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How the EU Survived the Populist Wave in 2017

This was supposed to be the year that the European Union imploded — the year when the populist revolts that engulfed the U.S. and the U.K. in 2016 would spread to the continent, toppling mainstream governments and withdrawing popular consent for European integration.

The tensions created by the eurozone debt crisis and the migration crisis would be finally laid bare in elections in the Netherlands, France, Germany and Austria, many pundits warned. The centrifugal forces pulling Europe apart would finally overwhelm the centripetal forces binding it together.

Yet the EU ends the year in better shape and more united than it has been for years. The populist revolt never materialized.

Instead, Emmanuel Macron’s victory in the French presidential election has injected new energy into the cause of European integration. Even the new Austrian government, which will include the far right Freedom Party following a deal reached last week, is committed to a pro-European agenda.

At a summit in Brussels last week, European leaders agreed to a big step forward in defense cooperation that had eluded the EU for over a decade and discussed ambitious proposals for greater economic integration.

And a deal formally agreed at the summit to wrap up the first stage of Brexit negotiations has raised the prospect of a softer U.K. exit than seemed possible a few weeks ago.

What went right? In reality, the pessimism at the start of the year was overdone. There was never any serious prospect of the far right gaining power in the Netherlands under the country’s strictly proportional electoral system. Nor was it ever probable that French far right leader Marine Le Pen would win the presidency, even if a late surge in support for far left challenger Jean-Luc Mélenchon turned the contest into an unexpectedly tight four-way contest in the first round.

True, the German far right Alternative for Germany performed better than expected in parliamentary elections in September, complicating the formation of a new government. But ironically this now looks likely to lead to a renewal of some form of grand coalition between Chancellor Angela Merkel’s Christian Democrats and the Social Democrats led by Martin Schulz, the fervently pro-European former president of the European Parliament who recently called for the creation of a United States of Europe by 2025.

Second, the European economy has performed far better than anyone expected at the start of the year, helping to ease the atmosphere of crisis that was still engulfing the continent in 2016.

The EU economy grew by 2.5% in the third quarter, with the eurozone enjoying its fastest growth since 2011. Business and consumer confidence in parts of Europe are at their highest levels since the creation of the euro in 2000. Unemployment is falling across the continent and business investment is rising.

Even Greece’s economy is growing again and the country was able to tap the bond markets again. Italy finally took decisive steps to tackle its banking crisis. Portuguese government debt recovered its investment grade rating and ended the year yielding less than that of Italy.

A third factor was the lessons that Europeans drew from the events of 2016. Many saw the election of Donald Trump as U.S. president and the Brexit vote in the U.K. as the most decisive shift in the geopolitical landscape since the fall of the Berlin Wall in 1989, signaling a retreat from decades of Anglo-Saxon global leadership.

Many Europeans have concluded that the EU could no longer rely on the U.S. and U.K. to help preserve the global order, obliging Europeans to take greater responsibility for their security and forcing them to develop greater capacity to act autonomously through greater integration in areas such as defense.

At the same time, the EU has seized on the perceived U.S. and U.K. retreat to push its own global agenda, particularly in trade. Last week, the EU reached agreement with Japan on an ambitious trade deal; the EU has also revived stalled negotiations with the Mercosur group of Latin American countries and decided to open negotiations with Australia and New Zealand.

Are Europeans in danger of being too complacent as they look ahead to 2018? There are few obvious political risks on the horizon. Italy will hold elections in March but under the new electoral system, few expect this to lead to the formation of a euroskeptic government. The risk of disorderly collapse of the Brexit negotiations cannot be ruled out despite last week’s progress, given the difficult unresolved questions, not least over the Irish border, but both sides will be determined to avoid this.

The biggest risk is perhaps that the new drive for closer integration in key areas such as the economy and security doesn’t go far enough, leaving the EU vulnerable to external shocks, including a slowdown in the Chinese economy, or geopolitical spillovers from North Korea or the Middle East that lead to new economic strains or a resurgence in the migration crisis.

Because one thing remains clear: the populist threat to unravel European integration hasn’t gone away. Indeed, one consequence of the elections in 2017 has been to leave populist parties of both the left and right as a major opposition force in the Netherlands, Germany and France. They now lie in wait, ready to pounce when the electoral cycle turns again should the EU’s leaders stumble. But those are worries for another day, another year.
Source: Dow Jones

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