Europe – can the centre hold? Mike Wilson takes a detailed look at the issues that lie ahead.

by | Feb 22, 2017

Share this article

Facebook Open Graph

The EU has more to worry about than just Donald Trump, says Michael Wilson, Editor-in-Chief at IFA Magazine. Populist nationalism is undermining the economy too. 

Now don’t even get me started on the burning question of the day. If anybody’s expecting any definitive answers here about how the Brexit negotiations are going to impact on the fortunes of mainland Europe – or about how an avowedly protectionist Trump presidency will affect the whole can of worms – I can do little better than to direct you toward a mate of mine who sells crystal balls. If you buy a dozen, he says, there’s sure to be one in the box that gets it right.

As I write these words in February, Donald Trump has been celebrating his second week in office by doubling down on his intention to retreat from the international marketplace. His threats toward China and Mexico now seem to have morphed into a vaguer but wider plan to dump 20% import tariffs on just about anything made by European factories in the emerging countries for sale into the United States.


That’s cars, computers and white goods, for a start. Plus pharmaceuticals, services and electronics. But recently it’s been Trump’s determination to turn away US-accredited Muslim workers as well as Muslim refugees that has sent shock waves around the world – ironically, too, among multinational companies like Starbucks, Amazon and Facebook.

Ironically? Yes, you see, all these companies have recently been getting the wrong sort of publicity over here for quite some years now – mainly for using their European bases to dodge US (or indeed any) taxes. So, if The Donald forces them all to repatriate their operations from Europe to the States – as he certainly wants to – are we likely to see all those Starbucks-boycotting European liberals suddenly herding back into the shops to order their triple skinny macchiatos, out of pure solidarity with the beast from Seattle?

Perfidious Frankfurt

That question isn’t quite as fatuous as it probably sounds. At the very least, it shows that Trump’s strategy is indeed disruptive to the perceived logic of the status quo, and in every way. And here’s more where that came from.


Most recently, Trump’s bizarre wish for a strong dollar has U-turned into a violent protest that Germany is engaging in a criminal undervaluation of the euro, China-style, so as to deliberately scupper the US trade balance. No, don’t even ask me how POTUS 45 imagines that Frankfurt alone could smash up the European currency, even if it wanted to. I don’t know, and I’m not sure that he does. But hey, this is the age of alternative truths, and some of them are likely to prove more durable than others.

What Trump’s volte-face tendency does do, though, is to highlight the quandary that Theresa May is in, as she tries to insist that the Brexit-means-Brexit approach will leave us safe in the dependable hands of our transatlantic ally. And that the Prez won’t change his mind again and slam the US door on us as soon as we’ve burned the European bridges.

Nexiteers, Frexiteers and all the rest

But drat, like I said at the outset, I didn’t mean to get sucked into all that. Europe has other problems on its mind – the worst of which is that the same populist nationalism that sparked both Trump and Brexit is now set to endanger the self-image of EU institutions themselves.


The 15th March sees an election in the Netherlands in which a far right-winger, Geert Wilders, seems quite likely to get more parliamentary seats than the prime minister. And who has said he’ll pull the country straight out of the EU. And who has been convicted of inciting racial hatred, and who wants to close the mosques.

The worry is not so much that Wilders will succeed, because the best he can hope for is to be leading a ragged coalition – but rather that it’ll give a platform for extreme nationalism that will have to be contained by other political parties.

And the economic consequences of a Dutch withdrawal? It’s extremely hard to imagine such a trade-dependent country with such strong ties to Germany turning its back on the Single Market – which suggests to me, at least, that even the foaming nutcases have a stronger plan than Mrs May’s hard Brexit. Please feel free to disagree.


Aux armes, citoyens

France’s intentions of quitting the EU are often overstated as well. Even though the far-right Marine Le Pen from the Front National is in with a very good shout against the conservative former prime minister François Fillon, it seems very unlikely that her Eurosceptic loathing of the EU will extend as far as a withdrawal. France does, after all, benefit mightily from agricultural subsidies, and its expertise at tweaking European trade and company laws is not something she’ll want to give up lightly.

But she does have a huge groundswell of popular support among a population that’s at least as Eurosceptic as our Brexiteers. And she’s demanding that France should partially leave the Eurozone – apparently by running both the euro and the franc at the same time.

In theory, this would presumably liberate French financial institutions from the centralising fiscal edicts coming down from the European Central Bank in Frankfurt. But in practice, it would tax the finest financial brains to figure out how the two currencies should be correlated if they slipped against each other (which they presumably would?) And how the euro could be defended if Paris decided to splurge its way out of stagnation. A distinct possibility, unfortunately.


Putting the brakes on Berlin

And so to Germany, the backbone of the northern European economy and the object of President Trump’s latest invective. Germany’s 2016 record of 1.8% growth sounds better than the fact that its third-quarter year-on-year GDP improvement was just 0.8% – on paper at least, one of the weakest performances in the western EU, and a very long way behind Britain.

Two points stand out, however. Firstly, that Britain’s second-half GDP growth was almost certainly boosted by one-off factors which economists are not expecting to survive the advent of higher prices in the UK – the result mainly of sterling’s 15% devaluation which our correspondents think will drive up UK prices before long.

And secondly, that Germany is allowed a little bit of slack. Its $300 billion current account balance accounts for three quarters of the Eurozone’s combined surplus. In cash terms it’s bigger than China’s. And, at 8.8% of GDP, it’s equivalent to 63% of America’s own yawning $475 billion current account deficit. Which is the main reason why Trump is shouting foul.


A lot will depend in the coming months on how the President acts on his conviction that Germany is playing dirty. The car manufacturers – BMW, VW Audi and Mercedes – are already under notice of huge import tariffs if they continue to export Latin American-built cars to the USA. But will Trump take it further? And what of Germany’s huge pharmaceuticals groups, who Trump has accused of blatant profiteering? And what if Germany’s food importers kick up about Trump’s intention to force exports of hormone-treated beef or GM food onto the most environment-savvy population in Europe? Will it descend quickly into trade sanctions?

That, of course, is only half of the worries on Angela Merkel’s mind as she contemplates the federal elections which must happen between late August and 22nd October at the latest. On paper, at least, Mrs Merkel’s Christian Democrats and her Social Democrat coalition partners ought to be safe against the ominous alt-right Alternative für Deutschland, which wants Germany to stop mollycoddling spendthrift southerners and split the Euro club so as to form a northern currency league. But, after the shocks of the last twelve months, nobody is taking anything for granted.

Merkel’s weakest front is on her (debatably sensible) decision to open up Germany’s borders to nearly two million migrants during the last two years, most of them from Syria and other Middle Eastern countries. Coming at a time when unemployment is at 6%, when exports to the UK are facing choppy waters, and when business confidence indicators are suddenly slipping back from a three-year high, there is much here to be worried about.


But it doesn’t end there, unfortunately. Fearful eyes have been cast at Italy, whose government botched and lost a key referendum last December, and which has somehow managed to put Eurosceptics into a commanding position. The problem is not so much that Italy is unstable – it has muddled through quite successfully for decades – but that worries elsewhere about the EU may focus on its terrible growth rate (0.9% in 2016) and its €1.5 trillion government debt pile which is growing a lot faster than that. And which is 130% of GDP….

At the same time, analysts point out, Italy is struggling to implement a rescue and recapitalisation package for its overstretched banking system. Only last December, the state had to shovel a quick €20bn rescue package into Monte dei Paschi di Siena, the world’s oldest bank, after the Qatari sovereign fund refused to play along. Had it not done so, it would very possibly have started a run whose effects would have risked ‘doing a Cyprus’.  And in that event it wouldn’t take very much to go wrong before Italian sovereign debt was also downgraded. Which, considering that S&P already rates it at a miserable BBB and negative and Moody’s at Baa2 negative, is uncomfortably close to the floor.

And that, with anti-EU sentiment growing fast, wouldn’t be good at all.


Share this article

Related articles

Sign up to the IFA Magazine Newsletter

Trending articles

IFA Talk logo

IFA Talk is our flagship podcast, that fits perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast - listen to the latest episode