After the United Kingdom narrowly voted to leave the European Union (Brexit) in late June, there was immediate chatter about other “exits”. Nigel Farage, gleeful over the EU’s looming collapse, crowed and predicted the Netherlands and Denmark would soon follow with a “Nexit” and “Dexit”. Some Americans speculated, playfully, on “Texit”—a Texas exit from the United States. While questions still loom over what Brexit pragmatically means (other than “Brexit”), some analysts have been drafting obituaries for the European project, yet others expect either a renaissance or a muddling-though.
A visiting scholar at the American Enterprise Institute (AEI), Vincent Reinhart explained last week that many of these debates about the future of the EU have usually hinged on the analyst’s initial biases about the project. They may hate it as a doomed attempt to cobble disparate and irreconcilable nations and economies together, or they may love it as a vital project that must succeed to unite a continent where millions had died in bloody wars. According to Reinhart, these debates usually occur in intellectual silos and at cross purposes. Thankfully, AEI hosted a panel of economists who presented and defended their contrasting forecasts about the EU’s future.
Offering the optimist’s perspective, Fred Bergsten from the Peterson Institute, where he was the founding director and is currently a senior fellow, emphatically argued that, yes, the European Union will survive for two main reasons. First, the geostrategic logic still drives European leaders and citizens, and from this perspective the project helps prevent regional war and provides some cohesion against Russian encroachment, especially when there is a risk America will not support NATO.
Second, the EU and the Euro currency overwhelmingly benefit Germany’s economic interest. Before the common currency, Germany faced a perennial problem where a manufacturing export boom increased demand for the Deutsche Mark, which caused the currency to appreciate, making German products more expensive and killing off the manufacturing boom. However, including weaker economies in the Eurozone keeps the Euro cheaper for Germany as its export boom continues unabated. Bergsten argues:
I say this carefully and literally: Therefore, Germany will pay any price, repeat, any price to keep Europe and the Eurozone together. Whether it is bailing out Greece to keep them from leaving, whether it is authorizing the European Central Bank to do unlimited monetary expansion to keep the economy afloat, Germany will pay any price.
Granted, Germany should buy more products from places like Italy and Greece and make other reforms. But the Europeans have been adjusting, even if progress is slow and messy. For Bergsten, this logic means the EU survives.
Desmond Lachman, an AEI resident fellow who had previously served as the chief emerging market economic strategist at Salomon Smith Barney, presented the pessimist’s perspective. He explained that Europe is in a downward spiral as voters, frustrated with a lost decade of economic growth after the Great Recession, are turning against the project that they cannot control. Italians, for instance, must endure with an economy that is still roughly seven percent smaller than it was in 2008 and is not expected to recover until 2025. Yet low oil prices and interest rates should be lifting Italy and Europe. Eventually, a headwind such as the US Federal Reserve raising interest rates will cause another crisis and drive more Europeans against the EU.
While the European political elites remain committed to the project, fringe parties on the far left and far right have gained support across the continent. Even the Alternative für Deutschland (AfD) has found electoral success in Germany. Opposition parties like these will someday capitalize on public outrage and gain enough influence over their governments, and the European Union will fall apart. Therefore, Lachman believes that Europe succeeds today if it can unwind the currency union now and keep the single market, instead of dooming the region to slow economic growth for another decade.
Pushing back against Lachman’s pessimism, Carlo Cottarelli, former director of the Fiscal Affairs Department at the International Monetary Fund (IMF), explained that even though reforms are needed, the problems are not insurmountable. For him the main problem was not the common currency but countries not implementing structural policies that would have made their countries more competitive. Therefore, a country like Italy could resolve the current crisis with relatively small fiscal reforms: it could freeze primary spending growth and keep services spending at the same level while the economy grows slowly, which would eventually lead to a balanced budget.
Moreover, Cottarelli and Bergsten pointed to Japan as an example of a developed economy which has survived decades with slow growth and high debt but still maintained a relatively prosperous society. Europe may also simply struggle with demographic changes and have relatively lower growth potential as people save more, a problem most developed economies are facing, including the US and Japan. Simply doing away with the Euro and EU will not cause Europe to grow faster if these dynamics remain the same. Bergsten added that Lachman made similar grim forecasts during the Greek debt crisis and was proven wrong.
When considering these opposing pessimistic and optimistic forecasts, stepping back to understand how the European Union would fall apart can be helpful in assessing whether or not the project will fail. Reinhart’s presentation fills this void by conducting a “pre-mortem” (though he did not use this term). His analysis found that if Europeans accept the EU as a social peace project, then it survives regardless of shocks. If it’s an economic project designed to help Germany, it survives as long as the costs are less than the benefits to Germany. But if the costs exceed the benefit, and if there are adverse shocks, then the EU’s future depends upon whether European leaders and officials’ accept the project’s failure. If they refuse to accept failure, the EU still survives.
As Reinhart argues, these officials have thus far been unwilling to admit failure. Instead, they have used a “Jeffersonian veneer of respect for democracy over Madisonian…distrust of the mob”. Essentially, bureaucratic institutions make decisions for national legislatures, something he argues the US has done as well (e.g., the Dodd-Frank Act). When Europe could have allowed parliaments and national assemblies to decide the nuts and bolts to complex problems like the Greek debt crisis, they gave responsibility to non-transparent institutions like the Troika to implement partial solutions. The result is a “bureaucratic doom loop” that leads to disquieted citizens and the seeds for future crises.
Reconsidering the economists’ arguments, nothing appears set in stone: the EU is neither destined for a renaissance nor doomed to failure. Yes, Europe faces severe structural challenges, some of which they can fix (e.g., Germany’s trade imbalances) and some that cannot (e.g., an aging population). There may be clear geostrategic and economic incentives for Germany to continue supporting the arrangement, but political risks remain since the public may reject the elites’ logic. Overall, concluding that the EU will survive by muddling through with impartial solutions for the next five years seems reasonable (forecasts beyond five years tend to be no better than guessing), though its failure would not be surprising.
Mark Melton is the Deputy Editor for Providence. He earned his Master’s degree in International Relations from the University of St. Andrews and focuses on European politics.
Photo Credit: At the Berlin-Tegel International Airport. By Oona Räisänen, via Flickr.