• Europe’s basic problem is a lack of leadership
  • This has led to fiscal crises and weakening internal cohesion
  • These problems are unlikely to be resolved in the coming year

Last week GIS published a report on Europe’s choices when it comes to its global position. Now we want to look at scenarios for what could occur within Europe.

After the extreme changes and devastating wars Europe experienced in the first half of the 20th century, in the second half the continent was on a nearly constant upward trajectory. First, countries in its west came together peacefully within the European Union. Later, the implosion of the Soviet Union gave several countries in Central Europe the freedom to join the bloc. From 1950 to 2000, Europe enjoyed peace and increasing prosperity.

With the collapse of the Soviet empire, Europe believed it was entering a phase of everlasting peace. Defense was no longer considered a priority; economic growth was taken for granted and the welfare state grew. The first real cracks in the facade began to show in 2008 when the financial crisis made several deficiencies clear. The financial crisis was not the cause of the problem, but a symptom. The lack of fiscal discipline led to the sovereign debt crisis, which started in 2010. The recession that had begun a year earlier was also due in large part to an insufficient number of new innovative enterprises. The economic malaise was mainly caused by excessive government involvement in the economy and overregulation – a combination which limited innovation and investment.

Europe’s poor footing in defense and foreign policy paralyzed it during the Ukraine crisis. These difficulties, along with the chaotic fiscal scene, had not yet been resolved when the migration crisis surfaced in 2014. All this had been foreseeable for more than 10 years, but the problems were not addressed in time.

Unresolved issues based on failing foresight

In 2016, the deteriorating economy, tension with Russia and the migration crisis all dominated the political scene. These issues remain unresolved and are jeopardizing the EU’s – indeed all of Europe’s – ability to be successful. Brexit was a drastic example of Europe’s inability to address real problems efficiently. The United Kingdom’s vote to leave the EU showed the lack of leadership and insufficient sense of political responsibility on both sides of the English Channel.

The Brexit vote was one of two important referenda in Europe in 2016. The other was in Italy, where the population rejected then Prime Minister Matteo Renzi’s proposed constitutional changes. Both brought surprises and both resulted in a vote against the political establishment. Europe will have two decisive elections in 2017: the French presidential elections and the German federal elections. Europe’s political establishment is paranoid about what it calls new “radical” movements – but they are not the real problem. The more substantial threat is the unresolved issues which the people of Europe see and rightly fear. By refusing to address them, the political establishment makes the radical movements possible.

Europe’s population realized long ago that the “feel-good society” had run its course

More responsible sections within the established parties had pointed out these challenges, but were silenced. Now, the radical parties might even be necessary to shake up the scene and open the path for real reforms. Europe’s population realized long ago that the “feel-good society” had run its course, but governments still maintain a Potemkin village of a functioning welfare state. Europe became very protectionist through many regulations, while the drive for internal harmonization jeopardizes local habits, customs and traditions. That is something people simply do not want.

As a result, the EU’s internal cohesion is weakening. The clearest example is Brexit. But other groups within the EU, especially the Visegrad Group and the Nordic countries – which have played a very positive role – feel uncomfortable with the idea of an ever-closer European Union. Anti-EU sentiment is also strengthening in places like Italy, which has struggled with the euro as its currency, and France with its onerous debts.

The basic problem of Europe is a lack of leadership. Within the EU, the tail is wagging the dog. The initiative should come from the European Council, which represents the member states. However, the technocratic European Commission, with its desire to regulate and dominate, has become the strongest body. It is interesting to note that the public sees little of the European Parliament and the Council. Commission President Jean-Claude Juncker is widely recognized as “Mr. Europe,” when in fact he only represents the EU’s executive body.

The future

If we look ahead to short-term scenarios for Europe, we see that the deficit and sovereign debt crises will not be resolved. The year 2016 showed the end of austerity, which was made possible due to the expansionary monetary policies of the European Central Bank. Economic growth did not follow, but it did buy time for governments – time which unfortunately was wasted instead of used to implement the necessary reforms. The Italian banking crisis has brought the debt crisis to the surface again – it will continue throughout the next few years across Europe.

The dire situation will become worse in 2017, with harsh consequences. We know from history that injecting artificial liquidity has never led to sustainable economic prosperity. The excessive liquidity provided by the ECB, combined with zero interest rates, will inevitably destroy private households’ savings and pensions. Unless courageous action is taken soon to reduce government influence in the economy, these savings will be wiped out. The resulting unrest will likely topple all of Europe’s current political elite.

Migrants from France’s “Jungle” center in Calais await relocation.
Migrants from France’s infamous Calais “Jungle” await relocation. The refugee crisis could rock the European political establishment in 2017 (source: dpa)

Instead of deregulating and unleashing the economy, and against all economic wisdom and experience, European governments are attempting to implement more regulation, control and central planning. This will only make matters worse. The scapegoat has become “inequality” and a witch hunt against the so-called rich has begun. Unfortunately, this distracts from the real problem of insufficient innovation and investment caused by overregulation. It is amazing in a sad way that many leading economists also support some of these wrongheaded ideas. The planned economy, to which they lead, was the system of Marxism-Leninism. It had terrible track record.

The year 2017 will mark 100 years since Russia’s October Revolution. This led to the creation of the Soviet Union, one of the most brutal dictatorships that ever existed and which fortunately imploded in 1989. Marxism-Leninism was the underlining ideology. Although it was clearly proven disastrous, its ideas remain strong and still influence many decision makers in the West. These leaders deny such a characterization and cynically label themselves “liberals,” while opposing classical liberal economic measures.

Loose ends

We must use this knowledge of the past when we imagine scenarios for Europe. Unfortunately, the political basis is not yet there for a return to a real, successful market economy, based on innovation, competition and increasing productivity. In the short term, more socialist measures will prevail, but there might be signs that a new generation of politicians will again strive for more market-based solutions and innovation. However, this will need another few years.

Europe will continue to muddle through on the issue of migration and will try to find “European solutions.” The wish to integrate migrants will clash with overly stringent European labor and welfare laws. The crisis is now splitting Europe between countries which want to welcome migrants but keep them in camps because their laws make it nearly impossible to find work, and others which say very clearly that they do not want to accept the migrants at all.

Instead of deregulating and unleashing the economy, governments want to implement more regulation

The migration crisis has become one of the biggest political issues in Europe and threatens the existence of many established political parties. There is very little chance that it will be solved in 2017.

In foreign relations, at least, leaders seem to realize that there are problems in defense and migration. There are lukewarm debates, but the action is insufficient and unconvincing. In all of Europe’s foreign relations there are loose ends that need to be tied up, whether with the United States, Russia, Asia, Africa, the Middle East, Mediterranean countries or Turkey. However, Europe has not taken matters into its own hands, and instead continues to react to events outside its borders as they happen.

Europe’s bumpy ride

The predictions for 2017 for Europe are not rosy. But sometimes things must get worse to get better. We can still believe in Europe’s regenerating strengths and in Schumpeter’s theory of creative destruction. Certainly, some radical movements in Europe which dominate the news are cause for concern, but what is really worrying is that the so-called liberal democracies lack the willingness to resolve their underlying problems. On the other hand, even if we do not like some of the new movements, they may be necessary. The political establishment needs a shake-up. Europe needs more diversity, less regulation and more freedom. The technocratic movements supported by the political elite cannot meet these needs. The political turbulence and resulting problems could finally bring out and strengthen the reasonable forces that favor individualism, freedom of choice, property rights and legal security, allowing them to put Europe back on track.

Two important elections will happen in 2017. In France, the center-right has chosen a strong candidate for president in Francois Fillon. He is a European in the tradition of Charles de Gaulle – seeking not a centralized union, but a Europe that serves as a fatherland of fatherlands. He also favors less government, intends to reduce France’s bloated civil service and believes in simplifying the regulatory jungle. It is likely that he will win the elections, which could bring a turnaround in France.

The German situation looks more difficult. Ms. Merkel will run again for the Christian Democrats and it is probable that they will remain the strongest party after the 2017 elections. However, their numbers may not be sufficient to form a government. The alternative would be coalition of the three parties of the left. It is highly probable that Martin Schulz, the outgoing president of the European Parliament, will run as the candidate for the Social Democrats. This is a very strong indication that the left plans a coalition. Mr. Schulz, who is very ambitious, would not give up his position to become a junior partner to Ms. Merkel in a “large coalition” or the leader of a medium-sized opposition party. If he leads a coalition of the three left wing parties, he could become chancellor. Both scenarios are conceivable. In both cases the lack of strategy seen over the last eight years would continue, as would Germany’s opportunistic muddling through. Outsider parties, such as Alternative for Germany (AFD), are likely to become a strong factor.

Europe will come back to realize that it does not need excessive harmonization

The year 2017 and those that follow will be very bumpy for Europe. But nearly inevitably, Europe will come back to realize that it needs a single market with the four freedoms (the free movement of goods, capital, services and people), but with as little harmonization as possible and a common defense for at least the major countries. However, the Union should also allow exemptions and will necessarily become more tolerant of local requirements. For instance, the wish to stop immigration when the number of foreigners has reached a certain level should be considered. If implemented reasonably, such limitations would not violate the freedom of movement.

It is very conceivable that Europe will find a sort of “Union light” for its periphery – something less stringent than the rules governing the current European Economic Area and which does not force the “Union light” members to implement all EU legislation. This could be a good model for the United Kingdom, but it could also resolve difficulties in the EU’s relationships with countries such as Turkey and Ukraine.

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