Thursday, February 20, 2020

Looking ahead at negotiations on the future EU-UK relationship

Published in the magazine of Dutch think tank Clingendael

Following the ratification of the Brexit Withdrawal Agreement both by the UK and the EU, the UK has formally left the EU at the end of January. Now, it has entered a ‘transition’ stage, effectively outsourcing its trade policy and regulatory powers to Brussels until the end of 2020, in return for full and unrestricted market access. Nothing will  really change until then.

From March on, negotiations on the future relationship will commence. Fundamentally, the EU wants the UK to align as closely as possible, fearing that the UK would otherwise emerge as a ‘competitor’, as Angela Merkel has put it. The EU side is also sceptical that the negotiations can be sorted by the end of 2020. The UK is on the other side stressing it wants to use its newly gained regulatory independence to the greatest extent possible, as Prime Minister Boris Johnson is ruling out an extension of the transition period.
How will these positions be reconciled? Of course, nobody can predict the future, but if both sides implement Brexit in a responsible manner, it means gradual and flexible divergence. This means that the EU concedes that the UK will be able to continue to enjoy great market access, even if it diverges on certain areas, very much like Switzerland. The UK on the other hand would thereby concede that it will only gradually diverge, as it will continue to align, in exchange for EU market access. Industry will rightly wonder why the UK would already sacrifice market access in order to gain the right to divergence when on the 1st of January, the UK won't have changed many rules anyway. Many will rightly wonder if it isn't responsible to coordinate changes to UK regulation with the EU, in order to minimize the market access the UK loses in return for diverging, which is of course important in order to reap the benefits of Brexit. The UK could for example commit to align until 2024, just ahead of the UK general election, so Brexiteers can be certain the UK wouldn't be locked into this arrangement indefinitely, while it enables time to rethink many of the EU rules the UK has now enshrined domestically. In this way, the UK would enter some kind of Swiss arrangement, which ultimately will end in a Singapore-style Brexit, at least if the Brussels regulatory machine refuses to restrain itself, which makes regulatory aligment for the UK unattractive.
What will the future relationship look like?
One thing is for certain: the UK wants to leave both the EU’s single market and customs union. Theresa May’s great failure was to underestimate the importance of leaving the customs union, and agreeing a Brexit deal whereby the EU would be able to veto whether the UK would get its trade powers back. This stance was inspired by businesses understandably fearing disruption to their supply chains. But it should always have been considered unrealistic for the world’s fifth largest economy to outsource its trade powers to Brussels until further notice. This mistake has since been rectified by Boris.
Is there any precedent for a country leaving the EU’s single market and customs union? Apart from Algeria in 1962, Greenland in 1985, and St Barts in 2012, not really. But there is a precedent of a non-EU country that wanted a close relationship with the EU, but at the same time refused to join its single market and customs union.
That country is of course Switzerland, which decided in 1992 in a referendum not to accept the status of Norway as a ‘regulatory vassal’ or ‘fax democracy’, as former Norwegian PM and current Nato chief Jens Stoltenberg once dubbed his own country (where officials sit by the fax machine waiting for the latest directive from Brussels to arrive). It basically then took five years, from 1994 until 1999, to negotiate which EU rules the Swiss would align with and the degree of market access that would be granted in return. A package of seven sectoral agreements was signed in 1999 – all related to single market access. Like Norway, Switzerland isn’t part of the EU’s customs union. Tariffs on Swiss-EU trade mainly apply to agriculture.
It will be a challenge to negotiate a ‘zero tariffs and zero quotas’ arrangement between the EU and the UK in less than one year, but this kind of agreement would only determine whether tariffs are due on goods that are being traded, not whether those goods are able to enter the market at all. Financial services also wouldn’t be covered.
Therefore, the real question is if there is time for the UK to negotiate a Swiss-style ‘pick and mix’ arrangement for market access? Having five times as many staff working on something – as there would be five times less time available – would speed things up and any arrangement could be implemented ‘provisionally’, meaning it would partially enter into force before national parliaments in the EU have approved it. At this point, Boris should perhaps wonder if the importance of sticking to his promised timetable is worth it – and implementing the exit from ‘vassalage’ in phases instead of in one go could save him face.
Another question is why the EU would relax its opposition to Swiss-style ‘cherry picking’ of market access. Its claim that this somehow endangers the functioning of the single market is quickly debunked by the fact that such an arrangement has been working just fine between the EU and Switzerland for almost twenty years. Whether Switzerland agreed to freedom of movement of persons as well as part of the package is irrelevant. If the UK rejects freedom of movement, it would simply have to ‘pay’ for this EU concession with reduced market access.
Sure, there have been tensions in the EU-Swiss relationship lately, with the EU cutting off market access to the Swiss stock exchange last summer, when the Swiss refused to sign up to a role for the ECJ and to take updates of EU regulations automatically. It must be said that this escalation, which didn’t cause much damage in the end due to Swiss countermeasures, was partially fuelled by the EU’s desire to set an example to the UK. And the tensions weren’t the result of a dysfunctional Swiss-EU model, but because of the EU’s attempt to increase its control over regulations in Switzerland.
It’s very hard to see any alternatives to the Swiss ‘pick and choose’ model for the EU-UK relationship. This model strongly resembles Theresa May’s Chequers proposal, which was previously called the ‘three baskets approach’. Here’s why there are few other options. Suppose the EU sticks to its current stance, and so forces a cliff-edge event, dismissing the UK’s offer for ‘selective rule-taking in return for selective market access’ because the UK refused ‘full rule-taking in return for full market access’ (which would have meant letting the EU regulate the City of London, the biggest financial centre in the world). EU businesses keen to see the chemicals trade and manufacturing supply chains undisrupted would be up in arms. It would also be strange to see the EU, which otherwise goes around boasting about how it is a ‘regulatory superpower’ – because other countries adopt its regulations – dismiss the UK’s offer to do just that, because the UK would only take over part of the regulations. Will the EU risk its £94bn trade surplus in goods to simply avoid making yet another negotiation U-turn? Political gravity is likely to prevail here.
A key question is naturally also whether Boris will reheat the Chequers deal again. Opinion seems to be divided here, with some arguing that Boris will prioritise the timetable and stick to his promise of not extending the transition, at the price of aligning more closely to the EU than one would expect, which will be easier given his comfortable majority. The prospect of possible job losses due to loss of EU market access and regulatory divergence, would push Boris to aligning even more closely.
Others argue that the election result is a vindication of those desiring to diverge in terms of regulation, to fully exploit the benefits of ‘taking back control’ as soon as possible. The thinking here is that prioritising the timetable will actually result in the UK opting for a more divergent approach. This is because there would simply be no time for a ‘mixed agreement’, which basically allows for a deal whereby the UK is more closely aligned, but which would also need to be ratified by all EU member states. An agreement which falls under EU exclusive competence alone is easier to fudge in such a short time period, but only allows a looser relationship.
Both sides make strong arguments and we’ll probably know sooner rather than later what the intention of Boris is. We’ve already seen reports that he will legislate to ‘block’ an extension of the transition period. In the longer term, it is very likely that the UK will opt for more regulatory divergence, which is in line with Boris Johnson’s own strong preference for divergence from the EU.
The reason for that is quite simple: one only needs to take a look at the new European Commission. Dutch EU Commissioner Frans Timmermans, who was responsible for the ‘better regulation’ agenda in the previous Commission and who only achieved disappointing results, is now pushing the so-called ‘European green deal’, which contains a raft of new EU initiatives for more regulation and imposes all kinds of more stringent targets – not to forget wild spending plans.
One example: imagine the UK ends up agreeing to align with EU chemical regulations, like REACH, after Boris listened to the concerns of the UK’s chemical industry, who are keen to keep EU market access (after having made huge investments to comply with REACH) and are wary of competition from outside of the EU. After a number of years, however, the EU may update REACH. That this update is likely to be more stringent, especially after it has gone through the European Parliament, is not hard to predict. If the UK rightly decides not to accept this update, this may well force it to give up part of its EU market access, something that would then need to be renegotiated. Remember: Brexit means perpetual negotiation.
To summarise, even if Boris opts for the softest of soft future relationship models, the EU’s regulatory zeal is likely to drive the UK to diverge in terms of regulation, thereby truly becoming the ‘competitor’ Angela Merkel fears. And so it would be the EU that would drive the UK toward becoming a ‘Singapore on Thames’ (even if Singapore is actually not as deregulated as sometimes assumed).
Last but not least, the regulatory competition resulting from all of this would not only benefit the UK, which would be able to attract new business and research, it is also likely to put more pressure on the EU’s regulatory machine. European companies may urge the EU to abandon regulations similar to its burdensome, unpredictable GDPR data regulation in case the UK offers digital service providers a more comfortable regulatory environment. Prominent European researchers have already warned that an ECJ ruling on gene-editing ‘will end innovation’. In the future, if the UK decides to adopt a more innovation-friendly approach, companies and researchers may consider moving there, in turn putting pressure on EU regulators to change tack.
Forget about the money that the UK will save as a result of no longer having to contribute to the – largely wasteful – EU budget or how the UK will manage to open more markets than the EU. The real benefit of Brexit will be to be released from the burdensome Brussels regulatory machine. Just as Brussels is partly to blame for Brexit, it may well ultimately drive the UK to more regulatory divergence than would have been the case otherwise.
Will the EU be divided during the trade negotiations?
This question is easy to answer. The EU is divided in every single trade negotiation. There always is a protectionist camp and a free trade supporting camp, and sometimes when a ‘pro-free trade’ country happens to host an industry which may face more competition after a trade deal, that country quickly jumps into the protectionist camp. There is little reason to believe it would be different here.
What would be different from a classic trade negotiation is that the purpose of this negotiation is not to open up new markets, but instead to protect ongoing trade as much as possible and reconcile this with the UK diverging in terms of regulation. The stakes for companies in an ordinary trade negotiation tend to be lower. Then, it’s about gaining new possible business or defending a market against new competition. In the EU-UK negotiation on the future relationship, it will be life and death for some companies, as they may need to lobby against being partially or fully shut out from the market where they currently operate.
In an ideal world, the UK would have remained a member of a trade-friendly EU, focused on its core business of scrapping trade barriers. But if there is one great benefit of Brexit, it is how regulatory competition will eventually enable an environment where different regulatory zones can experiment with their own approaches for the great challenges of today.
It’s likely that the UK will have to rethink the timing set forward by Boris, while the EU will eventually need to grant it Swiss-style selective rule-taking in return for selective market access. That would still closely align the UK to the Brussels regulatory machine, but due to the EU’s apparent willingness to continuously give in to its instincts favouring ever more regulation, the UK will ultimately end up as what has been described as ‘Singapore-on-Thames’.

Monday, February 03, 2020

What are the opportunities and challenges of Brexit for both the UK and the EU?

Published by The Telegraph and Doorbraak

How will Brexit affect the United Kingdom? How will it affect the European Union? As with everything, there are opportunities and challenges. Hereunder I provide an overview.

Opportunities for the UK

One of the main benefits for the UK is that it will be able to break free from the shackles of the Brussels regulatory machine. With Open Europe, we have estimated that not less than two thirds of the impact of regulations in the UK results from rules decided at the EU level. Even Brussels acknowledges that its top-down, one-size-fits-all approach is in need of reform. Hence the launch of its “Better Regulation” programme in 2014, which has yielded only disappointing results.
A second main benefit is that the UK will be able to beat the EU when it comes to securing trade access to the rest of the world. To be fair, the EU has done a pretty decent job here lately, having secured deals with Canada, Japan, Southern American countries and Vietnam, so in all likelihood, Britain’s first preoccupation will be to now safeguard this trade access negotiated by the EU before it can focus its attention on convincing the likes of America, India, Israel, and China.
Thirdly, and politically perhaps more visible, is that the UK will no longer need to contribute to the – largely wasteful – EU budget. Then the UK may well opt to “pay to play”, which is what the likes of Norway and Switzerland do.
Fourthly, Britain will have greater control over migration. The EU’s regulatory framework has bound the UK government’s hands when it comes to controlling family reunification for non-UK citizens and social benefits for EU citizens.

Challenges for the UK

The most important downside of Brexit is that the EU is likely to restrict current EU-UK trade in case of UK regulatory divergence. The EU could, of course, simply make its own regulatory framework more attractive for businesses, to challenge UK competition, but it prefers protectionism.
With Open Europe, we have estimated that whether the UK benefits from Brexit not only depends on safeguarding market access to the EU but also on how successful the UK is in compensating the loss of market access with making the UK economy more competitive, which includes deregulation, and with convincing non-European partners to open up trade.
British businesses that are dependent on trade with the EU are likely to be wary of regulatory divergence, rightly fearing the resulting loss of market access. Therefore, ultimately, the UK may decide that aligning with the EU’s costly “REACH” chemical rules, its petty MIFID rulebook for financial services, or its innovation-killing GDPR rules for data may still be worth it, given the attached market access to the EU.
An even more burdensome update of any of these acronym-bearing regulations may however change the trade-off and drive the UK to full-on Singapore-style divergence. Indeed, the EU recently announced proposals for yet another batch of top-down EU regulation, under the label " European green deal ".

Challenges for the EU

This doesn’t need much explanation. When the second biggest economy of the EU, which is also the second biggest contributor to the EU budget as well as a nuclear power leaves the club, it is not something to celebrate - not that this has led to much introspection in Brussels. The market access restrictions which the EU will impose as a result of UK regulatory divergence will also hurt EU businesses and consumers, given that trade is mutually beneficial.
The latter is often forgotten by pundits, but the discussion on fish and financial services will be a useful reminder of that: British companies will want to continue to be able to sell their fish in the EU market, while many EU companies depend on sophisticated British financial services, such as financial clearing.
Yet, in the public debate, one often hears that the UK would have the absolute “upper hand” on fish, while the EU would not have to care about UK financial services access to its market.

Opportunities for the EU

For free market supporting EU countries, the loss of the UK as a strong voice supporting these kinds of policies, is regretful. However, over the years, the UK has actually not been able to stop all that much EU over-regulation. It’s the most outvoted member state, something which ultimately also resulted in Brexit.
Perhaps the UK may be more influential outside of the club than inside. As Swedish centre-right MEP J├Ârgen Warborn puts it: the UK’s “ambitious goals for its business climate are one of the best things that can happen to Europe right now”, as “for far too long, issues of business climate and the conditions for European entrepreneurs have been missing on the agenda in Brussels.”
He’s correct, of course: every time the EU will come up with yet another plan for business-unfriendly regulations, the business community will simply point at the UK and its more innovation-friendly attitude.
It will be quite amusing to see how this year’s discussion on the EU’s seven-year budget will bring the reality home to the even the most extreme Eurocrat that EU spending cuts will really be hard to avoid, given the loss of the UK’s contribution.  Some EU budget austerity is a great thing for EU citizens, given how EU spending has been documented to support organized crime in parts of Southern and Eastern Europe. The precedent of Brexit will also be invoked every time there are plans for yet another round of power transfers to the Brussels level.
In an ideal world, the EU would reform to an organization focused mainly on scrapping barriers. However, Brexit may yet trigger more fundamental reform of the European Union than the UK could ever have driven from inside the club.

Wednesday, January 08, 2020

This time around, the EU should not wait until the last moment to become flexible

Published on The Telegraph
As Britain gears up to the next stage of Brexit talks, the most pressing question of 2020 will not b “to diverge or not to diverge” from European Union regulations. Members of the government will instead be asked why they would be willing to sacrifice European market access from 2021 onwards, when there is no prospect of the UK altering the EU rules in its current playbook at anything like this speed. 
Boris Johnson's answer will be predictable: sacrificing market access in gradual stages could perhaps be defended, but the EU isn’t offering it as an option anyway.
Speaking at the LSE today, European Commission President Ursula von der Leyen warned: “Without the free movement of people you cannot have the free movement of capital, goods, and services. Without a level playing field on environment, labour, tax, and state aid, you cannot have the highest quality access to the world’s largest Single Market.”
That the EU continues to repeat its line on the indivisibility of the four freedoms suggests that nothing has changed. In practice, the EU stands ready to disrupt the supply chains of big manufacturers - all because the UK refuses to let Brussels govern the biggest financial center in the world, the City of London.
This is plainly a terrible idea. As the Bank of England Governor Mark Carney explained, “It is not desirable at all to align our approaches, to tie our hands and to outsource regulation and effectively supervision of the world's leading complex financial system to another jurisdiction.”
Big manufacturers will of course urge the EU to show leniency. Shouldn’t the EU be delighted that the UK is willing to align its rules for selected sectors, at least for a while? And didn’t the EU negotiate such a “pick and choose” arrangement with Switzerland in the 1990s, which has worked more or less fine for the last twenty years? Global geopolitical tensions already seem to soften the EU’s stance on security cooperation with the EU, so this may lead to it becoming more flexible on trade.
The EU would naturally retort that even if it wanted to go down that route, one year simply wouldn't be enough time, such a comprehensive trade agreement would require ratification by EU member states.
How to square this circle? One option would be for both sides to agree a bare bones trade agreement quickly, promising not to impose any tariffs and quotas. Perhaps the UK could even agree a “level playing field” similar to the one agreed by Theresa May in November 2018, as this didn’t really have any legal teeth, save on state aid.
Secondly, the UK would not consider permanently aligning with EU rules in a number of policy areas, including financial services. In such cases, a Treaty providing full market access for three years in return for regulatory alignment could be agreed. The UK would then have time to change EU rules and negotiate market access for these sectors until the 1 January 2024, ahead of the next General Election.
Thirdly, in a select few policy areas, the UK may be happy to adopt EU standards permanently, or at least for the foreseeable future. Manufacturing can broadly fall into that category. Don’t get me wrong: regulatory competition is a great idea and will also benefit EU citizens wary of Brussels overregulation, as the UK ditching harmful EU rules would help rein in Brussels. But surely market access should only be sacrificed when the UK actually wants to diverge?
Free traders needn't worry: the over-zealous Brussels regulatory machine is likely to be a greater factor in pushing the UK towards divergence than the UK’s preference for economic liberalism.
Fourthly, a number of pressing EU concerns, like fisheries access, could be sorted quickly, but only in return for EU leniency when it comes to the parallel negotiation that will take place this year on how to implement checks between Northern Ireland and Great Britain, so to make sure these checks will truly be minimal. Most of the Northern Irish economy revolves around services and small businesses, so exemptions for the latter should go a long way to make sure only a fraction of the intra-UK goods trade is hindered by this extra bureaucracy necessary to avoid border checks on the island of Ireland.
Here, the Irish Republic will likely be a great friend for the UK at the EU table, as its main goal will now be to avoid anything upsetting the hard-fought settlement, where it had to concede to a possible unilateral Northern Irish exit.
Even if the political will existed for all of this, many will rightly argue that major legal hurdles remain. Both sides should put any moves towards negotiating open markets between the EU and the UK at the very top of the political agenda.
Fundamentally, however, ways can be found. In 2010, the leaders of Eurozone countries were able to negotiate a 500 billion euro “bazooka” bailout fund over a weekend. Surely, in 2020, they should manage to use the twelve months available to work out a framework for the future EU-UK relationship.

Tuesday, January 07, 2020

What can we expect from European politics in 2020?

Published for The Spectator and Doorbraak
As we enter the third decade of the 21st century, here is an overview of what to expect from European politics in 2020.
1. Brexit – or at least a ‘beta version’ of it – will happen
At the end of January, the UK will finally leave the EU, even if for the rest of 2020 it will continue to outsource its regulation-making capacity and trade policy to Brussels, in return for full EU market access. Boris Johnson has promised not to extend this transitional arrangement beyond 2020. A decision on that is due by the end of June.
There are two schools of thought as to what the UK will opt for. Some argue that there simply isn’t sufficient time to negotiate anything beyond a ‘bare bones’ trade agreement and that both sides will ultimately settle for that, with all its repercussions for industry.
Others think that while a deal to avoid tariffs and quotas is feasible, Boris will ultimately make major concessions, due to the damage industry would face from so-called ‘non-tariff barriers’ to trade. They think that as a result, the UK would simply agree to continue to take over most, or even all, of the EU’s rules in return for continued full market access because of the lack of time to negotiate market access dependent on UK regulatory alignment. In this scenario, Boris could perhaps argue that because the UK has at least recovered part of its sovereignty, this does not amount to extending the transition.
It’s very possible that the first school of thought is right and that Boris simply will go for ‘full regulatory divergence’ from 2021. Perhaps the resulting disruption may end up being a lot less disastrous than some predictions foresee.
Then the ultimate question would be: why would the UK opt to sacrifice market access in return for the right to diverge when it would not be planning to change many of the rules in place anyway just yet? Intransigence and path dependence may well keep the UK in the EU’s regulatory orbit for a few years. Rather than a conscious UK desire to diverge, it may instead be the EU’s zeal for evermore regulation which forces the UK to go for a ‘full divergence’ Singapore-style Brexit over the longer term.
2. EU relations with the rest of the world prove to be challenging
In between sorting out its relationship with the UK, the European Union is likely to be quite preoccupied with tense relations with the rest of the world as well.
First of all, it will need to deal with the tariffs of US President Trump, who may well end up being re-elected. Among his proposals is a threat to impose a 100 per cent tariff on European goods, including wine, from early 2020, in retribution for France’s ‘digital services tax’, which largely hits US tech companies. Only a single French company would have to pay the tax.
EU-Turkey relations are at a post-war low, while the bloc’s relationship with Russia has been icy for more than ten years now. France and Germany seem to be trying to mend relations with Russia – to the dismay of their Anglo-Saxon allies. Turkey, which now even faces US sanctions, is drifting further away from the West under the leadership of President Erdogan, however, he is facing more and more internal rivals.
Elsewhere, more of the EU’s external relations are going through stormy weather. The EU still hasn’t managed to force Switzerland to accept changes to the EU-Swiss arrangement, and another referendum on EU free movement is coming up in Switzerland in 2020. Even the EU’s recent successes in concluding trade deals aren’t secure. The deals with Canada and Latin American countries are likely to face road bumps when it comes to ratification by national parliaments in the EU next year.
Last but not least, tensions between the EU and China are increasing. In March, the EU named China a ‘systemic rival’ and China’s envoy to Brussels has warned that EU plans to clamp down on foreign corporate ownership, trade opportunities and 5G may trigger a backlash from ‘suspicious’ Chinese companies. This follows similar Chinese threats to Germany. On the more rosy side, China did just unilaterally cut 389 billion USD in tariffs, so there may be opportunities to improve trade relations.
3. A new migration crisis may be on the horizon
The challenge of uncontrolled migration is sneaking back to the top of the political agenda in European countries, having never really disappeared. Dutch PM Mark Rutte has listed migration as a ‘priority’ for 2020, even warning that the passport-free ‘Schengen [arrangement] is in danger’, due to the EU’s leaky external border.
Turkish President Erdogan has also warned that a new migration crisis may be on its way, as 80,000 refugees potentially make their way from Syria to Turkey. This follows his threat in October to ‘open the doors’ and allow Syrian refugees to enter the EU if he didn’t receive more assistance from it. Meanwhile 40,000 asylum seekers are currently stuck on Greek islands. The Greek government’s decision in March 2016 to no longer allow those without a positive asylum decision to leave the islands largely ended the inflow of people from Turkey, and almost completely ended the drownings at sea, but no solution for those stuck has been found.
Up north, Belgium and France are struggling to cope with illegal migrants refusing to apply for asylum – as this would lead to them to being sent back to Italy or Greece, where they have been ‘fingerprinted’. Many try to make it to the UK, where it is seen to be easier to live without documents. Meanwhile, in some kind of parallel universe, the new EU Commission led by Ursula von der Leyen is putting its energy in convincing member states to ‘voluntarily’ redistribute asylum seekers, as if people cannot simply move to wherever they want within the Schengen area. No effort is being made to link development aid to repatriations of those denied asylum, an area where the EU could provide added value, as big receivers of EU funds, like Morocco, sometimes even refuse to meet with government representatives of member states to discuss this particular concern.
4. The EU continues with business as usual
Regardless of crises of all kinds, the EU simply continues with its business as usual. That includes two main things: spending and regulating.
For spending, a deal needs to be found on the EU’s new seven year budget, to be spent between 2021 and 2027. Whereas the EU commission is proposing a modest increase in spending, the European Parliament has demanded a wild increase and member states – who will need to foot the bill – are resisting this. The big difference this time around, however, is that the second biggest contributor to this EU budget, the UK, is leaving the club. Of course, it’s possible that the UK will just ‘pay to play’, like Switzerland or Norway, but spending cuts will still be unavoidable. That’s of course a good thing, given how problematic EU spending is.
When it comes to regulating, the EU Commission seems to have redeclared its love for even more of it. As the Commissioner for ‘Better regulation’ under Jean-Claude Juncker, Dutch EU Commissioner Frans Timmermans made some – but still disappointing – efforts to restrain the Brussels regulatory machine. These days however, he’s in charge of promoting the so-called ‘European green deal’, a raft of newly proposed EU rules and stringent targets.
Of course, there will be several national elections this year. In particular, we need to look out for an Irish parliamentary election, the Polish presidential election and also whether next May, Belgium will break its own world record of one and a half years without a federal government. None of this is likely to be a game changer for EU policy though. Perhaps in Germany, Angela Merkel, who has pledged not to run again, will see her reign end in 2020, given how weakened her social democratic coalition partners are. But precisely because of that, it’s still more likely that both German governing parties will prefer to avoid an election before the end of the term, in 2021. One thing that may tamper with ‘business as usual’, is the EU’s ongoing confrontation with Poland and neighbouring member states over the ‘rule of law’, but it’s not likely to escalate.
5. A return of the Eurocrisis is always just around the corner
As the memory of the 2008 financial crisis fades, the Eurozone has become complacent. Governments are relaxing any spending restraint they may have had, despite decreasing growth and therefore likely lower tax revenue.
A number of hard facts suggest they will face a great challenge if the economic weather changes: Eurozone banks are still in a very shaky condition; Eurozone bond spreads have not converged since 2008, when they decoupled; and the European Central Bank is deeply divided internally, which would complicate any attempts for yet another monetary ‘bazooka’ – a policy instrument which is delivering less and less return. Stock owners must be enjoying something like the biggest bull market in history, so expecting a correction of some sort would not be an irrational expectation.
Sure, deeply indebted states like Belgium or Italy have been extending the duration of their debt, providing them with a cushion against a firm rise in interest rates. True, both Portugal and Greece have enjoyed growth in recent years. But they are all strongly dependent on Eurozone support and the ECB’s leniency. The high debt levels remain and the ECB’s easy money policies still do not discourage Eurozone members from taking on even more debt.
Most fundamentally, however, Eurozone politics has not changed. Populists in Italy and France may have abandoned their anti-Euro stance, but they have not abandoned their opposition to the EU imposing conditions. And if the North was asked once again to fork out billions to prop up the South, conditions will be part of the package. Some may wonder what the point is of throwing yet more money at something which looks like a bottomless pit, given that Italy’s per capita personal disposable income is lower today than before the introduction of the Euro more than twenty years ago. During a deep crisis, alternatives to more transfers – such as tolerating sovereign defaults, followed by relegating member states to Montenegro status or full Eurozone exit – may finally be considered. The same fundamental questions about the viability of the common currency, predicted by Margaret Thatcher and many others, could well return.