Close panel

Close panel

Close panel

Close panel

Analysis and opinion 04 Mar 2016

A tough year for Europe

It wasn’t long ago that Jean-Claude Juncker said that politicians all knew what measures were needed to resolve Europe’s problems, but no one knew how to get re-elected after applying them. Now the situation is more complicated. Europe is facing new problems, and it is no longer what needs to be done to address them.

Two of these issues were discussed at the European Summit held in Brussels on February 18th and 19th. Negotiations over the new status of the U.K. in the EU have led to an agreement in which most of the British Prime Minister David Cameron’s demands were accepted. The U.K. wasn’t asking for anything particularly difficult to approve for most issues, although delaying or limiting immigrants’ social rights in the rest of the EU was certainly a point of contention.

In any case, like most referendums on European issues, it seem that the Brexit referendum will depend more on intangible things like the political class’ and British population’s changing feelings toward the rest of Europe than on the details of the agreement. Brexit could have significant long-term consequences for the British economy, and also discourage the rest of Europe, which would witness an important piece of the European construction break off at a difficult time.

Brexit could have significant long-term consequences for the British economy

The other hot topic of the summit was the strategy to address the European refugee crisis, which may represent the greatest political and economic challenge for the EU this year. There is a certain level of consensus that a continent with demographic problems will need a large external workforce in the years to come, as Angela Merkel bravely recognized in her first reaction to the crisis after summer. However, managing the rapid influx of refugees is very difficult and has been complicated since then by several issues, such as the quota policy that has not been implemented, major discrepancies among member states regarding how to address the problem, and migratory flows that seem unlikely to slow down given the developments of the conflict in Syria and a certain “pull effect” that is difficult to measure. The current strategy focuses on an agreement with Turkey to stop refugee flows, but there is no guarantee it will work.

Regarding more economic issues, the year was not off to a good start for Europe. Declines in global financial markets and greater volatility could impact the real economy if they continue. Europe is currently and (also was in 2015) one of the main factors behind weak global growth, thanks to a depreciated euro and low raw material prices. Public expenditure on the refugee crisis in Germany and the largest fiscal margin since the adjustments of recent years will enable the fiscal policy to be moderately expansive in 2016, provided that monetary conditions continue being extremely lax.

However, also related to economic issues, uncertainty has increased due to the possibility of the slowdown in Chinese imports occurring faster than expected; the current situation in the markets persisting and affecting real variables; or of banks registering low levels of profit. On the other hand, risks of a more political or geopolitical nature could affect trust and investments, which continues to be the variable needed to support growth in Europe.

Apart from the British issue and the refugee crisis, questions over remaining reforms in countries like Portugal and France, the provisional situation in Spain and ongoing conflicts between the Italian government and its northern neighbors do not create an environment conducive to growth or dialogue over how to deepen integration processes in the Eurozone, which not long ago, used to be the main item on the European agenda.

Other interesting stories