The European Union is facing a perfect storm this summer
As Europeans look ahead to summer holidays, the union faces a series of severe tests.
By now, drama in Greece and mid-year market gyrations may seem routine, but the number and timing of this year’s challenges set 2016 apart from summers past.
With the UK’s referendum on EU membership set for 23 June, Spain’s rerun general election on 26 June, Greece just about agreeing a new deal so it can pay €7.5bn (£5.7bn) in debt redemptions, and a rise in migrant arrivals a distinct possibility, Europe may be facing a “perfect storm” of political risk.
Brexit
On 23 June, the Economist Intelligence Unit expects a majority of UK voters to choose “Remain”. However, there is a non-trivial risk that “Leave” will prevail, triggering a political crisis and the beginning of difficult separation talks.
We believe there would also be economic consequences, such as currency depreciation, bond and share price volatility, capital and labour outflows, and eventually, the possibility of reduced access to EU markets. The EU would lose its second-largest economy and a strong liberalising influence. And referendum contagion could spread, with voters in other member-states demanding their own ballot.
Spanish gridlock
Meanwhile, in Spain, no party will win a majority on 26 June. The Spanish Socialist Workers’ Party (PSOE) has been challenged for its place as the second-largest formation by an alliance between the populist Podemos and the smaller United Left (IU).
We believe that political pressure to form a government will end the gridlock after the vote, and that if it were overtaken, the PSOE would begrudgingly join or facilitate a coalition led by the conservative Popular Party (PP) instead of aligning with Podemos and the IU. Still, should it emerge, a Podemos-led government would pose a risk to policy stability and relations with the EU.
Greek summer
Turning to Greece, Eurozone finance ministers have just unlocked the bailout funds it needs to make its upcoming bond payments. Parliament passed a contentious omnibus bill earlier this month containing numerous measures required by Greece’s creditors, but the government’s slim majority fell in the process – down to just two.
Meanwhile, the International Monetary Fund (IMF) and Germany are at odds over talks on debt relief – with substantive discussions now delayed until 2018. Alexis Tsipras’s coalition may scrape through 2016, although we believe that it will eventually buckle under the pressure of bailout implementation.
“Grexit” is off the cards for now, but we forecast that Greece will leave the euro by 2020.
Refugee crisis
Finally, as conditions in the Mediterranean improve, a renewed influx of migrants could add another wrinkle. An agreement with Turkey is reducing arrivals to Greece, but has serious limitations. Moreover, arrivals by other routes — for instance, from Libya to Sicily — may rise.
A sharp uptick could spark tensions between member-states, potentially complicating the situation in Greece and influencing some voters in the UK.
Taken alone, each situation would be manageable for Europe, which has muddled through one challenge after another since 2009. However, the key challenge this year is that multiple downside risks crystallise together. This would make muddling much more difficult and could pose a more serious test to the EU’s integrity.