Brussels is breathing a sigh of relief. The first round of the French elections have passed with Marie Le Pen, the anti-immigration, anti-European Union candidate, and Emmanuel Macron, a centrist, pro-open borders and pro-European Union, heading for a runoff election on May 7th. Macron is heavily favored to win the runoff election according to polls. It is telling that both candidates are effectively outsiders – candidates from the French establishment parties were defeated.
But Brussels should not feel overly confident with this short-term respite. While Le Pen is likely to lose the runoff election, she will remain a political force. If she somehow pulls off an upset win, the shock to the EU will be severe – perhaps fatal. Italy, however, may be the true test for the EU. Indeed, Italy may be the place where the fate of the European Union is decided.
The European Union has been tottering from one crisis to another – and still faces many challenges to its future. Each election that comes forth on the calendar serves as a near-referendum on the EU’s very survival. And election outcomes friendly to Brussels do not cement the EU’s longevity – they merely forestall its demise.
Ultimately, it really boils down to two simple but intractable issues – a common currency (the Euro) – and immigration.
Germany – and to a lesser extent the rest of Northern Europe – has been effectively subsidizing its financially weaker neighbors to the South. As I noted in The Euro’s Failings:
When a stand-alone country encounters economic headwinds it can respond by adjusting its monetary policy (interest rates, available currency) accordingly. But the European Union must adjust its monetary policy based on the average overall condition of its member countries. The EU is also forced to give a greater weight in its monetary policy to the singular economic powerhouse of Germany. This creates a situation of perpetual interest rate imbalance. Said another way, interest rates will be too low in countries where wages are rising and too high in countries where unemployment is rising.
Another related and darker problem exists. Prior to the Euro’s creation, if a country belonging to the old EEC engaged in monetary recklessness (increased debt, spending, etc) the markets would respond with higher interest rates and/or falling currency prices via exchange rates. This controlling mechanism was removed with the creation of the Euro. In practical effect, the stronger, more fiscally disciplined economies were not only subsidizing countries that chose to engage in more reckless monetary policy and actions – they essentially encouraged them to do so.
A common currency accomplishes many things – none of them particularly positive. Proponents put forth the argument of currency stabilization – and its positive influence on trade amongst union members. But this argument ignores the ability to easily hedge currency fluctuations. The overwhelming problem is the loss of national monetary policy – and the incentive for, and assumption of, risk-taking by member nations.
Greece, Spain, Portugal, Italy, even France, are all facing high levels of unemployment. Yet Germany’s economy is booming and is running at or near full employment – as are several other member nations. What monetary policy do you engage in to fix the issue in one country without harming another? The hard answer is that there is no answer.
Then we have the issue of immigration. The doors to Europe were thrown open with the collapse of Libya – once the gatekeeper of Africa (see migratory map – scroll down slightly). Then came the Syrian civil war, which turned the tide into a flood. Refugees from Syria – and Afghanistan – migrated to European shores through Turkey. Turkey claims to be holding over 2.5 million refugees from Syria – a number which is in some dispute – and has not been shy in using the implicit threat of continued migration in negotiations with Europe.
Europe found itself overwhelmed – with Italy, Greece and Hungary bearing much of the initial burden due to proximity. While Germany has taken in the highest absolute number of refugees, Hungary, Sweden and Austria have taken the highest number of refugees per capita (you may find a series of explanatory charts from the BBC here – while somewhat dated they still do a good job of illustrating the situation).
Europe’s citizens were left angry, they felt lied to and misled. They endured economic mismanagement and then were asked to open their borders to a flood of refugees who have shown no interest in assimilation – and are a significant drain on already strained resources. They’ve witnessed entire towns that are no longer recognizable as the places they grew up – neighborhoods transformed.
And terrorism is now a very real threat.
The European Union leadership in Brussels has proven itself markedly inept at responding to crises – and fiscal management in general. Some member countries (i.e. Germany) feel burdened by the subsidization of financially weaker member nations while other countries are weighed down by financial constraints placed on them (i.e. Greece). The level of regulation put in place has been staggering – and costly.
Meanwhile, Britain seems to be doing just fine post Brexit – although it remains early days and the withdrawal from the EU has not been fully completed. My prediction is that while things may be bumpy over the next year or two, Britain will find itself reasserted as it is freed from the shackles of regulation and control emanating from Brussels.
The European Union is in jeopardy from within – and of its own makings. The choice of a common currency laid the foundations of failure. The decision to allow the immigration crisis to continue unabated may have caused failure to be realized.
Keep your eyes on the shifting political sands of Italy. The battle for the future of the EU may well be fought there.
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