The European Union (EU): the ideal of integrating Europe’s countries in an effort to counter the nationalism that saw the continent ravaged by two devastating World Wars. A vision that would realise the free movement of goods, services and people.
Fast-forward to today and it seems that the ideal that was the EU is disintegrating. Anti-globalisation sentiment is rife, populism is taking hold, and anti-immigration policies are increasingly forming part of political agendas.
Already, Hungary and Poland are governed by ultranationalist parties, and in 2016 Brexit happened. As the year drew to a close it became ever more apparent that many other continental European countries are tending towards a more nationalistic sentiment.
In December, Italy’s prime minister, Matteo Renzi, resigned after citizens voted overwhelmingly against his proposed constitutional reform, sending markets reeling, and likely bringing forward the 2018 election to 2017, Philip Saunders, co-head of multi-asset at Investec Asset Management, tells finweek.
The Five Star Movement (M5S), which according to polls is the most popular opposition party in Italy, has been pressing for this. “If this is the case, we would expect the M5S to be the largest party. They have also said that they could form a coalition with the Northern League, having dismissed this originally. If they win there is likely to be a referendum on the euro with a material chance of a vote to exit,” says Saunders.
Although Austria did not vote for far-right wing candidate Norbert Hofer in the same month, 2017 has other pivotal elections in store, including in Germany, France and the Netherlands. In the case of France, one of the EU’s key pillars, if right-wing candidate Marine Le Pen were to become president in May 2017, “it is going to be pretty difficult to sustain the euro in its current form”, says Saunders.
The problem with the EU
According to Arthur Kamp, investment economist at Sanlam Investments, the significant growth in support for nationalism in countries including Greece, France, the UK and Italy has happened within a relatively short space of time – the last five years. “It seems as though voters feel ‘disenfranchised’ amidst stagnant real incomes and growing income inequality.”
Sounds a lot like the reasons that got Donald Trump elected…
“The US reaction to poor growth and globalisation is also going on in the eurozone, but the EU has the added factor of a single currency,” says Saunders. “I think the problem with the EU is the euro. It’s a fixed-exchange rate regime and that means that there is this divergence in performance.”
Individual countries are not able to allow their exchange rates to float in order to help address macroeconomic imbalances and there is an absence of a fiscal union, explains Kamp.
Greece is a prime example of this, “where imbalances developed to the point where the required adjustment to fiscal policy is extraordinarily onerous. All of this implies the probability of disintegration (or at least partial disintegration) of the euro area at some point is not nil – even though the counter argument is that the costs of disintegration are so great so as not to be feasible,” holds Kamp.
Saunders believes that one of the key risk factors going forward is that Greece will finally be ejected from the eurozone. “It’s been kept on life support, but ultimately we have reached the end of the road.”
Although Brexit is on the agenda, the UK is not part of the eurozone, which effectively means Greece will set the precedent for leaving the currency. And as long as this is on the cards, the trend of uncertainty in the EU will continue, leading to persistent market speculation around an unravelling euro, says Saunders.
The implications of a divided EU are dire, in terms of global trade relations and economic growth, as well as minority rights (read: anti-immigration policies).
“Of course we should not forget that we already have authoritarian right-wing governments in place in Russia and Turkey. It is hard to imagine the UN Security Council with representatives of Putin, Trump, and Le Pen taking three of the permanent seats,” says Yannik Thiem, associate professor in philosophy at Villanova University in the US.
And in terms of trade, “If the mandate from the electorate is job protection and immigration control, then a drift towards inward-looking economic development and greater protectionism is likely. This would challenge the unity of the EU, which is based on treaties endorsing the exact opposite, namely free movement of goods and people between countries,” says Kamp.
This article originally appeared in the 29 December edition of finweek. Buy and download the magazine here.