Europe must reinvent itself or markets will tear it apart
As I sit on an over-crowded train at rush hour for the fourth time this week after a 12 hour shift (I hope my American co-anchor who doesn’t believe in European holidays is reading this), I look around and wonder how many people in the carriage still believe in Europe.
On 23 June 2016, 59.9 per cent of Londoners voted to stay in the EU. Today, what would that percentage be? The UK economy has held up well, despite initial forecasts. Growth is pretty solid with households continuing to do the heavy lifting.
Business investment in the UK was down 1 per cent in the fourth quarter; nothing alarming yet but capital formation by companies never picked up after the Brexit vote. Looking ahead, economists worry about inflation, a result of weak sterling, and a slowdown in activity. But compared to Europe, for the moment, the UK is A-OK.
European demographics are particularly worrying. Unemployment is still high, and an ageing population coupled with a lack of productivity growth means European growth could remain subdued.
And that’s where the politics kick in.
Read more: The decadence of Europe’s dismal elites is fuelling populism across the EU
Europe is going through an existential crisis as the wave of populism and anti-globalisation that engulfed the US is now threatening many European countries.
On 14 September last year, European Commission president Jean-Claude Juncker gave his State of the Union address for the EU. I’ve known Juncker for over a decade, but the staunch-European’s tone was different this time. He’s always wanted a Europe that protects, empowers and defends its citizens, and yet there he was – talking about Europe’s existential crisis.
For Juncker, after several decades of EU integration, member states have very few projects and ideas in common. He said European leaders spoke only of their domestic problems, with Europe not mentioned at all, as if there were almost no intersection between the EU and its national capitals anymore.
His analysis was spot on: national governments have been weakened by the forces of populism and seem scared and paralysed by the risk of defeat in coming elections. Europe, therefore, is fragmenting, which makes it very difficult for its citizens to feel empowered by its institutions.
Read more: It’s time to face facts: Pandora’s Box is open and Europe is finished
Suddenly, Europe has lost even more of its appeal.
And something has happened in the markets this week: after the surprise at victories for Donald Trump and Brexit, investors are now taking out extra insurance to protect themselves from a Marine Le Pen presidency in France. The chances of the leader of the French extreme right becoming President are very slim but, according to oddchecker.com, the three main candidates are pretty close in the first round of the elections. Almost all polls say Le Pen will get through the first round but lose in the second on 7 May.
But polls also show Le Pen closing in on both the Republican Francois Fillon and centrist Emmanuel Macron in the run-off.
Because of this uncertainty, French borrowing costs have been heading higher. That means the spread between the German and French 10-year yield is showing quite a lot of stress.
Then there’s Germany with elections later this year, where Martin Schulz – the Social Democrat candidate running for Chancellor – is gaining in the polls as a disruptor. Executive bonuses are turning into a campaign issue, putting Chancellor Merkel in an uncomfortable position seven months before the election.
Read more: Is Angela Merkel going to lose the German elections this year?
If Europe is to regain credibility, it needs to look at Brexit and learn from the referendum, because “disruptor-politicians” are trying to emulate it.
Europe must go through a radical reform of its institutions. But first and foremost, it needs to start getting citizens believing in the European project again. Alongside the figures and big ideas (let’s please work out how to fix productivity and growth), pro-EU politicians need to focus on emotions to remind citizens that Europe keeps them safe and can look after them.
Marine Le Pen said this week on French TV: “[Theresa May] is running the UK using policies that I want to run.” If imitation is the sincerest form of flattery, this time it may sit uncomfortably with the Prime Minister.
These views are not necessarily shared by Bloomberg.