2018 EUROPE GEOPOLITICAL FORECAST

United Kingdom

A Brexit deal will be reached. That does not mean the UK will not face challenges in the new year. London, its businesses, and its residents will experience difficulties because of Brexit. In a city driven by the services sector- around 360,000 people are employed in the financial sector alone – this will add a significant barrier to potential growth and has already resulted in some finance jobs being shifted to mainland Europe. London accounts for 22.5% of the UK’s economic output; Brexit could have major consequences for national economic forecasts. Both the UK and the EU have an interest in achieving a free trade agreement (FTA) to limit Brexit’s negative effects on trade. But the FTA will be complicated by political interests, as Prime Minister Theresa May’s governing Conservative Party will seek a deal that benefits the British people while EU member states will want to avoid getting pulled into a Brexit quagmire that could distract from a Eurozone deal to reshape intra-European trade in 2018. Expect to see a EU-UK FTA championed as a major political win for both negotiating teams and a feature of the larger deal that will take shape in 2018.

An EU external border must be implemented between the Republic of Ireland and the UK province of Northern Ireland. Despite European Council President Donald Tusk wanting to find “flexible and creative” solutions to the situation, border controls will be a necessity. This will increase the cost of cross-border trade and encourage Ireland to buy more goods and services from, and sell to, mainland Europe over the coming decade. More importantly, the separation could lead to significant tension between unionist and nationalist factions in Northern Ireland, which will need to be carefully managed by both sides of the divide. For policymakers elsewhere, this eventuality is worth noting as the UK’s departure from the single market and/or the EUCU could redirect trade preferences in the long-term.

Germany

Germany will remain without a permanent government in the early stages of 2018. Despite initially rejecting the formation of another ‘Grand Coalition’ with Chancellor Angela Merkel’s Christian Democratic Union (CDU), the Social Democratic Party (SPD) has agreed to talks with the CDU to form an alliance. A coalition agreement is now likely. Expect Merkel to eventually commence her fourth term as Chancellor in early 2018. This will be her third in partnership with the SPD – the CDU’s traditional opposition.

However, this coalition will be different to the last. Despite Angela Merkel’s inimitable international appeal, domestically she now faces stern opposition. The SPD and the CDU lost 14% of their vote in the latest election. In Bavaria, the CDU’s sister party, the Christian Social Union in Bavaria (CSU), lost significant votes to the anti-migrant Alternative for Germany (AfD) party, which is now the third largest party in parliament – it will become the official opposition in the event of a Grand Coalition. The losses will push the CSU to adopt more conservative policies, including a more hostile attitude towards Merkel’s migrant policies.

Despite the AfD’s gains related to the migrant crisis, many of the lost SPD votes were a result of the party’s apparent failure to moderate the last coalition’s legislative agenda. To win back its supporters, the SPD will seek assurances that key elements of its liberal platform are addressed – opposing the CSU’s political strategy. This could cause negotiations for a new coalition to drag well into the new year.

These political considerations will affect the Grand Coalition. First, it will not be quite as grand, as it will command a smaller mandate than in the last parliament. This means the coalition will need to focus on issues that have broad support across the country. Second, the new coalition will draw more heavily from the SPD platform, regardless of CSU objections. Expect SPD campaign centrepieces, including tax reform, EU socialisation and democratisation policy, health care reform, and public investment schemes, to be major legislative goals for the coalition. Germany in 2018 will have a ruling but beleaguered Grand Coalition that is far more concerned with securing and maintaining public support, and with social reforms, than the previous parliament.

France

French President’s insistence on further integrating the EU e.g. closer military cooperation, tightening of the eurozone, imposing more rigid screening of foreign investments, tougher anti-dumping duties could divide members of the tightly-knit Visegrad Group, with the four eastern nations - Poland, Hungary, the Czech Republic and Slovakia - facing their own frustrations if the changes come in. Leaders across the bloc are being encouraged to get behind the reforms, however not every nation is happy with the plans. Others simply have an issue with Macron as they believe Germany, which is the EU’s largest economy, is the bloc’s natural leader.

In turn, countries which have been aligned with Germany and Angela Merkel for many years are extremely concerned by the recent German election result, with the far-right party Alternative for Germany (AfD) entering the Bundestag for the first time since the Second World War. Péter Szijjárto, Hungary’s foreign minister, previously said Hungary and the whole region, views Germany as much more important than France.elAAA

Andrej Babiś, the new Czech Prime Minister holds the view that Macron should focus on reforming France before trying to change the EU. He warned pushing for deeper integration could lead to more members leaving the bloc after the UK.

Poland and Hugary are “very likely” to lose “even more influence” in the EU by being the main opponents of the French-driven reform agenda. Slovakia’s eurozone membership and constructive approach to President Macron’s initiative will become more influential in the post-Brexit EU than its Visegrad neighbours. 

Italy

A big electoral test  will be in Italy’s general election, slated for March 4. Among the four leading parties, the Five Star Movement (M5S) and the Northern League (LN) look set to gain votes. The former is an anti-establishment, anti-corruption movement that determines policies through online membership polls (making a traditional left-right classification difficult), while the latter is a formerly separatist outfit turned nationwide right-wing party under Matteo Salvini’s leadership. Polling places M5S in first with around 27-28% of the vote. But in Italy’s proportional electoral system, no party is likely to win a majority, and other parties are not keen to work with M5S. Instead the most likely arrangement will be between the parties of two former prime ministers: Matteo Renzi’s centre-left Democratic Party and Silvio Berlusconi’s centre-right Forza Italia. While populism will make gains, euroscepticism will fall to the wayside. Mr Berlusconi is campaigning as a European, and both M5S and LN have scaled back their previously anti-Europe rhetoric.

Nevertheless, there is a public anger over the refugee crisis and growing unease over EU membership. In one recent survey, less than 40 per cent of Italians felt that their EU membership was beneficial, putting them bottom of the pile of member states – an ominous sign ahead of an election that will see populist politicians jockeying for position.

Poland

In government, Poland’s Law and Justice Party’s will continue to consolidate its grip on power. Though the prime ministership has changed hands from Beata Szydlo to Mateusz Morawiecki, party leader Jaroslaw Kaczynski remains firmly in command behind the scenes and will continue to do so. Kaczynski will look to strengthen judicial reforms that give parliament power over hiring and firing judges. The moves have been criticised as authoritarian and has brought the European Commission to pursue a punishment procedure against Warsaw that could see it stripped of its EU voting rights. However, the appointment of Morawiecki signals Warsaw’s desire to show a friendlier face to Europe in the new year, and the prime minister has already accepted a European Court of Justice ruling on Poland’s logging industry — a sign of good faith after rejecting EU migrant quotas.

Hungary

In Hungary, Prime Minister Viktor Orban will likely remain in power after an April general election. The latest poll puts Viktor Orban and the increasingly populist-right Fidesz on a 57 percent of the vote. (Combined with the ultra-right Jobbik, the two right-wing parties poll a striking 70 percent)   . Expect Hungary’s continued opposition to the EU’s handling of the refugee crisis, bolstering those who call for Europe to move in a more conservative direction, along with suppot for Russia and ‘illiberal’ democracy.

Sweden

Sweden’s election although perhaps less consequential may well see a continuation of the current government led by the Social Democrats. But the vote share for the populist Sweden Democrats will be an indicator of how the refugee crisis and anti-establishment sentiment continues to ripple through northern Europe.

Deeper EU Defense  Integration

The EU is already moving towards deeper defence cooperation and the European Commission recently announced a European defence fund that will see billions of euros invested in joint military projects, including new battlegroups, equipment and research. Reforms to the EU’s Common Defence and Security Policy are expected, with the renewed Franco-German relationship expected to push for significant – but not radical – reforms.

The implications of Brexit for defence will be significant: the EU will lose one of its strongest military powers, but it will also lose its biggest internal opponent to a European army. However, some EU members will advocate for a special defence partnership with the UK after Brexit. Furthermore, EU members like Ireland, Malta and Austria, which have long opposed the concept of a European army, are likely to step into the vocal void created by Brexit. While increased military integration will continue in 2018, the prospect of a joint European defence force remains a long way off.

Deeper Economic Integration

Expect reforms to focus on deeper economic integration. Reforms to the Economic and Monetary Union are expected to be the biggest since the introduction of the Euro. French proposals include the establishment of a Eurozone Finance Ministry – a proposal supported by European Commission President Jean-Claude Juncker – as well as a pan-European rival to the International Monetary Fund. However, despite tentative German support, expect most EU members to oppose a Eurozone Finance Ministry, which would result in the loss of some power held by their own finance ministries. Hence, it is extremely unlikely that a Eurozone financeminister, should such a position be created, will have the ability to strictly enforce the Eurozone budget. Domestic opposition aside, a European finance minister would mix the roles of the European Commission and the European Council, meaning the EU’s internal structure would have to be reviewed. More likely instead is a beefing up of the capacities of the Eurogroup and increasing the budgetary powers of the European Parliament. While there is clearly renewed appetite for integration, the threat of right-wing populism throughout Europe — already a reality in member states — means that success is far from certain. 2018 will be a make or break year for the EU in more ways than one.

Catalonia

2018 will see little political change for Catalonia. Internal divisions will persist, both between the independence and unionist parties, as well as within the independence movement itself. The region’s economy can also be expected to continue to suffer as a result of decreased tourism and investment. This will have a flow-on effect to the Spanish national budget and will act as a complicating factor in national politics. While Catalonia’s secessionist attempt has been far from successful, there is a chance that it could inspire similar movements in other European regions in 2018, such as Scotland, Northern Ireland and the Basque Country.

Views from National Capitals

The views from Berlin: From Berlin’s perspective, 2018 will be more significant, not least because of the protracted search for a German government, which is costing Europe at least six months of political momentum. For Berlin, the best hope for Europe in 2018 is to muddle through. Specifically, the hope is that there will be no new spike in refugee flows, and that Europe will be spared another major terrorist attack or a significant rise of the crime rate among migrant communities. Such a respite would allow some much-needed time to develop, debate and decide a more robust response to the migration challenge. There will be little room for high flying plans like Macron’s agenda. Martin Schulz’s ‘United States of Europe’ will not come any closer in the next twelve months, either. The centrifugal trend will remain strong over the coming year. Despite a favourable economic outlook, the German political class seems to prefer smaller steps over grand designs, largely due to a fear of failure. Berlin needs a low intensity year to avoid being pushed onto the defensive while trying to keep up some pressure for reform. As to the greatest worry, the German view would focus on risks beyond Europe. Matters on the continent are not good, but seem predictable even in the worst case scenarios. A major conflict involving great powers would be a crisis of different dimension. The greatest worry would thus be an escalation of the Korean crisis, at some point triggering a US military strike to destroy North Korea’s nuclear capability, with substantial collateral damage ending many lives on the Korean peninsula. Should the North Korean regime survive such a strike, a ‘political nuclear winter’ could follow, as relations between the US and China would freeze over, extending into the regional alliance system and international trade. 

While geographically far away from the epicenter of conflict, Europe would be significantly hit by its fallout: Transatlantic relations would take another blow; Europe’s economy could fall victim to a new Cold War in East Asia, and the nuclear non-proliferation system could break down, triggering nuclear arms races in regions closer to Europe. The bigger the nuclear casualties, the deeper the fall in political temperature of world affairs is likely to be, with a rules-based international order disintegrating further and great power confrontation becoming the dominant paradigm.

The view from London: Top of Theresa May’s New Year’s resolutions for 2018 is to bring to life the idea of ‘Global Britain’. This is the dazzling international role that, she has promised voters, will replace the constrained and undervalued ‘European Britain’.

But despite the UK’s military strength, its world class diplomacy, and its leadership on international aid, it is unclear what this notion really means. So what May’s government hopes for next year is a crisis or two that would allow them to define this ambition through action. Something that shows that Britain is a serious actor, with the ability to get the right people round the table to find solutions  that protect the interests of the UK and the liberal order.  That it draws strength from its special relationships, but that when needs must it can also take its own line – its challenge to Trump’s decision to recognise Jerusalem as a capital of Israel being a case in point.

If this sounds selfish, it is because it is. Time is not on Theresa May’s side in delivering Global Britain to UK voters.  In 2018 she needs to create facts on the ground that make clear that the UK will not fade into global insignificance after March 2019, when it leaves the EU.

This is not just about proving to voters that they were not lied to about the ‘huge opportunity’ that Brexit represents. The demonstration is also about convincing EU members that the UK still matters enough diplomatically that they should co-operate closely with it on security and trade matters, and give it privileged access to council working groups and formats that shape European foreign policy.  And it must be a sufficiently emphatic display to win over Europeans who have been put off by the UK’s chaotic approach to the separation negotiations.

Theresa May’s single biggest fear for 2018 is that the story she and her government have been spinning about the UK’s ongoing relevance, and about Europe’s need to keep the UK close after Brexit, will be exposed as false.  She needs Global Britain to put on a good show in 2018, both to keep her domestic political situation under control, but also to remind other European countries of the valued partner the UK can be – evidence of which has been thin on the ground of late.

For Theresa May, Global Britain has to become real in order to secure a good arrangement for the UK in its future relationship with the EU. As superficial as the plan is, there is no plan B. Splendid isolation stopped being so appealing for the UK a century ago. In an interconnected world, the prospect looks positively frightening.

The view from Paris: With Emmanuel Macron’s victory, France aims at returning to the forefront not just of Europe, but of global affairs. Consolidating the new momentum in Europe is obviously France’s key priority. With the uncertainties around the next German government, and several other roadblocks to be overcome, this is far from guaranteed.

For France, this is not just about tackling the European Union’s internal challenges. A European renewal should also help Europe to assert its views and interests on the global stage. In Macron’s vision, this new European impetus needs to be extrovert too: as he said in his speech at the Sorbonne, only Europe can “ensure a real sovereignty, i.e. our capacity to exist in the current world”.

Hence France’s renewed ambition - against the global backdrop of a retreating United States and increasingly assertive China - to act as the champion of multilateralism. Europe will better thrive if intrinsically global challenges, such as terrorism, migration, climate change, and digitalisation, are tackled under a multilateral approach. France’s hopes for a more effective multilateralism go beyond immediate security crises such as in Syria or in the Sahel.

France’s hope is that the multilateral architecture is strong enough to resist the current assaults, allowing Europe time to get its act together. Macron’s initiatives even suggest that he plans that international institutions succeed in reforming themselves in a direction that will make them more effective, more responsive, and closer to a “multilateralism that protects”, to paraphrase one of his famous slogans.

The worry for the French leader is that something could trigger the demise of this multilateral order - in particular, renewed international proliferation of weapons of mass destruction. From a French perspective, international security is among the primary missions of the multilateral order.

France’s official assessment of the current international environment points to an unprecedented “concentration of threats and crises”, but notes that “proliferation of weapons of mass destruction and their delivery systems remains a particularly troubling development”, which could pose “direct challenges to… international institutions and norms.”

France is also vehemently opposed to US moves which risk the unravelling of the Iran nuclear deal. And Paris is closely following the deteriorating situation around the Korean peninsula, which it sees as at serious risk of conflagration.

The latter case is a significant example of how Macron is keen to maintain France‘s global reach, and of how it hopes to sweep along the rest of Europe to defend a renewed multilateral agenda.

The view from Rome: Elections in Italy are foreseen in the first quarter of 2018, most probably on 4 March. The last election created an unstable legislature, which saw four different centre-left governments. Recently, the Parliament passed a new electoral law (supported by Renzi’s Democratic Party and Berlusconi’s Forza Italia). But rather than bringing more stability, the new law is designed to reward coalitions while penalising solo riders - clearly intended to restrict the rise of the Five Star Movement.

This tells us much about the government’s hopes for 2018: win over the Eurosceptic populists and remain anchored to Europe and its Franco-German engine. 

No doubt the next months will be characterized by intense political confrontation, where populist arguments will dominate. While in past elections the theme of Europe was not part of electoral campaigns, today it is, and not in the way Europhiles hoped for. Indeed, the last European barometer highlights how Italians have become Europe critics, where only few years ago they were overwhelmingly pro Europe. The Euro crisis, migration and security concerns are the major drivers of this U-turn.

The Democratic Party should try to ally with new political forces, such as “More Europe”, in order to overcome the current negativity and create a pro-European narrative echoing Macron’s "Europe qui protége”. Some also fear the interference of fake news and a potential involvement of Russia through direct or indirect support to the North League and the 5 Stars Movement, who allegedly have strong ties with the giant neighbour, and who are strongly Eurosceptic. 

According to an IPSOS recent poll, migration is a major fear among Italians, second only to employment. Clearly, this is a subjective matter: the actual number of migrants reaching Italy does not justify such concerns. As in other countries, it is very likely that many Italians will vote out of fear instead of out of rational thinking, and certainly not out of hope. Worse, populist arguments have also penetrated traditional party agendas, while the right wing, once moderate and focused on a liberal program, today has become a much more aggressive far-right. 

Hopes and fears are two parts of the same coin, with migration and Europe being very much interlinked. The European Union took too long to respond to Italy’s appeals for solidarity and relocation schemes have never been truly implemented. Instead of coming up with a common policy to manage migration, the EU has outsourced it: to Turkey for the Syrian refugees and to Libya - an almost-failed state - for Sub-Sahara Africans, with tragic consequences. 

The future does not look bright: the ongoing attitude of the Visegrads, the clash between Tusk and the Commission, the US leaving the global compact on migration, all reduce the possibility of solving the problem. The challenge for winning the next election will be rebuilding the foundation of trust among citizens, and to do so parties will need to come up with a strong vision and concrete plans, both on Europe and on fear-creating issues such as migration. Failing to do so will mean their defeat.