WHAT TO EXPECT FROM EUROPEAN POLITICS IN 2020

Source: The Spectator

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 face road bumps when it comes to ratification by national parliaments in the EU. 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 conditions; 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.