurozone and respects the fundamental ‘laws of gravity’ of the single currency, can we bring stability to the most vulnerable parts of the eurozone and thereby avoid spillover effects. Automatic transfers, for example through a European unemployment insurance system, are a necessary part of such a union. The fact that this has been overlooked or rather willfully ignored in the creation of the euro is a historic mistake. It is high time that we eurozoners fix this mistake. Of course, as has been pointed out by commentators like Hans-Werner Sinn, a European fiscal union will not function properly if it is created outside the structures of a state and before the formation of such a state. A common debt and a fiscal union without other elements of a state, such as a common defence force, could create moral hazard by inclining member-states to run up large spending deficits in the knowledge that the shortfall would be absorbed by the common budget. It is partly for this reason that we should not call for step-by-step European integration, but rather one big move to a federal state, including the creation of a single army. This army would, by the way, take Europe a lot further in increasing her defence capabilities and her contribution to NATO than simply increasing individual member states’ defence spending to reach the 2% target would, and at a much lower price tag. For one thing, this is the best way for Europe to survive the age of Donald Trump. It is hard to overstate the dramatic effects the Trump presidency could have on Europe. This is so for two reasons. First of all, unlike most of its internal policy, US foreign policy lies to a great extent in the president’s prerogative. As the repeal of the ‘Muslim ban’ and serious push back from congress in many cases has shown, the American system of checks and balances has proven and will continue to prove that Trump’s ability to fundamentally change the internal structure of the Unites States is limited. This is not the case regarding the US government’s external outlook. It is this policy area where Trump and his very powerful, far-right chief strategist Steve Bannon can most easily implement their radical and to some extent dangerous beliefs. Second of all, this is the area where Trump seems to hold his most genuine beliefs and where he is most likely to actually act on them. As Irish historian and president of the PDU, Brendan Simms, shows in his recent book Donald Trump: The making of a world view (co-authored with Charlie Laderman) Trump has consistently over years been advancing a view of US foreign policy that we may now see put into action. In his mind American presidents have for decades failed in unleashing the USA’s true national ‘greatness’. In terms of economics they have put too much effort on international trade and cooperation and too little on US manufacturing and construction. In Trump’s mind, this emphasis on trade has invited America’s partners to exploit her domestic economic potential. What’s worse, the president thinks that in terms of geopolitics his predecessors have failed in realizing how America’s allies are free-riding under the US defence umbrella. Trump thinks America’s protection of her friends and allies is a waste of resources that are being kept away from restoring America’s greatness. He doesn’t think that European security is in the United States’ own interest. Trump believes that we Europeans have long realized this and laugh up our sleeves at this manifestation of American stupidity. His plan is to put an end to our European party, which America has paid for without even being on the guest list. If Trump is successful in implementing this plan and Europe fails to grow up, emancipate itself and stand up to him defending the Western liberal order based on close cooperation and unconditional solidarity, Europe risks falling apart. What needs to happen then is that we Europeans pool our resources to create a viable alternative to relying on our partners across the pond to uphold our values and safeguard our security. The problem is that a lot of the EU’s resources will be taken up by an unnecessary internal struggle, the organisation of an orderly exit of the UK from the union. The challenge posed by Brexit thus is twofold. First, it needs be done in a way that serves the interests of both parties. For example, the EU should not be too set on keeping the UK out of the single market and punishing it economically, while the UK should make it clear that it will continue to use its full military and geopolitical power to serve European security interests. This is the bargain negotiators on both sides should have in mind. Second, however, it needs to be done in a way that doesn’t tie up too much of European resources, keeping them away from even bigger challenges. If this twofold challenge is met, then Brexit may after all not be the catastrophe many people take it to be. Of course, it would have been better had the referendum not happened. However, the UK would never have had any part of the full political union that should now be the goal of continental Europe. So once article 50 is triggered, which will likely happen around the time this article is published, the UK and the EU should not waste any time and see to it that the terms of the new relationship are set out as quickly as possible. If this doesn’t happen, forces hostile to the project of European integration, Mr Putin in the East and Mr Trump in the West, will use their chance to exploit a further weakened Europe, preoccupied with unnecessary internal struggles. Adding even more uncertainty to all of this are the French and German elections to be held in April/May and September respectively. Since the German Social Democrats (SPD) have proposed Martin Schulz, former president of the European Parliament, to be their candidate for the chancellorship, the race between the CDU’s Angela Merkel and her contender has become tighter than anyone would have expected. However, both of them can be counted on to commit the next German government to continued European integration. The real danger lies in widespread support for the ‘Alternative for Germany’ (Afd). This young party, initially founded as a one-issue eurosceptic party, took a sharp right turn after Germany welcomed close to a million refugees in 2015 and is now a nationalist force, threatening the liberal consensus that dominates German politics. Given current polls, the AfD is set to be one of the strongest opposition parties in the next Bundestag, which would make it hard for any new government to ignore the substantial share of voters they represent. It is thus imperative for all German political forces committed to a liberal order and to European integration to find a strategy to get back voters they have lost to the AfD. However, potentially the real European doomsday comes already five months before the German elections. On May 7th, the French people will elect their next president in a run-off vote. As polls suggest, this ballot will contain the names Marine Le Pen and the liberal, committed European Emmanuel Macron. If Le Pen, leader of the right-wing Front National wins the election, then it is likely game over for Europe. Though it is doubtful whether she would actually commit to pulling France out of the EU and the euro, these two institutions would take irreparable damage. Le Pen has built her career on two pillars, more or less blatant racism and hostility towards European integration. Should she win, Germany, who has always led every single step towards closer European cooperation in tandem with France, will be left to its own devices. The project of European integration would effectively be over. The best case scenario we can hope for this year is thus that Emmanuel Macron defeats Marine Le Pen in the French elections and recommits France to European integration, that the outcome of the German elections makes it possible for either Schulz’ SPD or Merkel’s CDU to lead a stable government, committed to a solidary Europe, that the UK and the EU find a way to come up with an agreement that is in the best interest of everyone and that Europe takes the Trump presidency as an opportunity to grow up, emancipate itself and finally complete the foreign policy and security union. However, even if this happens, we will have only bought ourselves more time. The underlying systemic flaws will still not go away. What would be needed is that European leaders and civil societies realize that this year Europe has looked into the abyss and call for systemic change. If this happens there is hope for Europe. The worst-case scenario is that Le Pen will be the new French president taking the country en route towards Frexit (by far the most dangerous of all potential outcomes), that the AfD will win even more seats than expected in the German general elections, making it almost impossible for any new government to ignore the eurosceptic sentiment within the German population such an outcome would be testament of. Furthermore, the EU and the UK end their failed marriage in tears, Donald Trump continues his dangerous path away from a stable liberal American democracy and Europe fails to stand up to him, risking being crushed between an authoritarian Russia in the east and a completely unreliable partner in the west. If this scenario materializes, it could well mean the end of the EU and European integration altogether. Both scenarios are equally unlikely. Odds are that after this year is over we will find ourselves somewhere in between these two extremes. However, the worst-case scenario is far too frightening not to do everything we can to prevent it.

"

What would be needed is that European leaders and civil societies realize that this year Europe has looked into the abyss and call for systemic change. If this happens there is hope for Europe

THE GLOBAL TRADE PLATFORM