Center for Strategic and International Studies: An Eroding European Union

WASHINGTON, April 7 -- The Center for Strategic and International Studies issued the following commentary by Heather A. Conley, senior vice president for Europe, Eurasia, and the arctic and director, Europe program:

The COVID-19 pandemic will be a history-altering event. But where will it take us? In "On the Horizon," a new CSIS series, our scholars offer their insights into the fundamental changes we might anticipate for our future social and economic world.

At the end of a frustrating six-hour teleconference with European Union leaders at the end of March, French president Emmanuel Macron warned that the Covid-19 pandemic was challenging "the survival of the European project." These dramatic words, uttered to spur the European Union and its member states into action, revealed both the bloc's fragility and its "pre-existing conditions," which make it more susceptible to grave economic and political blowback from Covid-19. A project that was designed for peace has declared war on the novel coronavirus. The European Union that emerges from this war will not be the same as it is today.

European watchers have grown so accustomed to high-level European meetings producing little and to observing EU leaders quarreling among themselves that we may not fully appreciate the magnitude of the crisis facing Europe. It is true that Europe progresses through crises and has managed an extraordinary series of shocks over the past decade. But in all of these cases, European leaders exited the crisis through a fragile institutional stalemate rather than a full resolution. Each crisis gradually weakened the rationale behind Europe's institutional complexity and its solidarity mechanisms.

The European Union's pre-existing conditions were created by two external crises that aggravated its internal weaknesses: (1) the 2008 global recession and subsequent Eurozone crisis, which exposed the incompleteness of Europe's monetary union, pitting northern creditor countries like Germany against mostly southern debtor countries; and (2) the 2015-2016 migration crisis driven by the Syrian and Libyan civil wars and ongoing instability in Afghanistan and parts of Africa. The political shockwaves from both crises hastened the decline of the post-World War II political party structures and re-enlivened Europe's far-right, and in some cases far-left, political movements. With growing anti-globalization sentiment, xenophobia, nativism, and anti-Semitism, European governments found it difficult to form majority governments after inconclusive elections. Established political parties could no longer keep new and more extreme voices outside of governments as fragile, multiparty, or minority governments became common.

Against this backdrop, a more brittle Europe confronted two homegrown crises: (1) the democratic decline of select EU members, led by Hungary and Poland; and (2) the departure of the United Kingdom, the bloc's second-largest economy. The European Union has been unable to provide any meaningful response to Hungarian prime minister Viktor Orban's 10-year democratic deconstruction effort. The European Union proposed numerous technical fixes to Hungary's illiberalism and corruption, which Orban easily sidestepped. It was therefore not surprising that Hungary became the first country to invoke emergency powers with no end date, no meaningful oversight from parliament or its courts (which had been neutered already), and a suspension of elections. The second and more impactful event was the United Kingdom's departure from the European Union in January of this year, the end of an uncomfortable marriage of 40-plus years and the result of a toxic brew of nationalism, populism, and anti-globalization sentiment in the country. The current negotiations over the future trade relationship between the United Kingdom and European Union will be similarly shaped by gross mismanagement by the British political leadership and a lack of flexibility from EU leaders.

The European project is designed to gradually transfer sovereignty from the state to the supranational level in return for greater benefit--peace and prosperity. Its strengths--a 446-million-person-strong single market and the free movement of people, goods, and capital that eased trade frictions and internal borders--provide enormous benefit when times are good. However, the coronavirus pandemic has reinforced impulses that go against these strengths: sovereignty and narrow nationalism, borders, and national survival through a zero-sum calculus. The bloc as a whole responded poorly to the onset of the crisis, particularly Germany, Austria, and the Netherlands, which created a severe political backlash. Propelled by this earlier error, European cooperation has improved, but deep fissures remain.

Resting on this foundation, what is on Europe's immediate and long-term horizon through and after the Covid-19 crisis?

The Short-term Horizon: Money Problems

This coming week, the European Union will likely develop a package of stronger financial measures to support its most vulnerable members, particularly Italy and Spain. However, EU leaders will have to formally agree to accept them. EU financial leaders will decide to use the European Stability Mechanism, a financial mechanism created at the height of the Eurozone crisis, and its existing credit lines. The real fight will be over the conditionality of those credit lines: with stringent conditions (it can only be used for health spending and measures to address the economic fallout from Covid-19, and it requires technocratic supervision to ensure a return to fiscal discipline) or without, a solution advocated by Spain and Italy. An EU unemployment reinsurance scheme could also be created if EU members contribute additional funds. The European Investment Bank may also contribute additional resources if members contribute more funds. Finally, a quick conclusion of the European Union's next seven-year budget--another bone of contention between member states due to the significant budget gap left by the United Kingdom's departure--could be reached by early next year if EU members agree and provide additional resources. Even this financial package will be important and necessary but likely insufficient.

What continues to divide EU and Eurozone members is money: wealthier northern nations transferring wealth to less fortunate southern (and, at times, eastern) members, especially through debt sharing. Germany, the Netherlands, Austria, and Finland--the "Frugal Four"--are unwilling to underwrite the debt of other Eurozone members, though they are exploring options to increase monetary donations. Southern members, led by France, Italy, and Spain, want to use the pandemic to force northern members to accept debt mutualization in some form, either through the creation of "coronabonds" or a time-limited common EU fund.

If this all sounds very technical and based on fiscal morality, it is. A technical project can only react with technical responses (just as it did with Hungary and Poland over its anti-democratic moves). As Prime Minister Conte of Italy recently noted about the pandemic, "We are not writing the page of an economic manual, we are writing the page of a history book." But the European Union is trying to write a future economic manual; the writing will be slow and, as in past crises, result in painstaking compromise that will not fully satisfy any EU member. The bloc's two main political drivers, France and Germany, are deeply divided on the economic way forward: Paris champions the weaker south, while Germany, the champion of the well-to-do north, stands firm.

The Long-term Horizon: Institutional Futures

From the immediate economic response, Europe has two possible future paths, one negative and one potentially more hopeful (although it has a negative twist). The European Union's institutional inertia is unsustainable because the economic impact from the pandemic will overwhelm its most vulnerable members.

In the negative scenario, the European Union is increasingly hollowed out, eventually rendered meaningless. The bloc will not collapse in the formal sense, but it will be unable to maintain economic cohesiveness between its northern and southern members and democratic cohesiveness with some eastern members. The United Kingdom will attempt to compete with the European Union in the economic sphere, particularly in the digital economy. Europe's demographic decline, its economic stagnation prior to the pandemic, and increased migration pressures from the south--all of which fall heavily on southern member states--will drive political instability, particularly for Spain and Italy. The decades of European treaties, rules, directives, and regulations will be unable to resolve these issues. More European governments, using emergency powers to stymie political opposition, will grow anti-democratic and suspend elections. Without economic growth, European defense capabilities will fall further behind, affecting the United States' willingness to provide its security umbrella to Europe. A weakened Europe would be more susceptible to Russian and Chinese influence, ultimately accommodating their preferences. For example, some members of the EU may recognize Russia's territorial claims over Ukraine and lift sanctions; some will economically engage more deeply with China.

However, the pandemic could require Europe to take a different path. Should Italy's solvency be in doubt, Germany and other northern Europe countries could be forced to accept some level of debt mutualization and wealth transfer. This would dramatically transform the European Union, give financial meaning to its oft-touted "solidarity," and offer greater hope and economic opportunity to southern members. The euro could begin to compete more successfully with the U.S. dollar globally.

But this path could also produce an unanticipated negative outcome: such an impactful decision by northern Europe could transform it politically, with particular implications for Germany. A recent history of collapsing blocs suggests the strongest economic member of the union or federation typically departs a deteriorating organization first, not the weakest. The United Kingdom's departure was an ominous warning in this regard. Should the European Union not be able to enforce its trade and strict fiscal rules and debt mutualization occur, would Germany or other states wish to remain in this very different union?

The European Union has faced many tests before. Yet the coronavirus will test everything we have come to understand about Europe over the last 70 years.

Heather A. Conley is a senior vice president for Europe, Eurasia, and the Arctic and director of the Europe Program at the Center for Strategic and International Studies in Washington, D.C.