What is Going on in Europe
By Hatem Dhiab
Every year, I get a chance to travel across the Atlantic to regroup with family and friends from Europe. In a time where the world seems in a state of disarray from so many different economic, social and political undercurrents, I thought I’ll draft an overview of who the big players within Europe are and what currents are driving their internal politics and markets. My comments are partially informed by some of the attitudes encountered while interacting with people there and my educated guess on how things may end up working out eventually.
What is the European Union?
The European Union - often known as the EU - is an economic and political partnership involving 28 European countries. It began after World War II to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other.
It has since grown to become a "single market" allowing goods and people to move freely, basically as if the member states were one country. The EU has its own currency, the euro, which is used by 19 of the member countries. Its own parliament and it now sets rules in a wide range of areas - including on the environment, transport, consumer rights and even things such as mobile phone charges. As a bloc, the EU is a political counterweight to the US, a unified market with over 500 million consumers and producers with an economy rivaling the United States’ GDP.
Joined the EU in 1973 and is one of its largest members, the UK never adopted the Euro as a currency but was an integral part of shaping the Union in its current form. The Brexit referendum in 2016 which was narrowly won by the “leave faction” triggered the process by which the UK will leave the EU within 3 years. The full divorce date is set for March 29th2019. British citizens are frustrated by an open immigration policy and a perceived lack of sovereignty over rules and regulations. They are also angered that the central EU government in Brussels is neglecting the needs of UK citizens. This process has been messy and is causing upheaval for both British citizens and businesses. Negotiations about future relations between the UK and the EU are taking place now. Both sides hope they can agree by October on the outline of future relations on things like trade, travel and security. If no agreement is reached this can create a cascading effect roiling markets and relations worldwide as it will effectively cut off the UK from the single market and undoubtedly harm its economy. London, a global financial hub with financial services as its largest export and biggest employer, is already feeling the squeeze with many institutions already planning on relocations to other European cities.
A de facto leader in the EU from the start, France elected a young Emmanuel Macron in 2017 who’s a champion for European causes, global trade, the environment and progressive causes. His platform hinges on overhauling France's economy, a bloated public sector, an antiquated labor market that is mostly ruled by unions and kept hostage to an administrative state that lacks the flexibility and spirit of entrepreneurship vital to any modern super power in an ever-changing world. His election is providing a counterweight to a nationalist wave gripping the world and embodied by none other than Trump in the US. Macron’s reforms are slow to take place but are offering young French citizens and business leaders a new wave of optimism and hope that the country will regain its much-relished world leadership and economic prowess. Hopefully providing new economic opportunities and set the country up for growth and prosperity.
When it comes to Europe, he has said candidly that reform is needed in Brussels as well as Paris if the pressing problems facing France are to be addressed. This may set him on a collision course with Germany, because France and Germany have starkly different views of Europe’s future. Without significant advances, he will struggle to convince Germany of his big ideas for eurozone reform.
Germany is Europe's most industrialized and populous country. Famed for its technological achievements, it has also produced some of Europe's most celebrated businesses and globalists. It became the continent's economic giant and a prime mover of European cooperation. Germany is the envy of other European economies and ironically draws the ire of most European politicians because of its success. It must balance its intra-EU trade accounts to allow other countries to grow, create jobs and square their public finances. Germany now generates 65 percent of its trade surpluses on the back of other EU members. This is a huge point of contention with other EU members. Trump’s ascent to power is traumatic especially to Germans. His values are dramatically opposed to the liberal, postmodern, rules-based, multilateral world view that permeates German society. This anxiety has been exasperated by a wave of home-grown neo-Nazi nationalism flaring after a large wave of Syrian refugees being admitted in the last few years.
Ever so the problem child, Italians have mismanaged their economy for decades. Plagued by corruption & fraud, Italy's unreformed and unaffordable welfare state has led to calamitous public sector accounts. The country's gross public debt stood at 155 percent of GDP at the end of last year, which compares with the euro area average of 105 percent of GDP. With some of the highest unemployment rates in the continent, it has seen the election of the 5-star movement this year. The party is avowedly Eurosceptic, anti-free trade and fueled by populism. Formed in 2009 in the aftermath of the financial crisis, Five Star has fed off public fury over corruption in the Italian establishment and sluggish economic recovery. The party originally backed Italy’s withdrawal from the eurozone and Nato. Its rapid ascent into the political mainstream has seen party leaders either downplay these radical policies or drop them entirely. It is also driven by anti-immigrant sentiment stemming from a large wave of immigrants landing on Italian shores after fleeing ravaging wars in Africa and the middle east. To put it best, Italy is having a Trump moment.
Threats such as the rise of nationalism, far right and neo-Nazi movements are fueling concerns while drawing condemnation from the majority. A palpable anxiety over what it means to be European, as millions of immigrants are flooding ashore and straining national resources and shaking social norms are fueling more extreme movements even in historically tolerant and progressive countries. A rise in terrorist activities form extremists have made EU capitals dangerous and shaken business confidence while hurting tourism in some of the most sought-after EU destinations.
Despite all the disarray, there is no constituency strong enough to wreck the EU's project of a continent that is free, peaceful, united and prosperous. The European project remains on track. The euro-denominated assets are sound investment choices thanks to the European Central Bank (ECB) — arguably the best and the most useful institution the Europeans have created so far. Currency is stable, inflation under control and financial markets are relatively calm, at least within the biggest countries and economies. Growth however is still lackluster if existent and remains to be Europe’s greatest challenge as their leaders’ attempt to integrate & assimilate these seemingly disparate economies and cultures.
Europe throughout history has seen its share of wars and devastation, and despite it all, my overall conclusion is that EU citizens and their elected leaders overwhelmingly believe and understand that united they stand, divided they fall. Bono, the Irish mega star and activist from U2 said it best “Europe needs to go from being a bore, a bureaucracy, a technical project, to being what it is: a grand, inspiring idea “
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