Wharton's Mauro Guillen and American University's Michelle Egan discuss ongoing turmoil in Europe.

Europe is facing testing times these days. The Dutch elections last week were a bright spot for those who are concerned with a rise in far-right populism. But uncertainty prevails over whether voters in the forthcoming French and German elections will respond in kind. Meanwhile, Germany is trying to find some equilibrium with the new White House against the backdrop of Donald Trump’s campaign criticism of Angela Merkel’s immigration policies and the prospect of closer U.S. ties with Russia. Amid all that, the United Kingdom is pursuing a Brexit agenda while dealing with a call from Scottish political parties for a new independence referendum.

From the standpoint of the U.S., strong ties with Germany are the most important, according to Mauro F. Guillen, Wharton management professor and director of The Lauder Institute. He noted that the U.S., Germany and China are the three “most influential” countries in the world today. Germany is “an economic powerhouse” that has a balanced budget, runs a large trade surplus and is also “doing really well economically,” he said. “It is a democracy that seems to be working quite well.” Against that backdrop, German Chancellor Angela Merkel’s meeting last Friday with Trump was “very important,” he added.

The economic elephant in that room at the White House last week was the future of U.S. ties with Russia. Germany relies heavily on Russian gas, with 40% of its natural gas needs supplied by Russia, and the U.S. sanctions imposed by the Obama administration specifically target Russia’s energy sector. It doesn’t help Germany that there is little clarity on how U.S. sanctions against Russia will play out, said Michelle Egan, professor in School of International Service at American University and Global Fellow at the Wilson Center.

Guillen and Egan discussed the future of U.S.-German ties and the political currents in Europe on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

A Complex Relationship

The images are fresh in the public mind of the lukewarm vibes between Merkel and Trump during their meeting last Friday, after it was postponed because of the winter storm earlier in the week. Still, the meeting was less unfriendly than many had expected, and Merkel did try to rebuild bridges, as the Washington Post reported. Her delegation included CEOs from the German automobile industry to emphasize German investment and job creation in the U.S., Egan noted.

“It’s a relief that populism didn’t have another good day [in the Dutch elections].”–Mauro Guillen

Guillen set the backdrop for that uneasy setting between Trump and Merkel. The U.S. and Germany have a “complex bilateral relationship,” and their trade relationship has an imbalance that is in favor of Germany, he noted. Germany has the largest current-account surplus of about 270 billion euros (about $300 billion), bigger than China’s surplus, he said.

Significantly, Merkel faces an election in September that would decide if she could continue for a fourth four-year term as chancellor. “It’s not all about Trump [for Merkel]; she has domestic issues as well,” said Egan. Merkel also faces issues with neighbors such as the recent tensions with Turkey over an April referendum in that country that is intended to give Turkish President Recep Tayyip Erdogan sweeping new powers, she noted. Erdogan’s Justice and Development Party wants to campaign in Germany to build support among some 1.5 million Turks living there who are eligible to vote in the referendum.

Dutch Pointers

As elections in Europe go, the preliminary results of the Dutch elections held last Wednesday belied fears of a surge of populist sentiment (the full official results will be out on March 21). “It’s a relief that populism didn’t have another good day,” said Guillen. The populist Party for Freedom led by Geert Wilders had to settle for second place with a lower-than-expected tally, while prime minister Mark Rutte’s People’s Party for Freedom and Democracy led the polls. “We saved the day,” said Guillen of Rutte edging out Wilders. “We in Europe have now more optimism about the forthcoming negotiations with the U.K. about Brexit and also the upcoming French election, which is the next big test.”

At the same time, the fractured electorate in the Netherlands was a cause for concern. “The problem is extreme fragmentation,” said Guillen. “The Dutch electorate has chosen representatives across many different parties, so that is not a recipe for stability.” Egan, too, noted the high level of “voter volatility” with 28 parties contesting the Dutch elections.

“It’s not all about Trump [for Angela Merkel]; she has domestic issues as well.”–Michelle Egan

Egan pointed to some important takeaways from that election’s outcome. “One is the demise of the center-left in this election — they absolutely lost out,” she said. Another is the emergence of two pro-euro parties — the Democrats 66 and the GreenLeft, she added. She also noted that while Rutte edged out Wilders, his party actually lost votes since the previous election. She said that while people in the U.S. tend to link the outcomes to the debate over populism, domestic issues were more at stake. “For a lot of the Dutch it was about health care, social security and perhaps down the road, also immigration.”

French Connection

According to Egan, there are few direct lessons from the Dutch elections to the forthcoming French elections in April and May. “The only analogy I would make is with the upcoming French election is that the center left was decimated [in the Netherlands] and we have no center left running in the French election,” she said. In fact, Egan said that seemed to be a factor across Europe, and also pointed to Britain where she saw the opposition Labour Party as “very weak.”

The French elections are critical to the future of Europe, according to Guillen. “France in general lies at the core of the problems in Europe,” he said. The coming election will be “an important watershed” because it is not just about immigration or about the future of Europe but also about the French economy and how the country should deal with its various problems, he added.

Guillen hoped that Marine Le Pen of the right-wing National Front will be stopped in the second round if not in the first round with some “pragmatic voting.” (The French elections will be held in two rounds on April 23 and May 7.) The National Front espouses populist policies such as opposition to immigration, and it wants France to exit the European Union. “People who absolutely detest her will join forces and vote for the candidate running against her in the second round.”

Guillen noted that while the two-round process is “fairly undemocratic” and “somewhat dubious” constitutionally, in this election it might be a blessing in disguise. “In this case, it might prevent a candidate like Marine Le Pen from being president.”

Brexit Gets Closer

Egan said the French elections are significant also because the European Union is waiting for the results before it moves forward on Brexit. British Prime Minister Theresa May faces many challenges with Brexit, said Egan. May has to sell it to her own party and to Europeans, she explained.

As May presses on with plans to begin Brexit negotiations sometime soon (on March 20 she announced she would officially notify the EU on March 29 that the U.K. will leave the union), big questions loom, said Egan. One is on whether Britain will have an EU exit bill to facilitate the process; while another is over the exit terms and conditions and a free trade agreement after the exit. The Brexit process also has to effectively address the concerns of areas that voted to remain in the EU, especially the City of London and the financial services industry, she noted. May also has to bring clarity on the “thousands of rules and regulations” in the U.K., as to how they will be implemented after Brexit, she said.

“France in general lies at the core of the problems in Europe.”–Mauro Guillen

Another major point in the negotiations will be finding acceptable ways to determine the status of 1.3 million British citizens scattered across the 27 other European countries, many of them retirees relying on the local welfare state, said Guillen. That is also true also for some 3.2 million EU citizens living in the U.K., said Egan.

May is also dealing with another uncertainty — Scotland’s push for a fresh referendum on whether it should stay in the U.K., and thereby its continuation or otherwise as part of the EU. Scottish First Minister Nicola Sturgeon has said that the previous referendum in September 2014 did not raise any doubts about Britain’s membership in the EU. Scots voted narrowly in favor of staying in the U.K. in that referendum. But the Brexit vote of June 2016 warrants a fresh referendum, Sturgeon has said, explaining that she wants Scotland to continue to be part of the EU.

According to Guillen, Sturgeon’s Scottish National Party is playing “a very risky bargain” by calling for a fresh referendum because he sensed a rising tide of Euro-skepticism among Scottish voters of late. He said May might prefer to agree to that second referendum a year or 18 months from now, and after she wraps up the Brexit negotiations. In that strategy, May’s game plan is to be able to persuade the Scots against independence if the Brexit negotiations turn out to be in the U.K.’s favor, he explained.

Egan noted that Sturgeon’s party won 24% of the vote in 2016 in the Scottish Parliament, while the Conservatives won 24% in 2015 in the U.K. House of Commons. “Neither of them has a full mandate, so to speak,” she said. She agreed with Guillen that there is growing Euro-skepticism among the Scots and concern over the timing of a fresh referendum. Another uncertainty stems from the growing importance of political parties that do not want independence from the U.K., she said. It is also not clear if Scotland would get automatic EU membership if it were to break away from the U.K., while Scottish economic dependence on England is another factor, she added. Scotland would also have to raise taxes if it were to become independent because it now depends heavily on fiscal transfers from the U.K., she noted.

In the end, it all comes down to the price of oil for how Scotland would vote, said Guillen. Optimism about Scottish independence ran high when oil prices were very high a few years ago, he noted. But the current low prices of oil would make it difficult to drum up sufficient political support in a referendum to win more than 50% of the vote to go independent, he said. “Pretty much everything is going in the wrong direction for the Scottish independence movement, except for Brexit,” he added. However, he thought the Conservatives could try and negotiate Brexit in a way that makes it seem like a good deal for the U.K.

Anniversary Time

Amid all that, a clutch of anniversaries is seemingly dictating the course of events. Egan noted that Merkel will also seek to re-assert the significance of the European Union against the backdrop of the April and May anniversaries of the Marshall Plan and the Schuman Declaration, respectively — two events that helped European recovery after World War II. Guillen noted that British Prime Minister Theresa May was expected to delay Brexit negotiations with the EU in the next few weeks to avoid a clash with the 60th anniversary of the Treaty of Rome on March 25 that helped create the European Economic Community. On Monday morning, May’s office said the U.K. will start Brexit negotiations on March 29.