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MENA: Europe’s nemesis?

The European Union (EU) is facing some strong headwinds, as geopolitical forces globally appear to be pushing it in the direction of disintegration. With borders being closed across the continent, the lack of a comprehensive, and unanimously agreed upon, strong foreign and security policy threatens EU economic revival, as countries across Europe have seen.

It is almost a dead cert that the Syrian civil war, and its spill over into Iraq, will continue raging on for the foreseeable future. There are too many factions, militias, and parties that are fighting each other, while several of the major external players have conflicting interests.

A durable truce is therefore unlikely in the near to medium term: Russia and Iran are not prepared to drop Assad, Saudi Arabia is more worried about Iran than about ISIS, Turkey wants Assad to go but is even more fearful of the Kurds, and so on.

In other words, violence, war, and refugee flows will continue to be the order of the day while external great powers – with the US and Russia in leading roles – will continue to jostle for position.

Persistent civil war in Syria and Iraq, as well as more violence in Afghanistan imply that the refugee flows will grow, especially when the weather improves in the spring and summer. This will ratchet up the pressure in Europe and greatly undermine the remaining solidarity between the member states and with refugees. Borders are being closed all over the continent while the rules imposed on migrants are tightened – to an antisocial degree in some countries. And as the populist parties become more popular, cohesion continues to crumble inside the EU.

Extremism, as well as the other conflicts in the Middle East and North Africa (MENA), poses risks to the markets and the underlying causes of the unrest in the region will not disappear anytime soon. In other words, violence, war, and refugee flows will continue to be the order of the day while external great powers – with the US and Russia in leading roles – will continue to jostle for position.

No relief in sight

This is bad news for Europe, where the ongoing refugee crisis has added a distressing dimension to the tensions that are already undermining unity. As well as a rift between North and South, the gap is widening between East and West.

Moreover, the Greek pressure cooker is nearing boiling point. The country’s economy was already in the doldrums and the refugee crisis is very expensive, sending shockwaves through society, and weakening the Tsipras government. The Grexit debate could flare up again at any moment. Tsipras and his team are at loggerheads with Europe regarding the treatment and dispatch of refugees and also – not for the first time – about structural reform. The Prime Minister is caught between a rock and a hard place; a new Grexit discussion would not just revolve around a departure from the Eurozone but also from Schengen and even the EU.

Rebellious Renzi versus vulnerable chancellor

From the most fragile to the strongest member state: Germany. Chancellor Merkel’s hand has already weakened and her working life has lately become even more difficult. Politicians, including those in her own coalition, are attacking her and she is rapidly losing popularity among voters as the right-wing populist party, Alternative fur Deutschland, makes headway in the polls. The pressure on Merkel will only increase as the refugee flows continue to swell over the course of the year.

And the pressure isn’t only domestic. The Italian Prime Minister Renzi is increasingly setting himself up as a rival European leader in hopes of filling the vacuum that will be left if Merkel is ousted. Maybe not coincidentally, his domestic reforms are materialising at a sluggish pace. Renzi will take an even more assertive stance if the situation in Libya spirals further out of control and once refugees again try to reach Italy by sea (the vast majority of migrants are now entering Europe via Greece).

Internal frictions, such as these, are hampering the badly needed progress in the euro area – the bank union is far from complete and the monetary union should be strengthened, for instance. However, increased integration appears an ever more distant prospect. National borders are slammed shut as a Brexit looms alongside a Dutch referendum on a treaty with Ukraine (which is just a thinly disguised vote on the EU itself) and so on and so forth.

Apart from the concrete risks that Europe faces and the factors that could potentially act as a drag on growth – a French think tank estimates that disintegrating Schengen would cost €110bn over the coming decade – a miasma of misery could descend on Europe.

Boundless malaise

Whilst the Eurozone economy is not doing that badly, many people feel despondent. Citizens feel defenceless; many have abruptly realised that Europe’s borders are porous and susceptible to a multitude of threats.

Although the disintegration of the Eurozone is not yet on the cards, the global geopolitical forces seem to be pushing the EU and Eurozone in this direction.

When scanning the panorama from West to East we see a variety of risks, including: a possible Brexit, which would be fuel to the fire of the separatist movement in Scotland (and perhaps even Northern Ireland); a deeply divided Libya that could be overrun by ISIS; countries such as Syria and Iraq that are torn apart by civil wars and foreign interference; Islamisation and authoritarian governance in Turkey; corruption and Russian meddling that are destabilising Ukraine. Clearly, Russia will relentlessly continue to play the European countries against each other.

Add to this the uncertainty about the slowdown in China and the notion that the United States’ power and status on the global stage are waning and it will be obvious that the outside world holds few attractions for the Europeans. But there is scant evidence – if any – of concerted action.

Addressing the refugee crisis would go a long way to easing the pressure on Europe. The problem is that Europe can do very little in this respect as – regardless of various grandiose plans – it has not managed to pursue a strong foreign and security policy. The continent is dependent on other actors when it comes to restoring calm in the MENA (which would help to reinstate a sense of order at Europe’s boundaries). However, the chances of the latter are minimal.

The US is wary of getting in too deep, Russia is doing its utmost to make the situation worse, China does not (yet) aspire to play a pivotal role, while Iran and Saudi Arabia seem to be obsessed with tripping each other up. Finally, Turkey is preoccupied with shoring up Erdogan’s authoritarian regime and suppressing the Kurds. We also do not have high hopes of the effectiveness of supranational organisations such as the UN and NATO.

Fragile foundation

To sum up, the main geopolitical risks threatening US interests are identical to the forces that could trigger an existential crisis in the EU and (by extension) the Eurozone. This leads us to believe that the euro will be in trouble again later this year. Levels near 0.90 in EUR/USD are possible while we could see widening yield spreads between the (supposedly) strong Eurozone countries and those in the southern part of the monetary union.

Yields rising in tandem could signal a burgeoning confidence in economic growth or (in a pessimistic scenario) mounting doubts about the durability of the EU and the euro. There is no denying that the (political) trends around the world and in Europe are restrictive rather than stimulative.

Addressing the refugee crisis would go a long way to easing the pressure on Europe. The problem is that Europe can do very little in this respect as – regardless of various grandiose plans – it has not managed to pursue a strong foreign and security policy.

Although the disintegration of the Eurozone is not yet on the cards, the global geopolitical forces seem to be pushing the EU and Eurozone in this direction. Particularly as an EU-wide consensus appears to be an impossible ideal. Nevertheless, Europe is unlikely to implode in 2016 – if at all.

But not so long ago it would have been inconceivable to present the demise of the Schengen Zone and even the EU as a realistic possibility. Now thoughts of this are buzzing around in more and more people’s heads. This is not a solid foundation for a strong European economic revival.

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