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European Commission Offers 5 Scenarios

Summary:

EC is committed to the future of Europe.

Juncker presented five scenarios.

Even if the populist-nationalist do not win the electoral contests, the national identity issues will continue to exert influence.

 

Europe not deadLater this month, Europe celebrates the 60th anniversary of the Treaty of Rome, which established the European Economic Community.  Very near to the anniversary, which was not one of the original members,the UK will likely begin the process that will lead to its exit.  This, coupled with some reluctance of some new members in Eastern and Central Europe to embrace liberal values of the west, and the ongoing economic adjustment in the EMU has posed an existential crisis for European integration.

The European Commission offered a white paper that suggests five future scenarios for the future of Europe.   It will be a discussion point in the coming months, with Juncker’s State of the Union speech in September will likely focus on it before preliminary conclusions are made at the heads of state summit at the end of the year.

This note is to present the scenarios so that the general framework can be appreciated by investors. The scenarios address the question of what Europe may look like in 2025.  They are designed to cover a range of possibilities.  They are not mutually exclusive or exhaustive.

  1. Carrying on: It is not simply the status quo but assumes the implementation of reform agendas.  Free movement of people remains, though security is reinforced.  Some border frictions remain.
  2. Single Market:  EU members do not agree on new policy areas to integrate.  The focus is on the single market.  Free-movement of people becomes more difficult. This returns the EU to its roots.
  3. Multi-Speed: The white paper does not use the multi-speed terminology but discusses “coalitions of the willing” that could pursue greater integration on a range of specific policy areas, such as defense, internal security, or social issues.  This is a recognition of different appetites for integration.
  4. Narrower Focus:  The Commission calls this scenario “Doing Less More Efficiently.”  Rather than a broad range of activities, the EU narrows its focus to policy areas where it is perceived to add value.    This is a smaller form of integration and represents a recognition that some limit has been reached.  It is consistent with a strengthening of national identities.
  5. Enhanced Integration:  More power, resources, and decision-making are shared.  Deliberation process is expedited and decisions on the European level are made more quickly and implemented by national authorities.

These scenarios are meant to launch the year-long discussion of the future of the European project.  The EC will issue several more discussion (reflection) papers. Some European officials were wary of the white paper ahead of the spate of elections beginning with the Dutch in a couple of weeks. It is possible, and we consider likely, that populist-nationalist forces are not part of the next governments in the Netherlands, France or Germany. The power of national identities should not be under-estimated, and its influence on policy debates may exceed the electoral success.

Populism-nationalism does not appear to be reducible to pure macroeconomic variables.  Where it has enjoyed initial success has mostly been in economies that are doing relatively better like Hungary, Poland, and the Czech Republic.  The US and UK emerged from the Great Financial Crisis better than most other high income countries. The US and UK economies were larger than ever, and by at least conventional measures, the labor market was well on its way to full employment.

Many had worried that the UK decision to leave the EU was going to lower the barrier to exit and encourage other countries to leave. The elections are still ahead of us, but the opinion polls suggest that to the contrary, support for the EU has risen.  The project has been attacked, and it is as if the wagons are circling. Just like the desire for national identity cannot be reduced to a macroeconomic variable, European integration is not simply about economic.  Since the Greek crisis first surfaced in 2010, the lack of appreciating the non-economic considerations, especially political will, saw pessimism and cynicism cloud investment decision and led to speculation of the collapse of EMU and the EU.

 

Full story here
Marc Chandler
He is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. He regularly appears on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH
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