Europe’s next crisis

EU a beacon for the rest of the world

The decision of the German finance minister Olaf Scholz to acquiesce to a discussion on the creation of a euro-zone common deposit insurance scheme is welcome in the light of the half-baked nature of the euro-zone financial system. However, like the proverbial drunk searching for his keys under the streetlamp, it is also a case of tardy backwards looking, policy making.

For example, the facts that the market capitalization of Deutsche Bank trades at only one quarter of its book value and that the business model of Wirecard, Germany’s fintech leader, has been surgically dissected by the FT, suggest that reform of the domestic banking system is a more urgent and yet incomplete task for Germany (Mr Scholz may hope that one day Italian savers will bail out German banks).

While the ongoing focus on remedies to a future banking crisis is a reminder of Europe’s fragilities, the most damaging and alarming crises tend to strike in areas that policy makers have not yet tended to.

In that light, if Europe is going to have another crisis, it is much less likely to be economic in nature, such has been the develeraging of European economies and corporates in recent years, and such has been the focus on building new economic architecture in the euro-zone.

Rather as the new Commission takes office, their focus should be to look forward and grapple with the emerging debate in European values and identity, of which there are at least three strands.

The first of these relates to Europe’s place in the world. As globalization ebbs, and gives away to a multipolar world made up of at least three regions – US, China and Europe who do things increasingly distinctly, the organizing ethic of the EC must be to think of Europe as part of a system of great power rivalries as opposed to a cog in an integrated world. The weakening of the diplomatic ties and communications from Washington to Europe is just one sign of this.  The notion of a more singular EU points towards a deepening of efforts towards common European defence and security capabilities, a trade strategy that is prepared for ‘the worst’, and a greater effort to bolster Europe’s financial strength.

The second strand is that as the EU defines itself more clearly relative to the US, China and to a lesser extent Russia, individual member states will increasingly feel obliged or forced to take sides. Eastern European and Balkan countries, some of who enjoy investment flows from China and political support from Moscow will be the centre of attention here. Though there are few formal means of ‘bringing them onside’ there may soon be calls to curb EU aid to member states who are too closely aligned with China and Russia, or to change voting procedures to ensure that the likes of Hungary cannot sway or bloc EU wide votes.

Then, identity and the idea of European values crisis crosses country politics and has been brought to prominence with the clunky job description of ‘protecting our European way of life’ for Margaritis Schinas.

The recent rise of Vox in Spain is another example of the emergence of far-right wing political parties across Europe, and it is a possibility that we see a ‘Heimat’ coalition of such groups across the EU. Here, the EC can do several things, such as better defining what European values are in a practical sense that tallies with the everyday lives of Europeans and using social media to capture the values that resonate Europeans. Specifically, immigration is a policy area where the EC needs to have a much clearer and better organized approach, especially so in the case of refugees.

One additional factor worth highlighting, is that the generalized picture of the many protests around the world, from India, to Honduras to Lebanon, is that people want an end to inequality, corruption damage to the environment, and arguably, better democracy. The EU can take some comfort from the fact that, as a bloc, it is a leader in the field of liberal democracy, climate change and equality.

The final task for the new Commission is to dispel the sense that as Jean Monnet is reputed to have said, ‘Europe needs a crisis to move forward’. Brexit has shown how forcefully the EU can act when united and organized. Political chaos in Westminster and Washington makes Brussels look like a bastion of good sense.

Europe’s financial crisis has many lessons – the necessity to tackle emerging risks early and if anything to over rather than underreact, the need to coordinate well across countries, Commissioners and specialist areas, and the need to better communicate with Europeans as to what is being down in their name. The new Commission should internalize these lessons and move to pre-empt the ‘next’ crisis.

Have a great week ahead,

Mike