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The European Union in 2019 faces multiple pressures, including the controversial Brexit, or the U.K. plan to leave the EU; trade issues between the union and its partners; the migration crisis; the growth of populism across the region; and a shaky relationship with the Trump administration. Wharton finance professor Joao Gomes and Garret Martin, a lecturer at the American University’s School of International Service, shared their perspectives on the challenges the European Union faces this year for a series titled “2019: A Look Ahead” on the Knowledge@Wharton radio show on Sirius XM. (Listen to the podcast at the top of this page.)
The most urgent issue is Brexit, and on Tuesday, British Prime Minister Theresa May’s compromise proposal to leave the EU by March 29, 2019, all but collapsed as British MPs voted out her revised Brexit deal that aimed to smooth the exit process. It had already suffered a heavy defeat on Monday, when peers in the House of Lords rejected it in a 321-152 vote. May’s Brexit proposals have faced strong resistance from not just the opposition Labor Party but also within her own Conservative Party over the years, endangering the survival of her government on several occasions. Immediately following Tuesday’s vote, Labour Party leader Jeremy Corbyn tabled a no-confidence motion to debate the incompetence of May’s government on Wednesday. Meanwhile, May said that she will engage in talks with opposition parties about alternative Brexit solutions.
According to Martin, May’s government would not survive a no-confidence motion. “Now what happens is anybody’s guess, and [there are] many different scenarios,” he said. As for the larger ramifications of the vote, Gomes said the EU does not consider Brexit to be “an existential threat” anymore. “It is a little bit like a fire that has been contained,” he said. “It is a mess for the U.K., though. It is a mess they created, and they have to live with it.”
Top Issues the EU Faces
According to Gomes, 2019 will be “a year of transition” for the EU. “The Union has to come to grips with how it is going to work effectively with 27 countries at the table, or 28 maybe (if Brexit does not materialize) – who knows. Who exactly is in charge? What exactly are the competencies that it needs centrally and at the country level? It has to slowly evolve and figure out what’s the best way to deal with this and to delegate powers and decision-making. And, until somebody steps up and effectively assumes that mantle in a particular position, it’s not a well-functioning unit.”
Gomes said the biggest concerns for the EU in 2019 are its relationship with the U.S. and the elections to the European Parliament between May 23 and 26 that will see new leadership in the region, including new heads of the European Central Bank and the European Commission.
U.S.-EU ties are tense with indications that they could get worse. Trump called the EU a foe of the U.S. when it comes to trade, and his administration last week downgraded the EU delegation in the U.S. without informing them. He has also periodically threatened to levy tariffs on EU cars imported into the U.S., prompting EU officials to prepare for a trade war similar to the U.S.-China tariff conflicts of the past two years, although the two countries have agreed on a 90-day suspension through March 2019 of tit-for-tat import tariffs.
“The U.S. and Russia have the same interest – to weaken the EU to make it ineffective, and ultimately to destroy it.” –Joao Gomes
The EU also faces leadership challenges. German Chancellor Angela Merkel is on her way out and has announced that she will not run for political office after her current tenure ends in 2021. Expectations that French President Emmanuel Macron would fill the leadership void Merkel leaves also appear overstated. “Macron’s capital of goodwill has been exhausted,” Gomes said. “He’s no longer carrying that god-like status that made his presence and his speech so influential for the first year [after his May 2017 election win]; I think that’s over.”
Gomes pointed also to the impact on the EU of presidential elections in Ukraine on March 31, even if it is not part of the union. He added that the EU would prefer an election outcome in Ukraine that advances the case for Ukraine’s membership in the EU. “What will the EU do when the Russians almost surely step up pressure on the Ukraine?” Under the current circumstances, “there’s not much it can do.”
Trump and Trade
Martin was skeptical that the U.S. and China could strike “a major, comprehensive agreement,” although he admitted that he may be proven wrong. “The issues that separate the U.S. and China are very substantial,” he said. “When it comes to issues of access to Chinese markets or protection of intellectual property, we haven’t seen the Chinese very willing to make major concessions.” However, “if [a U.S.-China trade agreement] happens, that could put a bit of pressure on the EU’s trade negotiations with the U.S. as well as those with China.”
Meanwhile, the EU has of late attempted to grow its trade relationship with other countries, and it is close to striking a major free trade agreement with Japan, Martin noted. “They won’t make up for the U.S. in size, but nonetheless it shows to the EU and to others that it has alternatives that still have some commercial appeal.”
The 90-day tariff cease-fire between the U.S. and China will ensure against any major developments on that front in the early part of 2019, said Martin. However, it is possible that Trump might resume his trade attacks on the EU, he cautioned. “The downgrading of the status of the E.U. ambassador certainly showed that Trump has not a lot of warm feelings toward the EU, and that is unlikely to change in 2019.”
As Gomes saw it, “The U.S. and Russia have the same interest – to weaken the EU to make it ineffective, and ultimately to destroy it.” He said Trump is in favor of Brexit “because that weakens the union, separates and divides it, and ultimately has him deal with maybe the French leader or maybe the German leader, one-on-one, and not the whole 300 or so million consumers, citizens and voters.”
Gomes noted that European leaders do not have the ability to oppose either Trump or Vladimir Putin. The European economy’s weak economic performance in 2018 “just renders the European Union completely unable to oppose in any significant way whatever the U.S. president wants,” he said. “They absolutely need some sort of trade deal or reassurance that there’s not going to be any tariffs, that the deal between the U.S. and China is going to somehow remove uncertainty about global value chains, and that it will eliminate whatever threats we have to German exports and European exports.”
Much of how strongly Trump will go after the EU depends on what he considers important for his presidential accomplishments, according to Gomes. “It could be that Donald Trump feels that two victories – NAFTA (rechristened as the U.S.-Mexico-Canada Agreement) and China – are enough of a statement.
“Whatever separates the U.S. from Europe is small potatoes by itself, and there’s not going to be much of a push because its relationship with Europe is not asymmetric in terms of trade – we don’t have a particularly large imbalance,” Gomes added. The U.S. trade deficit with the EU was just short of $140 billion between January and October last year, while it was $344 billion with China. He noted that the EU’s vulnerabilities lie in areas like agricultural subsidies and the opening up of its financial markets, and that it could have “a little bit of a problem” if Trump decides to target those.
Gomes laid out the key issues EU leadership must address going forward. “The No. 1 thing the European Union needs to decide is whether it wants to be a separate power on its own or it needs allies,” he said. “It needs to align itself with one particular block. They’ve operated as if this is about creating a separate pillar of power in the world that can stand up to the [U.S.] and ultimately to China and to Russia. I don’t think that’s realistic anymore. They just need to come to grips with that.”
“One of the great challenges for the EU is the impression or the risk of appearing rudderless, of lacking a clear leader,” said Martin. “Angela Merkel was very much the face of the EU for the last 10 years. Macron was viewed as a possible candidate to take over that mantle – someone who has campaigned and positioned himself as pro-EU, pro-integration. Now, unfortunately for Macron, some of [his] shine has been taken away [by France’s] internal problems.”
“The EU needs to be able to walk and chew gum at the same time, but that has been the big challenge.” –Garret Martin
As a consequence of that power vacuum, “the EU will remain navel-gazing and inward-looking,” said Martin. “It will not be able to take a more active role on the international stage at a time when [it faces] very serious challenges and very serious changes, whether it comes from the U.S., which shows a deep-seated ambivalence towards Europe and the EU under Trump, a more aggressive Russia and China flexing its muscles. The EU needs to be able to walk and chew gum at the same time, but that has been the big challenge.”
Populism Across the EU
The populism evident across the EU “reflects dissatisfaction with the way the European Union has delivered for its citizenship,” said Gomes. “Europe is run electively by some bureaucracy in Brussels and a series of treaties that so tightly regulate business activity, political speech or connections between the states that [the European Commission] almost does not matter too much.”
Gomes pointed to populist parties winning the elections in Italy last March as “a clear manifestation” of the frustration of Europeans with the economic performance within the EU. “It is very important that the people in Brussels and in Paris and Frankfurt and Berlin listened to it and pay attention and say, ‘We need to do better; we just need to create more jobs and we need to deliver economic growth.”
According to Martin, populism has always been a part of the European politics. “It’s now become maybe more prevalent across a variety of countries, but we have to be careful of assuming that it’s a transient or a new phenomenon,” he added. “The bigger problem is this broader trend across Western Europe of a fragmentation of the political landscape.” He explained that many European countries are moving in the same direction as the Netherlands, “where multiple, small niche parties that represent a tiny part of the electorate are already struggling to govern.”
Unlike in years past, the clout of the traditional center-right and center-left parties that dominated European politics has declined, said Martin. “That means that we have more coalitions or we will have more situations like in Sweden, where the election results weren’t conclusive and there’s an inability to form governments. That is the outcome I anticipate we’ll see in the European Parliament elections in May — a messy outcome where the populists show some inroads but not enough to gain a majority.”
Martin said that if populist agendas prevail in the EU elections in May, “they could shape the policies and the agenda of the EU for years to come.” Added Gomes: “The populists have never been able to work well across borders. They’ve been successful on a country-by-country basis, but they just have not been able to cooperate with populists in other countries in effective ways.” Therefore, the European Commission could continue to operate as it has thus far, “but that could change if the populous bloc becomes very large in the European Parliament to the point that it actually affects who gets picked as a commissioner,” he added.
Migrant Crisis Persists
The issue of migration continues to be “very toxic and very divisive,” said Martin. He noted that the United Nations last month pushed ahead with a pact to deal with migration without the support of the U.S. and several European countries. “It shows the issue is still alive and kicking. It’s still an issue that populists and others will try to mobilize.” He noted that although the EU has managed to contain the migrants problem over the last two years by working with a variety of partners including Turkey and some North African countries, it continues to be a crisis “in the sense that the EU is no better prepared [to deal with it] than it was in 2016,” when the migrants issue was at its height.
“The No. 1 thing the European Union needs to decide is whether it wants to be a separate power on its own or it needs allies.” –Joao Gomes
“The crisis made it clear that there is no will amongst the citizens of Europe to absorb large numbers of migrants at this stage,” said Gomes, adding that that sentiment persists. At the same time, he didn’t expect it to be “as acute” as it was in 2016, partly because the civil war in Syria that drove out many migrants is relatively less daunting than it was at that time. Last month, in a move that was widely criticized at home and abroad, Trump announced he would withdraw American forces from Syria after declaring victory over ISIS, the militant Islamic group active in that country.
Why Economic Performance is Key
Over the longer term, the rise of disenchantment over the lackluster economic performance of the EU could propel member countries to want to go their own ways, as with Brexit, according to Gomes. “A lot depends on how economically successful this union is,” he said. “This entire edifice was built on the idea of economic prosperity – ‘Join us, be part of this union; we’re going to make you rich and successful.’ It hasn’t delivered for a lot of [EU member] countries. That’s a question that will be asked again if we don’t see meaningful economic growth in the next couple of years. This is a serious threat – the world economy is slowing down, and Europe is slowing down dramatically.”
It is possible that “the memory and the experience of the Brexit negotiations will act as a deterrent for future countries that might consider the same path,” said Martin. “Five to 10 years from now, let’s say the U.K. has recovered and it is economically thriving, and we have a sclerotic EU, then it is possible that we might have more whispers of a country wanting to leave.”
If Brexit eventually happens, the EU has to contend with a smaller budget and will therefore be less effective in many ways than it is currently, said Martin. He pointed out that the EU has a seven-year budget cycle, and the next cycle will be from 2021 to 2027. “With the U.K. out of the EU, you will have a budgetary shortfall. It will be interesting to see if other countries agree to chip in and compensate – which is unlikely – or if we will we have a smaller EU and a smaller EU budget that some countries are pushing for. That might make it less likely for the EU to be effective — if it has fewer resources.”