The tortuous saga of the negotiations between Greece and the rest of the Eurogroup over the terms of its bailout package highlights the increased fragmentation of the European project. This fragmentation has been an ever-present danger since the move to further integration with the formation of the European Monetary Union and the single currency area. Europe’s electorate at large has been increasingly sceptical of the European project.
But it has been the failure of Europe to grow and tackle its crisis in productivity growth, employment and public finances since the end of the Great Recession that has raised that risk to near breaking point, as the Greek saga has shown.
The election of the region’s first true populist government, Syriza in Greece, confirmed the step change in fragmentation. While Greece’s problems are arguably more severe than elsewhere (GDP has shrunk 25% from its pre-crisis level), it’s increasingly clear that many other electorates have similar pain thresholds. The parties that flourished in the post-war order have failed to deliver the growth and prosperity promised (particularly in the eurozone periphery where the single currency project was seen by voters as a ticket to northern European living standards) and are now being held to account.
|Source: Idea, Independent Strategy|
Even outside the EMU, populism has developed. In Sweden, the nationalist Democrats emerged with the balance of power after the September 2014 election. In the UK, the rise of Eurosceptic UKIP and the Scottish National Party has eroded support for the mainstream parties. Spain votes for a new government this December and if polls stay as they are the winner will be far-left Podemos (another Syriza), a party that only came into existence in 2014.
Italian politics has become equally tortuous with stagnation and political malaise leading to the emergence of the Five Star Movement. The far-right Front Nationale (NF) in France under Marine Le Penn has used the crisis to rebuild support for the party. Populist anti-immigration parties are well established in Austria and the Netherlands, and have made inroads elsewhere from quasi-Nazi Golden Dawn in Greece to Jobbik for the Hungarians (who already have Fidesz’s Viktor Orban to deal with).
Opposition to austerity has been central to groups in the eurozone periphery and in those states forced into bailout programmes. Ironically, welfare/health spending is ballooning as constrained governments pursue counter-cyclical and pro-reform policy measures while complying with the various EU treaties. Indeed, social spending as a share of total government spending is already well above 50% in the big eurozone states.
Austerity programmes have been enforced in an uneven and unproductive way, typified in sluggish progress towards structural reforms in many peripheral states (for example liberalizing labour markets, reforming health and retirement provisions) while easier fiscal steps, such as raising taxes and cutting investment (including education), which undermine demand and potential growth, are pushed through. As a result, the benefits of ‘reform’ are not felt on the street.
Populist parties might be kept out of government by grand coalitions seeking to preserve the centre ground, even in countries where these are historically rare. But they will still shift the national political debate from the side-lines. Established parties have become more populist and economically irrational. For example, see the anti-EU/anti-immigration stance that the UK Conservatives have adopted to counter the threat from UKIP.
The irony is the demographic deficit throughout all Europe needs skilled immigration to maintain living standards and fund social welfare and pensions. The problem is the tone of the immigration debate which makes it impossible to differentiate between importing valuable human capital and the unskilled migrant labour that can drag on productivity growth (the one thing that is critical in order to raise living standards) and become a social burden. This goes someway to explaining the relative ease which countries with points based migration systems have in integrating migrant labour, compared to those with open borders policies that do not differentiate.
Unfortunately, there is very little time to debate how to manage these conflicting pressures as the current crisis coincides with the onset of demographic rot. The rise in fragmentation threatens the whole European project unless reforms are implemented and growth returns to narrow the democratic deficit.