European Affairs

2016, a tale of two Europes? Anti-terrorism, Refugee Crisis, and Economic Headwinds to Test EU Institutions     Print Email
By James D. Spellman, Strategic Communications LLC

spellmanOn many fronts, Europe is at a watershed entering 2016.

Its agility in negotiating economic, political, and social challenges ahead goes to the heart of the European Union’s future—its purpose, effectiveness, resiliency, and evolution.


From the unease over security after the Paris terrorist attacks to the continuing weakness of Greece to the ongoing influx of refugees (already at one-million entrants by sea in 2015, a scale not seen since World War II), the “shifting intensity of countervailing headwinds and tailwinds” seems more tumultuous ahead than in years past.[1] “An existential crisis for the EU” may be “the big geopolitical event in 2016,” surmises James Stavridis, former top commander of North Atlantic Treaty Organization and now dean of the Fletcher School at Tufts University.[2]

And yet, a paradox: investments in stocks of European companies were among the world’s best performers last year, with investors remaining equally optimistic for similar gains this year despite the anemic growth forecasts for the world and European economies.[3]

What perils and opportunities lie ahead, and what are the consequences for EU institutions, policies, and leadership as the Netherlands assumes the EU's six-month-long rotating presidency? Will “Europe” and “Union” be “missing” in responses to the crises in 2016, as EU Commission President Jean-Claude Juncker has complained?

Security: The terrorist attacks in Paris last year redefined the discourse over the scale and focus of security enhancements throughout the European Union, as emerging details about the attackers’ strategies and intra-Europe movements revealed breaches in controls both at the borders of the Schengen passport-free travel zone and within member-countries.

The attacks also raised questions about the political interests and strategic capabilities of the EU collectively and member-countries individually to exert force abroad jointly to combat terrorism, as France has done already through its air strikes against Islamic State militants in Syria since mid-November. For as the French Institute of International Relations points out, terrorist threats for Europe and elsewhere stem from the political instability in Africa’s Sahel zone and the Middle East.[4]

“Support from elsewhere in the bloc has largely been lacking, however, even though France has invoked the mutual defense clause in the EU treaty, obligating member states to provide aid and assistance ‘by all the means in their power,’ “ notes Vivien Pertusot, head of the Brussels office of the French Institute of International Relations.[5]

Brussels is calling for efforts on many fronts in its proposed directive on counter-terrorism.[6] “Our proposal targets not only those who commit terrorist atrocities, but also those who help with travelling, financing or supporting terrorism,” said Dimitris Avramopoulos, the European Commissioner for Migration and Home Affairs. “This is how we reinforce our criminal response to tackle the serious threats posed by foreign terrorist fighters.[7]

Measures include collecting and sharing more data among member-states, increasing resources for border control operations, and enhancing trust among EU member-states’ law enforcement authorities. “Isolation, working together with countries of origin and transit states, but also prevention of flight causes are the mottoes, in that order.[8]

“[W]hat is new now is that Isis has proved they are capable, after Paris, of carrying out terrible attacks beyond its traditional arena of the Middle East,” said Margaret Gilmore, a senior associate fellow at the Royal United Services Institute. “It is clear from what we saw in Paris that they are capable of controlling the process – able to train, plan, and execute these attacks – and that is something that the security services across Europe will be taking very seriously indeed.[9]

Monitoring and blocking that “process” is central in the EU agenda, testing the bloc’s jittery and inchoate political cohesion. Some analysts worry that policymakers will drive the EU refugee policy with antiterrorism tools. Others are raising red flags that civil liberties could be traded off in the war against terrorism, the imbroglio of cross-competing imperatives stymying solutions.

What is sought in Brussels remains a function of each member-state’s domestic politics, which between this year and next could see shifts. Brexit? In 2016, presidential elections in Portugal (January) and Austria (April), and a general election in Ireland (parliament must dissolve by April) may yield conflicting signals for a tilt to the left or right within the EU. In 2017, German Chancellor Angela Merkel is running for her fourth term with elections possibly in August, although the Financial Times predicted this month she won’t secure a fifth term. The French Presidency is up in 2017, too. François Hollande has said he won't run if unemployment does not fall, and he'll be 71. The Netherlands also has general elections in 2017, and Italy may move up its elections to 2017.

Refugees: Member-states are abnegating the Schengen rules by beefing up border security to cope with the refugee influx and implement their own anti-terrorist measures. Sweden, Denmark, and Norway have just chosen to erect administrative barriers, moves that prompted Germany to reiterate the need for a joint EU-wide approach.[10] The EU has been encouraging countries on the bloc’s edge to reduce the flow of migrants through more forceful policing of borders.

The capacity of EU member-states to respond is increasingly strained, especially given the number of asylum seekers, without an end in sight. Some refugees from the Middle East have been in Europe for nearly two years now without jobs. Temporary housing, registration, relocation, and other transition services provided by member-states are overwhelmed given the limited resources. Brussels promises aid to help but member-states complain it is inadequate and short-sighted. Surveys, such as that conducted by Germany’s labor department in October, found that most refugees lack professional qualifications or skills that employers need.[11]

Initially, EU leaders were pressed to act as the news media reported one horrific example after another of refugees killed or injured en route to Greece’ shores, or living in squalid conditions after their arrival in Europe. A sense of humanity was violated and public outcry throughout Europe was enormous. Moods changed, though, as the realities of supporting immigrants set in, with polls showing increasing concern and opposition to a continuing influx of refugees.

CHARTS: IMMIGRATION FLOWS INTO EUROPE IN 2015

spellman201601chart1
Source: BBC. http://www.bbc.com/news/world-europe-34131911

spellman201601chart2
Source: Pew Research Center, September, 30, 2015. http://www.pewresearch.org/fact-tank/2015/09/30/europes-asylum-seekers-who-they-are-where-theyre-going-and-their-chances-of-staying/ .

Brussels and member-states’ governments are wrestling with the question of whether refugees help economies to grow or extract costs that are structural and long-term. Studies vary widely on this question, with some suggesting that immigrants do have a positive impact on economies (they pay more in taxes eventually than they have taken from society) while others find that the costs are long-term since the transition into sustainable employment is lengthy, difficult, and the failure rate high (with obstacles ranging from language to prejudice).[12] Data is limited, though, to obtain answers.

Ahead, many variables will play a role. Central is the macro-economic outlook, determining the capacity to absorb excess labor. Education and demographics of immigrants matter, too. Younger, well-educated immigrants tend to easily transition into their new societies and find jobs; older and unskilled workers don't. Further, older immigrants compound the problems of Europe's aging society. In the EU, four working-age people now pay for every pensioner; that will shrink to about two within 50 years, according to the EU Commission, what the headline writers called the “demographic time bomb.”[13]

spellman201601chart3
Source: Pew Research Center, October 8, 2015. http://www.pewresearch.org/fact-tank/2015/10/08/refugee-surge-brings-youth-to-an-aging-europe/ .

ILLUSTRATION: SCHENGEN AREA

spellman201601chart4
Source: European Commission

The recent remarks of Danish Prime Minister Lars Lokke Rasmussen show the dilemmas and difficulties faced by member-states. “We cannot deprive people of their rights to seek asylum,” he said. “But we can make sure that those who do not have legal reasons to come to Denmark are turned away at the border.”

Yet, Merkel said, “I am convinced that, handled properly, today’s great task, presented by the influx and the integration of so many people, is an opportunity for tomorrow.”

Fissures — Grexit and Brexit:

For Greece, “last year was tumultuous, punctuated by two elections, a referendum, the imposition of capital controls, negotiations to reach a bailout deal, cliffhanger parliamentary votes and Athens’ closest brush yet with bankruptcy and euro exit,” as a Guardian reporter succinctly summarized the sequence of cliffhanger events in 2015.[14]

Greece faces political difficulties in enacting tough pension reforms it committed to complete to obtain a bailout package from the European Commission, the European Central Bank, and the International Monetary Fund. The Labor Ministry had been drafting an overhaul of the social security system, a proposal calling reportedly for cutting state-guaranteed pensions by half, according to press reports. A person’s income and years of payments would also determine social security benefits, the ministry’s proposal had apparently envisioned. But the left-wing government said Tuesday (January 5) that it would not slash pension expenditures for current enrollees and that these costs would starting rising if the economy grows after 2018. Instead, employee and employer contributions would be increased and future pensions cut by up to 30 percent to meet the bailout lenders’ demands. That likely puts Athens on a collision course with the EU, the ECB, and the IMF.

CHART: GREECE HAS THE HIGHEST PENSIONS SPEND IN THE EUROZONE.

spellman201601chart5
Source: Mehreen Khan, “Greece on a collision course with creditors after voiding not to slash pensions.” The Telegraph, January 5, 2016. http://www.telegraph.co.uk/finance/economics/12082375/Greece-on-a-collision-course-with-creditors-after-vowing-not-to-slash-pensions.html .

The head of the country’s central bank warned that backtracking could unravel the bailout deal. "A potential failure in completing the review would be destabilizing, bringing to memory the experience of the first half of 2015. A repeat of that experience entails large risks, difficult for the economy to withstand this time," wrote Bank of Greece Governor Yannis Stournaras wrote in January 3 edition of the newspaper Kathimerini.[15] Greece has made progress, three-quarters of the way toward a primary budget surplus of 3.5 percent of economic output by 2018, according to his analysis.

CHART: GREECE GDP

spellman201601chart6
Source: Helena Smith, “Greece's economic crisis goes on, like an odyssey without end.” The Guardian, January 4, 2016. http://www.theguardian.com/business/2016/jan/04/greeces-economic-crisis-goes-on-odyssey-without-end .

A more pessimistic view is offered by the American economist Nouriel Roubini. “Greece’s exit from the eurozone may have been only postponed, not prevented, as pension and other structural reforms put the country on a collision course with its European creditors,” he writes.[16]

British Prime Minister David Cameron has been negotiating reforms to the country’s relationship with the EU ahead of an “in-out” referendum Cameron promised the electorate by the end of 2017, the first time in 40 years the issue has been put to the test.[17]

Cameron has called for what some observers call a “two-track” membership structure for the EU that would allow Britain to opt out of the EU’s vision to “forge ever closer union,” give national parliaments more power to block EU legislation, require Brussels to recognize formally that the euro isn’t the EU’s only currency, and restrict migrants’ “in-work and out-of-work” benefits. Simon Tilford of the Center for European Reform argues that vote is over immigration, that “[EU] membership has become synonymous in many voters’ minds with uncontrolled immigration.”[18]

On January 5, Cameron complicated the domestic politics by allowing his cabinet ministers to campaign for or against Brexit, a move that may improve the odds of the UK’s exit, which analysts generally see as a 50-50 chance.

Outlook: China’s stock market rout and Europe’s moderate growth forecast

Signs that China’s economy may be worsening at a faster, deeper pace than thought just last month triggered a sell-off in Chinese stocks and sharp devaluations in the country’s currency, the yuan. Worldwide, investors feared further drops in commodity prices, including oil, and capital flight. Their anxiety led the Stoxx Europe 600 index (SXXP) to fall 2.2 percent (to 346.51), closing January 7 its lowest level since early October and possibly resulting in the worst opening week of trading for the index in a new year since 2000. (For background, see “New Storm Clouds for Europe: China’s Weakening Outlook” posted August 31, 2015. http://www.europeaninstitute.org/index.php/ei-blog/265-august-2015/2077-new-storm-clouds-for-europe-china-s-weakening-outlook-8-31 ).

Analysts, such as Andrew Sentance, senior economic adviser at PwC, had forecast that Europe will have its strongest year of growth since 2007, driven by northern Europe, growing at nearly four percent, and eastern Europe. The sharp drop in oil prices, the ECB’s quantitative easing, and the euro’s decline against the U.S. dollar are creating a highly favorable climate in 2016. The euro area economy expanded 1.6 percent and the EU28 grew 1.9 percent in 2015.

The bank HSBC has been telling investors that "Europe is our top pick for [2016]." But banks are a source of concern as they undergo stress tests this year, their debt overhang and holdings of sovereign debt two areas of weaknesses that may put to use the new powers of the ECB to close down insolvent or undercapitalized banks and require investors for the first time to ‘bail in,’ provide their own capital
rather than rely on a “bailout” using public funds, to shore up problem banks. And, now, the rippling effects of China’s turbulent markets and weakening economy seem to be more forceful and continuous than projected year-end 2015.

CHART: EU GDP GROWTH RATE

spellman201601chart7
Source: Trading Economics. http://www.tradingeconomics.com/euro-area/gdp-growth .

The tale of Europe, ahead, then, is a tale of two cities, to paraphrase Charles Dickens. It is a time of cooperation and a time of nationalism, an age of integration and an age of balkanization, a season of risk-sharing and a season of divergence, and a spring of solidarity and a winter of disintegration.[19]

 


[1]Quote from Deutsche Bank overview best summarizes the pattern.

[2]Stephen Fiedler, “A Perilous Year for European Unity.”  Wall Street Journal, January 3, 2016.  www.wsj.com .

[3]The pan-European benchmark STOXX 600 ended 2015 up by 6.9 percent.

[4]Dominique David, “Le 13 novembre, et après ?” 

http://www.ifri.org/fr/publications/editoriaux/13-novembre-apres .

[5]Vivien Pertusot, “Semi-Mutual Defense: Europe’s Patchwork Response to Paris Attacks.” The Global Observatory, December 9, 2015.  http://theglobalobservatory.org/2015/12/european-union-isis-syria-paris-attacks/ .

[6]December 2, 2015. 

http://ec.europa.eu/dgs/home-affairs/what-we-do/policies/european-agenda-security/legislative-documents/docs/20151202_directive_on_combatting_terrorism_en.pdf

[7]Duncan Robinson, “Brussels plans to make terrorism travel illegal.” Financial Times, December 2, 2015.  www.ft.com.

[8]Christoph Hasselbach, “EU 2015: Crises, nothing but crises.” Deutsche Welle, December 31, 2015. 

http://www.dw.com/en/eu-2015-crises-nothing-but-crises/a-18900663 .

[9]Matthew Taylor, “Terror threats will be the new normal for Europe, experts say.”  The Guardian, January 1, 2016.  http://www.theguardian.com/uk-news/2016/jan/01/terror-threats-will-be-the-new-normal-for-europe-experts-say .

[10]Charles Duxbury, “Sweden and Denmark Step Up Border Controls in Attempt to Slow Flow of Asylum Seekers

 Wall Street Journal, January 4, 2016.  “This highlights that we need a joint European solution,” the Germany government spokesman Steffen Seibert said.

[11]Guy Chazan, “Frustrations mount for refugees navigating Germany’s jobs market.”  Financial Times, January 3, 2016.  www.ft.com.

[12]Studies:  positive impact in UK:  https://www.ucl.ac.uk/news/news-articles/1114/051114-economic-impact-EU-immigration; issues with data in understanding benefits/costs in UK:  http://www.migrationobservatory.ox.ac.uk/briefings/fiscal-impact-immigration-uk; 2005 study finds mixed experience in Germany and limits on the ability to arrive at conclusions because data is difficult/lacking/etc.:  http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=9&ved=0CF8QFjAIahUKEwj8p4Dq4-PIAhUDdD4KHUIdDAk&url=http%3A%2F%2Fec.europa.eu%2Fdgs%2Fhome-affairs%2Fwhat-we-do%2Fnetworks%2Feuropean_migration_network%2Freports%2Fdocs%2Femn-studies%2Fillegally-resident%2Fde-finalstudy-eng_en.pdf&usg=AFQjCNE-qTSKt61udF6Cg3EUXBN0w-xX2A&sig2=1mtSmTmm-6Gib790w-XKGA ;  immigration from outside Europe 'cost £120 billion'; inside Europe saw L4 billion benefit (University College London):  http://www.telegraph.co.uk/news/uknews/immigration/11209234/Immigration-from-outside-Europe-cost-120-billion.html .

[13]Szu Ping Chan, “Mapped how a demographic time bomb will transform the global economy.”  The Telegraph, January 2, 2016.  http://www.telegraph.co.uk/finance/economics/12068068/Mapped-how-a-demographic-time-bomb-will-transform-the-global-economy.html .

[14]Helena Smith, “Greece's economic crisis goes on, like an odyssey without end.”  The Guardian, January 4, 2016.    http://www.theguardian.com/business/2016/jan/04/greeces-economic-crisis-goes-on-odyssey-without-end .

[15]http://www.ekathimerini.com

[16]Nouriel Roubini, “Opinion: Europe’s disintegration could be biggest threat of 2016.” 

Marketwatch, January 4, 2016.  http://www.marketwatch.com/story/europes-disintegration-could-be-biggest-threat-of-2016-2016-01-04

[17]Karla Adams, “The chances of Britain leaving the EU may have just gone up.”  Washington Post, January 5, 2016. 

https://www.washingtonpost.com/world/europe/the-chances-of-britain-leaving-the-eu-may-have-just-gone-up/2016/01/05/a5e47ef0-b3bb-11e5-8abc-d09392edc612_story.html .  The text of the ballot question has not been decided.  The “Draft European Union (Referendum) Bill,” published by the Conservatives in 2013, proposed: "Do you think that the United Kingdom should remain a member of the European Union?"

[18]Geoffrey Smith, “The Many Things That Could Go Badly Wrong for Europe in 2016.”  Fortune, December 23, 2015.  http://fortune.com/2015/12/23/europe-2016-preview-risks/ .

[19]This borrows from Roubini’s polarities: “Europe needs more cooperation, integration, risk sharing, and solidarity. Instead, Europeans appear to be embracing nationalism, balkanization, divergence, and disintegration.”