If we are to believe the stock markets, all is well in Europe. But are markets in danger of underestimating looming perils such as populism, a Brexit, German dominance and weakening European power? ECR investigates.

The Greek crisis has been gnawing at the foundations of European unity for quite some time now. Negotiations over new aid have been conducted in combination with domestic political developments, Europe-wide trends, external threats and personal clashes. The result is that parties on either side have dug themselves into a hole, suffered from tunnel vision, and frequently ignored emotions and arguments put forward by the opposition. In this polarised climate, the real purpose of the negotiations has largely disappeared from view.

A move away from the centre

An important implication of the events in Greece is an increase in the popularity of Europe’s left-wing as well as right-wing populist parties. In the weak Eurozone countries, the leftist populist movements are making headway (for example, Podemos in Spain). The right-wing populists, too, have the political wind in their sails (for example, Lega Nord in Italy).

Numerous voters think that the elites – wherever they are on the political spectrum – have failed and should be ejected from power. This helps politicians who are seen as ‘outsiders’ or who are good at creating the illusion that they do not belong to the political establishment. It lends credibility to their claim that this time, everything will be different.

And in the ‘stronger’ Economic and Monetary Union (EMU) countries, the parties that are acting against immigration, European dictates, and the euro are doing well: for instance, the PVV (the Netherlands), the Fins (formerly the True Fins), the DPP (Denmark) and so on. Often, such parties combine a conservative, right-wing bias (sometimes mixed with racism) and left-wing viewpoints on pensions and healthcare.

The aforementioned parties are able to flourish because ‘the masses’ feel disenfranchised; powerless to influence the governance of their own country, for which they blame globalisation and the European integration process, as well as self-serving elites. German philosopher Friedrich Nietzsche stated that: “The democratisation of Europe is at the same time an involuntary arrangement for the breeding of tyrants.” Regardless of whether it is justified, this fear is what lies behind the dissatisfaction of many European citizens who believe that a small group of people, backed by powerful business interests are firmly in charge; whereas, ordinary people are left to the mercy of overwhelming global political and economic forces.

In the words of George Will, a US conservative political commentator, “the question we settle in an election is not whether elites shall rule but which elite shall rule.” Numerous voters think that the elites – wherever they are on the political spectrum – have failed and should be ejected from power. This helps politicians who are seen as ‘outsiders’ or who are good at creating the illusion that they do not belong to the political establishment. It lends credibility to their claim that this time, everything will be different.

Brexit: further disintegration?

European integration could be undermined further due to the threat of a Brexit. Prime Minister Cameron has promised a referendum regarding Britain’s EU membership – at the latest in 2017, when he hopes to have negotiated new conditions for a renewed British membership. It is feared that Westminster’s demands will compromise a fundamental tenet of the European project: the free movement of goods, services, capital, and people. Cameron wants to curb the latter, in particular. He is also opposed to any attempts towards an ‘ever closer union’. In addition, he wants to reduce the EU budget and repatriate powers from Brussels.

The sorry Greek saga has reinforced the British belief that the EU should be overhauled. Bridging loans for Greece are financed by the EU; not the Eurozone. Every attempt is made to ensure that non-EMU states do not run risks in this respect. Yet, the British do not like the direction things are headed.

Simultaneously, British EU-sceptics see Greece’s woes as an opportunity. They hope that Cameron can land several ‘scoops’ for the UK during the negotiations on Eurozone and EU strengthening. His approach will be: “I really want to put the Eurozone on a firmer footing but can you guarantee that it will not steamroller London when taking future decisions and what will you give me in exchange for my support, which is essential?” A fascinating political game, played for high stakes is guaranteed.

The Paris-Berlin axis

But right now, more important than hanging on to the British, is keeping the French-German relationship on track. The European project was built on the Paris-Berlin axis from the start. France’s political and military might and the German economic miracle made for an equilibrium of sorts. German reunification threw the relationship off balance to some degree though and it has continued to deteriorate as Germany has far-exceeded France’s economic performance.

Moreover, the eastward expansion of the EU has put Berlin at the geographical heart of the union, replacing Paris as the central hub. The credit crisis (and its ramifications) has further reinforced Germany’s position as Europe’s dominant power.

It was hoped that European integration would render Germany more ‘European’. Now, many fear that Europe is becoming more German. Berlin is not consciously striving for hegemony, but it is prepared to take the lead, although it does not want to be seen as a ‘bully’. Many think it is already too late and that the euro crisis has poisoned Germany’s attitude towards Europe and vice-versa.

The story continues

Nationalism, populism, ideological rifts, and economic worries are distracting leaders from other pressing issues, like the chaos at its southern borders and the Russian threat. The EU has always found it difficult to take a hard line – from both a political and military standpoint. Its USP seems to be economic as well as ideological/moral. In the latter areas, it has incurred heavy damage – internal divides are widening and political unity has declined.

For the moment, Greece may have been saved from the abyss but the underlying weaknesses of the Eurozone and the EU remain in place. Still, we do not think Europe will disintegrate for the foreseeable future. After all, the EU project is of importance to the European leaders. It has boosted economic growth, greatly reduced the chance of war breaking out between EU countries, former communist countries are functioning as democracies, and Europe has a significant presence around the world. This is not forgotten and the EU leaders will not easily abandon the project.

The most likely outcome is that the Eurozone and the EU will continue to muddle on. At the same time, there is a constant threat of disintegration and waning global influence. Not to mention the rise of populism and problems arising from Germany’s ascendant dominance.

On the other hand, the Eurozone and the EU are no longer a byword for unity, prosperity, democracy, solidarity and mutual respect. In essence, the project should be revamped to stop the rot, but this is unlikely to happen. Visionary leaders are lacking and the sprawling structure of the EU is incredibly complex and often rigid. Reforms are therefore years in the making.

The most likely outcome is that the Eurozone and the EU will continue to muddle on. At the same time, there is a constant threat of disintegration and waning global influence, not to mention the rise of populism and problems arising from Germany’s ascendant dominance. A political analysis of Europe’s future underpins our economists’ opinion that the euro will have a hard time holding its own against the dollar in the medium to long term. The European fairy tale is over, but the story continues.