Europe’s Battle on Four Fronts

Anatole Kaletsky

Last year’s "multi-crisis" in the EU – including Brexit, refugees, “illiberal democracy” in Hungary and Poland, and the still-unresolved euro crisis – has produced a convergence of opportunities. With Germany's election over, European leaders no longer have an excuse for inaction while they wait for voters’ next rebuff.

LONDON – With Germany’s election over, Europe has reached the end of a season of continuous political upsets. It is now time for actions that adequately respond to the upheavals created by all these votes.

Frans Timmermans, the European Commission’s first vice president, last year described the state of Europe as “multi-crisis”: Brexit, refugees, “illiberal democracy” in Hungary and Poland, the still-unresolved euro crisis, and the geopolitical risks attributable to Donald Trump and Vladimir Putin. All are challenging the “European project” that began 60 years ago with the Treaty of Rome.

But crises invariably create opportunities. And last year’s multi-crisis has produced a convergence of opportunities. European leaders no longer have an excuse for inaction while they wait for voters’ next rebuff.

Economic reforms in France, German unease about refugees and the euro, new attitudes toward European integration in Brussels, and signs that Brexit will be delayed indefinitely or even completely averted: all have created new possibilities for taming the dangerous forces unleashed by last year’s populist revolts. But realizing these opportunities will require four simultaneous political and economic breakthroughs across Europe.

France must act on over-regulation and excessive public spending. Germany must rethink fiscal austerity and monetary dogma. Britain needs a turnabout on nationalism and immigration. And European Union officials must abandon their obsession with driving all member countries toward an “ever-closer union” that many of their citizens do not want.

Without simultaneous breakthroughs on all four fronts, it is hard to imagine progress on any of the separate aspects of the multi-crisis. For example, any easing of German-inspired austerity will require evidence of economic reform in France; but French reforms will succeed only if Germany agrees to more generous fiscal rules and supports monetary policies that benefit the eurozone’s weaker members.

Similarly, Brexit could be averted or indefinitely delayed if the EU offered an extension of the negotiating period beyond March 2019 and suggested some modest concessions on immigration and welfare payments. But European leaders would consider offering such concessions only if they saw clear evidence that British voters were changing their minds about leaving the EU.

Now consider the German voters who have turned against Chancellor Angela Merkel and her SPD coalition partners, mainly because they resent what they see as uncontrolled immigration and unjustified transfer payments to Greece. These voters will oppose the fiscal and monetary integration required to stabilize the eurozone if they think their money will be spent on subsidizing poor countries on Europe’s periphery that refuse to cooperate on refugees and fail to abide by EU laws.

The only way to convince German voters that their money will not be misdirected would be to create separate political institutions and a separate budget for the eurozone. This is the proposal advanced by French President Emmanuel Macron and supported in principle by Merkel. But plans for such a two-track Europe can advance only if Merkel can overcome German nationalists who want to break up the single currency, and only if Macron can silence integrationist zealots in Brussels who want to force all EU countries to join the eurozone.

At first sight, simultaneous progress on many fronts seems too much to hope for. After all, if the necessary breakthroughs in France, Germany, Britain, and Brussels were each a 50-50 coin-toss, the probability of all four coins landing “heads” would be only 6.25%.

Fortunately, there are at least two reasons for dismissing such apparently logical scepticism. First, the political and economic decisions that leaders across Europe now face are anything but independent. What happens in Paris, London, and Brussels will depend crucially on the government program that Merkel negotiates with her eventual coalition partners in Berlin. And Germany’s coalition agreement will, in turn, depend on Macron’s diplomatic skills in advocating a distinct politico-economic identity for the eurozone.

Equally important, the EU bureaucracy will have to embrace – enthusiastically – the concept of a two-track Europe. This means abandoning the assumption that all EU members are heading for the same destination, and an end to treating non-euro countries as second-class laggards (described condescendingly as “pre-ins”).

Now, suppose that EU leaders recognized that the only feasible way to maintain European stability and progress would be by adopting the two-track or “concentric circles” model, with a more politically integrated eurozone surrounded by a looser economic confederation of non-euro countries. Under these circumstances, Britain would be likely to change its mind about Brexit.

Failing that, Britain would spend several years in a transition limbo and would then almost certainly re-join Sweden, Denmark, Poland, Hungary, and the Czech Republic in the outer ring of EU countries that object to the pooling of sovereignty required by the euro. This outer orbit would also attract Norway and Switzerland through the irresistible pull of economic gravity.

This points to the second reason to believe that EU leaders could achieve simultaneous political and economic breakthroughs across Europe. The necessary decisions in Paris, Berlin, London, and Brussels are not just a random coin toss. There are strong incentives for voters and political leaders in all democratic countries to take decisions that support economic prosperity and political stability, once it becomes obvious that all the alternatives are economically damaging or politically dangerous.

This is the point that French voters arguably reached in April when they elected Macron, and a similar turning point is rapidly approaching in Britain, as the risks and contradictions of Brexit become ever clearer. All that remains is for Germany to recognize that its prosperity and security depends on a more integrated eurozone inside a more flexible EU.  /project-syndicate