3 January 2017

Divided and deluded, Europe faces crisis on every front


“Europe” is not a monolith. It comprises several overlapping entities.

There is “Freemovementland” – the passport-free travel area that stretches from the Greek islands to the north of Norway. There is “Frontlineland” – the countries which fear Russian meddling and aggression. There is “Euroland” – the countries which use the common currency. And there is “Singlemarketland” – the area governed by the guardians in Brussels who try to guarantee the free movement of goods and capital, and prohibit protectionism and cartels.

There are two important things to know about these entities. The first is that all straddle the familiar categories of European Union and Nato. Finland, Sweden and Ukraine, for example, are in Frontlineland but not in Nato. Norway is in Frontlineland, Freemovementland and Singlemarketland, but not in the EU.

The second is that all these entities are beset by woes which are going to worsen in 2017.

Euroland is in the biggest pickle. A common currency is a splendid idea. It intensifies competition and cuts transaction costs – but only when the economies taking part are similar, or already converging fast.

Instead, the euro was used as a means to encourage convergence. A hard monetary constraint, the theory went, would encourage low-productivity, slow-growing economies like Italy and Greece to modernise and reach German standards.

Predictably in hindsight, that didn’t happen. Barred from its usual route to maintaining competitiveness – devaluing the lira – Italy was imprisoned in an iron triangle, with a fixed exchange rate and little room for expansionary fiscal policy. Debts ballooned; output stagnated.

Greece went on a borrowing binge which has left the country bankrupt. Cyprus was toppled by its penchant for highly leveraged offshore banking. Portugal, similarly uncompetitive, has had a decade of stagnation.

The price is not just lost output: millions of young Europeans have had their twenties and thirties blighted by lack of opportunity: living at home and working in dead-end jobs when they should be starting careers and families.

Germany has been the big short-term beneficiary of this. The D-Mark should have soared against other European currencies, reflecting Germany’s formidable productivity and competitiveness. Instead exchange rates stayed low: a huge disguised subsidy to German exporters.

Moreover, German savers sought high returns by lending to dodgy borrowers in southern Europe. The price is that Germany now has a soft currency: to stave off disaster in the south (and to prop up the German banking system) the European Central Bank has printed trillions of euros in a way that the Bundesbank would have never countenanced.

People are fed up with this, and with the smug attitude of the Euroland elite, which insists that everything is going to be fine.

Singlemarketland, too, is in trouble. Donald Trump has made protectionism and interventionism respectable, even fashionable. Globalisation is out of fashion. Britain – one of the strongest champions of competition policy – is leaving. Voters want their national governments to do more to prevent jobs flowing abroad, to prop up national champions and to lessen economic uncertainty.

Again, people are fed up not only with their situation, but with the smug attitude of the Singlemarketland elite, which insists that everything is going to be fine.

Freemovementland is also badly off. Abolishing national borders works brilliantly if the external frontier is properly secured, if the countries are of broadly similar standards of living, and if law enforcement can act smoothly and swiftly across the old national borders.

In Europe, none of those conditions apply. The external frontier – notably in the Mediterranean, but also with Turkey – is porous. Standards of living vary hugely, meaning that destitute Roma from eastern Europe can legally move to rich countries where their lives will be better, but where their chances of finding lawful employment and harmonious neighbourly relations are slim. And cross-border policing is hampered by strict rules on privacy and data-sharing.

Unsurprisingly, people are fed up with this, and with the smug attitude of the Freemovementland elite, which insists that everything is going to be fine.

It is Frontlineland, however, that faces the most dramatic danger. Vladimir Putin is on a roll. He has used the Syria conflict to show that Russia is once again a force to be reckoned with, able to project force beyond its borders.

He has successfully wooed Turkey – and is drooling at the prospect of Mr Trump in the White House. The president-elect believes diplomacy is about deals, not alliances. He reveres strength. He wants to make repairing relations with Russia a hallmark policy of his first months in office.

The states in Frontlineland tremble at this prospect. Nato is essentially a bluff: it relies on adversaries believing that an attack on any member of the alliance will invoke the wrath of the others, particularly the United States.

Mr Trump’s scornful remarks about allies, and his gushing admiration for Mr Putin, shreds the credibility of that bluff. Ukraine and Georgia will be the first victims: America under Mr Trump will drop sanctions and accept, de facto if not de jure, Russian sovereignty over Crimea. Further Nato enlargement will be ruled out.

That is terrible news for Sweden and Finland, which have always assumed that if they needed to join the alliance, they could.

Most dangerous of all, a Russian-American deal will demoralise the Baltic states – the weakest and most exposed members of Nato. Mr Putin does not want to conquer these countries; but he would like to subvert them. That would neatly shred Nato’s credibility and pave the way for a new European great power politics, in which Russia could play a full role.

People in Frontlineland are pretty fed up with this too. They wonder why they trusted Nato. In countries such as Hungary, some policymakers think it may be better to do a deal with Mr Putin while the terms are good, rather than wait for them to worsen.

At least on this issue, some decision-makers are no longer smug. In the dying days of his presidency, Barack Obama imposed sanctions on Russia which he should have slapped on eight years previously. Britain is belatedly waking up, as is Germany.

But in many countries, especially in southern Europe, the mood is still astonishingly complacent.

Timid, deluded and divided, Europe’s different entities are facing disaster. Yet the European ruling elites have missed countless chances to avert it.

And they are so convinced of their own rightness, and of their right to rule, that they show no sign of changing course – or of listening to the rumble of the approaching tumbrils.

Everything is not going to be fine.

Edward Lucas writes for the Economist