AIQ - The Now Normal

United Europe

From discord to harmony?

Global politics are in flux. Can Europe come together and carve a place for itself on the international stage, or will it end up a passive player buffeted by greater forces?

As the world begins to think about post-pandemic reconstruction, the European Union is at a defining moment for its future. The way it comes together – or not – to decide on its ambitions and how to achieve them will shape the continent, and global geopolitics, for decades to come.

In this article, we look at the steps the region is taking to achieve greater unity and cooperation; how the EU could be impacted by threats to multilateralism; and why using its ‘soft power’ could see Europe emerge as a global leader.

Towards a more complete union?

Two key issues to consider are inequality and the environment.

“As we look forward, dealing with COVID-19 but also believing there is a post-COVID world, Europe has gone to great lengths to stress that the rebuilding has to consider the green agenda and a renewed look at inequality,” says Stewart Robertson, senior economist at Aviva Investors.1

Rebuilding has to consider the green agenda and a renewed look at inequality

The disproportionate impact of COVID-19 on the most vulnerable has increased the urgency to act, but also highlighted that a premature withdrawal of fiscal support by the governments of individual member states could be one of the biggest dangers to the recovery.

“One of the casualties of COVID-19 is the European Stability and Growth Pact, which used to stipulate 60 per cent debt, three per cent budget deficit. The EU may revisit some fiscal rules in future, but I would be very surprised if we returned to anything remotely resembling those,” adds Robertson.

Monetary and fiscal commitment

Underlying these efforts is the €750 billion ‘Next Generation EU’ pandemic recovery fund agreed in July 2020. While not necessarily a ‘Hamiltonian’ moment, the fund is a key signal of closer integration.

This achievement and collegial effort should not be underestimated

“While details still need to be defined, this achievement and collegial effort should not be underestimated because its existence speaks to a sense of unity and a vision for the future towards further integration,” says Giovanna De Maio, non-resident fellow at the Brookings Institution’s Center for The United States and Europe.

The next few years will likely see ongoing fiscal and monetary support which should be possible if, as expected, interest rates remain low; the European Central Bank (ECB) has already said it will keep monetary policy loose for as long as necessary.

“Effectively, the bank will allow inflation to happen more than in the past. That means interest rates can stay lower for longer. The hope is that will allow the longer end of the yield curve to stay low, keeping financing affordable,” Robertson explains.2

Time for optimism?

Closer cooperation and ongoing policy support should be welcome news to investors, especially those who have been underweight the region for a long time.

Current challenges would be much greater were it not for the existence of the EU

“Despite the serious current challenges, there is growing recognition among member states that these would be much greater were it not for the existence of the EU,” says Sunil Krishnan, head of multi-asset funds at Aviva Investors.

“Added to the EU’s greater willingness to share the fiscal burden around and consider closer integration, all of these are big differences from how we have looked at Europe over the last ten or 15 years. It’s a change to be looking for opportunities in Europe rather than deciding what to avoid or where to go short,” he adds.

De Maio, meanwhile, sees opportunities for progress in political areas and believes COVID-19 has been a turning point for Europe. Domestically, it has triggered broader support for the leaders in power. Internationally, the lack of US leadership led EU countries to take independent initiatives on managing the pandemic, while also offering help to other countries in need.3

Multilateralism remains under threat

On the world stage, however, Europe remains caught in the middle of nationalist power plays that could undermine its cohesion.

“Whether it’s Russia with regards to the eastern fringe of the EU, or the UK trying to negotiate the best deal in terms of Brexit, a number of actors are trying to peel member states away from each other and prevent coordinated responses,” says Krishnan. “Similarly, in wrangling over the use of Huawei technology in 5G, the US and China haven’t been lobbying the EU for a coordinated response, they have been pressuring individual countries to act.”

Nationalist politics are destabilising the broader multilateral order on which the bloc is founded

Nationalist politics are destabilising not just the EU’s cohesion, but the broader multilateral order on which the bloc is founded.4 Stephen King, senior economic adviser at HSBC Holdings and specialist adviser to the House of Commons Treasury Committee from 2015 to 2017, says when the institutions that uphold common standards are under pressure, the rules of the game begin to collapse and globalisation retreats.5

“Humanity has demonstrated time and time again it is more than capable, whatever the technology, to build walls and borders and barriers. We may be going through that process again,” he says.

To resist these centrifugal forces, the EU needs to step up cooperation on defence and diplomacy, developing credible approaches to dealing with the US, China and Russia, differentiating its response but standing firm to defend multilateral principles, as well as EU values and interests.6

Building a new future

In a strange twist of fate, the nationalist forces trying to undermine Europe’s cohesion may be helping it gain more influence globally. On the one hand, although China has been effective in projecting hard power, some of its diplomatic initiatives have been less successful. On the other hand, America’s soft power has diminished as it has been unwilling to engage with multinational organisations (although new president Joe Biden has signalled his support for institutions such as NATO, which his predecessor Donald Trump often criticised).

The EU could serve as an arbiter of sorts between the two superpowers

The EU could serve as an arbiter of sorts between the two superpowers, not only in trade matters but also ideology. Rising in defence of the multilateral, rules-based global order, it could help restore the ability of bodies like the World Trade Organization to resolve disputes and encourage international cooperation.7

Climate policy and regulation are good examples of where Europe can use its soft power to lead. Environmental policies could even spur the region to drive technological leadership.

“There are already leading green technology companies in Europe and there will be more. Whether the region can create a fertile environment for a broader range of technologies is an interesting question, and one which I think will reward investors to look at,” says Krishnan.

Whether future innovations emerge in the EU or continue coming from the US and China, Europe has already taken the lead in regulation with rules such as the General Data Protection Regulation (GDPR), which has set the standard for data privacy.8

The EU must think hard about how and where to invest to achieve the green and inclusive economy

However, before it can consolidate its position, the EU must think hard about how and where to invest to achieve the green and inclusive economy it envisions after COVID-19, and to maintain growth despite an ageing population.9

“The real question for the future will be how that is targeted; this is perhaps even more important when you move beyond education to infrastructure spending and R&D,” says Krishnan. “Most of the evidence suggests the more localised you make the decisions, the better they tend to be. This shouldn’t start and end with the pandemic but apply to a much broader range of policies. Perhaps we are now going to create the dialogue and the structures to allow that to happen.”

Europe as a global power

Europe was not created to play power politics but to abolish them; yet it is now in a unique position to use its leverage to defuse existing tensions and, eventually, build a new, fairer and greener rules-based order.

The question is not Europe’s power; it is whether member states will be willing to wield that power jointly to create new possibilities for a more open future.

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