The EU reflects on past issues to identify challenges and opportunities in 2017.
A year ago in Davos, the World Economic Forum Global Agenda Council on Europe published a short report: Europe: What to watch out for in 2016-2017.
We noted that the EU “seems to be moving from one emergency to the next” and that “Europeans have taken their eyes off more profound long-term challenges.” We concluded that “how the European Union copes with its immediate problems in the next couple of years will determine how the continent will fare in the decades to come.”
We highlighted challenges concerning the European economy, digitalization, migration, geopolitical threats and the risk of Brexit.
“A year has passed – where are we now?”
A year has passed – where are we now?
Last year, we argued – against the conventional wisdom at the time – that the risk of a Leave victory in the UK referendum was substantial, fueled in particular by widespread concerns about refugees and migration.
In the event, a slim majority of Britons did vote to leave. Theresa May’s government is now committed to turning Brexit into reality. Just a couple of months before triggering the Article 50 process of exit negotiations, questions remain about the future EU-UK relationship.
Once Article 50 is triggered, however, the clock starts ticking and we assume that the formal exit of the UK from the EU will happen at the latest in April 2019.
The exit negotiations will be difficult and potentially divisive but are far less important than the negotiations on establishing a new formal relationship between the UK and the EU.
It is now confirmed that the May government intends to take the UK out of the single market, which by any reasonable definition is a “hard Brexit.” The best that can be achieved for business under these circumstances is probably a “slow but hard Brexit,” which allows for adjustments during a longer period.
Restricting the free flow of capital between the continent and Europe’s biggest financial center would have repercussions, not only for London-based financial institutions, but also for financing opportunities across Europe.
2. Migration and refugees
The 2015 refugee crisis abated after the EU-Turkey migration deal and the closure of the Balkan route in the spring of 2016. According to the EU’s Frontex border control agency, “the total number of migrants reaching Europe by two main sea routes in 2016 fell by nearly two-thirds, to 364,000 in comparison with 2015.”
But while the number of refugees from Syria and Afghanistan coming across the Aegean Sea dropped by about 80 percent, the number of migrants from West Africa reaching Italy across the central Mediterranean rose by 20 percent, reaching a record high.
The influx into Italy has fueled mounting concerns and dissatisfaction, which may have contributed to the referendum defeat and resignation of Prime Minister Renzi in December.
Although the number of asylum seekers in Germany fell to below 300,000 in 2016 (according to preliminary estimates, down from almost 900,000 in 2015), Germany still took in more refugees than the rest of the EU combined.
This has fueled doubts about EU solidarity among the German population: The share of Germans who hold a positive view of the EU collapsed from 45 percent to 29 percent over the course of one year. Three out of four Germans say they feel let down by their European partners.
The seeming stability in the refugee and migrant situation is fragile. The future of the agreement between the EU and Turkey is not assured, given how much the mutual relationship has deteriorated in the past few months.
Although the situation remains precarious, we see less risk of chaos and collapse than last year. Relocation inside the EU has largely failed, the African migration issue remains to be effectively addressed and the integration challenge, different in different countries, remains massive. But overall, the sense of acute crisis driven by the refugee and migration flows has abated.
3. The European economy
Despite the Brexit shock, the economic situation in the EU and the Eurozone area has continued on its path of gradual improvement during the past year.
“Real economic activity is growing, thanks to strong consumption.”
Real economic activity is growing, thanks to strong consumption, the ECB’s accommodating monetary policies, low oil prices and the weaker Euro. These forces should help produce growth of 1.5-2 percent in the European Union this year, one of the strongest growth rates in years.
There are, however, several risks clouding the economic outlook for Europe. Trade policy especially has emerged as a possible new crisis area for the EU in the years ahead.
The future of the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the U.S. – once heralded as Europe’s best hope for reviving its competitiveness and staying ahead in a global race to set standards for the digital economy – looks highly uncertain.
Fears of a hard Brexit, populist election wins and an escalating trade war could well cloud economic expectations in Europe in the year ahead.
Against this backdrop of risks, we should not forget that some European economies remain among the most competitive in the world. In the latest rankings of global competitiveness from the World Economic Forum, six European countries were ranked among the top 10 and seven more among the top 25.
4. Digital Europe
In its endeavor to prepare European societies for the digital future, the EU has made some incremental progress in 2016, although the process remains slow in view of the complexity and sensitivity of some of the issues involved.
This was reflected in the process that led to the adoption of the General Data Protection Regulation (GDPR), which will come into force in May 2018, as well as in the eventual agreement with the U.S. on the new Safe Harbor agreement on data transfers.
In both cases, privacy concerns loomed large in the debate, with the European Court of Justice taking a particularly strict line.
Within the EU, and despite the EU’s aim of creating a fifth freedom for the cross-border movement of data, we still see mercantilist tendencies in the debate about data flows in some EU countries and restrictions on how data can be stored will impose costs on business in the EU.
5. Foreign and security policy
In June 2016, the EU published its European Global Strategy, attempting to set out a coherent framework for its relations with the outside world.
“The politics of Europe, along with the rest of the Western world, have entered a new period of volatility.”
From this flowed both a new level of cooperation with NATO on meeting different “hybrid” threats, as well as plans for new steps in security and defense cooperation inside the EU.
This notwithstanding, the EU remained a marginal player on wider security issues.
Syria peace talks, started in a UN framework, continued bilaterally between the U.S. and Russia, but have now been taken over by Russia and Turkey with a role also for Iran. Prospects are uncertain, at best.
On a positive note, there is now a serious possibility of resolving the issue of a bitterly divided Cyprus – although the outcome of the twin referendums to ratify a possible deal remains hard to predict.
6. The political scene
The politics of Europe, along with the rest of the Western world, have entered a new period of volatility.
One of the effects of Brexit has been to reduce support in the remaining 27 countries for the idea of leaving the EU, although this probably has been driven more by fear of the uncertainty associated with leaving the EU than genuine support for the EU process.
The challenges for the cohesion of the EU will come from within the member states in the next couple of years. Across European countries, previously dominant political parties have lost support to populist forces focusing on anti-immigration, anti-trade and anti-Europe issues.
Many mainstream parties are trying to regain voter support by copying some of the policies of their populist challengers, including being “tough” on the EU.
Such tactics may not succeed, since the current political revulsion seems to go much deeper than voter dissatisfaction with individual policies. The traditional Left/Right divide is being supplemented or replaced with a new divide along the lines of open or closed societies.
A series of important elections in 2017 will show how these issues will play out in the EU member states, most notably in France and Germany.
Spain now has a minority government that is likely to last for some time, but the prospects for Italy are more uncertain. And an election in Greece might well bring back a New Democracy government after the semi-populist experience of the past few years.
This article first appeared on World Economic Forum and was republished with permission.
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