Trade and Investment

Who are the real winners and losers in Europe?

Katinka Barysch
Chief Human Right Officer, Allianz
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Around 380 million Europeans were called to vote for a new European Parliament last month. Although opinion polls had long predicted that populist and anti-EU parties would gain lots of votes, the results came as a shock nonetheless. In France and the UK, the Front National and the UK Independence Party (UKIP), respectively, came first. In Greece, around 40% of the votes went to extremist and far-left groupings. Almost one-third of the seats in the new European Parliament will now be occupied by politicians who challenge the pro-European establishment.

At a glance, the European idea has suffered a setback and populists have won the day. But now that the dust is settling, there is time to reflect upon the real significance of the vote. Who are the real winners and losers?

The European Commission

As soon as the election results were announced, Europe’s political leaders started haggling over who would get the top jobs in the European Union, including the presidencies of the European Commission (the EU’s executive), the Council (where the national governments meet) and the Euro Group (which represents the members of the single currency area).

On the basis of an ambiguous article in the EU treaty, the European Parliament claims (for the first time) the job of the commission president for the man whose political grouping won the most seats in the May elections. Parliamentarians assert that this would give the EC more democratic legitimacy and therefore strengthen its role in European decision-making.

They are right to worry about the standing of the commission but wrong to assume it could be improved by creating closer links between the EC and parliament.

The commission has been losing ground in the EU power balance ever since the days when the mercurial Jacques Delors was president. The last president, José Manuel Barroso, lost a lot of support during his second term, when he was accused alternately of being too “free market” and of excessive pandering to the interests of the European Parliament. During the euro crisis – where decisions were made in late-night phone calls between European capitals – the commission’s standing suffered further.

A strong EC is important for European integration, now more than ever. The commission needs to handle delicately its new powers to monitor and enforce budget rules and reform plans in the member states. It needs to be the driving force in maintaining and expanding the single market.

The EC can only be effective if it has the backing and respect of both the European Parliament and the EU member states. The commission president is always a compromise and he is usually a former politician, rather than a bureaucrat. But if he were seen to be beholden to one party-political grouping in the European Parliament, some national governments might be reluctant to work with it or question its independence. National EU governments might then deal with more and more EU business, out of the established Brussels institutions and through intergovernmental negotiations.

The Franco-German motor

In France, Marine Le Pen and her Front National won almost a quarter of the vote, reducing the ruling Socialist Party of President François Hollande to a measly 14%. This followed an already painful defeat at the local elections a month earlier. Le Pen appears to be shaping the political agenda in France now, and she is setting her sights on the presidential elections in 2017. Hollande reacted to the local and European election result by reshuffling his cabinet and adopting a hotchpotch of measures, including tax cuts. But few people expect him to tackle France’s more urgent challenges, such as freeing up a rigid labour market and improving the investment environment.

Stagnation and confusion is setting France further apart from Germany, which is doing well at the moment and feels unusually confident. The German economy is growing twice as fast as the French, while Germany’s unemployment rate is half that of France. While Hollande is the most unpopular president ever, Angela Merkel, the German chancellor, enjoys approval ratings of 65% – and that after nine years in power.

A growing number of Germans fear that an “unreformable” France could become a drag on the entire eurozone. Few Germans dare to imagine what would happen if France – the second biggest economy in Europe – would one day need a bailout like Greece or Portugal.

Traditionally, European integration has only made progress if France and Germany agreed and pushed matters along. For some Germans, France is now turning from an indispensable partner in the European project to a potential risk. For many French, Germany is the country that imposes damaging austerity on its neighbours and forces globalization on the EU to further the interests of its own exporters. Unless France and Germany can narrow the gap in terms of economic performance and trust, EU decision-making will remain difficult.

The euro

At first sight, this election was bad for the euro. Did not hundreds of thousands flock to parties that either chastised the austerity and reform packages imposed on them during the euro crisis or to groups that opposed bailing southern European countries?

The EU has just been through the most turbulent and painful period since its inception: years of recession, millions of unemployed people and antagonistic political debates about who is responsible for the mess and who should pay. Of course, European voters react to this. In some ways it is a marvel that the backlash was not worse. Over two-thirds of the seats in the European Parliament will still be occupied by pro-European forces. The fact that there will be obstruction from noisy newcomers could mean that the mainstream parties will move even closer together (coalitions and consensus is how the European Parliament works anyway). Despite the euro crisis, the European institutions will continue to function. And now that the elections are out of the way, European leaders can hopefully concentrate on continuing to fix the flaws in their single currency.

What happens in the member states is at least as important for the future of the euro than Brussels policy-making. In France, the prospects for reform may not be great. But in other places, they are looking up. Italy’s new centre-left prime minister, Matteo Renzi, won a stunning 41% of the vote, twice as much as the populist Beppe Grillo. Renzi has promised to tackle many of Italy’s problems – from administrative sloth to taxation and the electoral system – in record time. He rejects “German-style” austerity, which implies that he will want to borrow a bit more to cushion the impact of his ambitious reform programme. Merkel has, in any case, softened her austerity message over the past year and would probably accept higher borrowing, provided it is accompanied by structural improvements. Reforms in Italy – alongside those already being implemented in Spain, Portugal and elsewhere – put growing pressure on France to also get its act together. This would be really good news for the future of the euro and European project.

Author: Katinka Barysch is Director of Political Relations, Allianz SE, Germany. She is also a World Economic Forum Young Global Leader and Global Agenda Council Member. The views expressed here are her own.

The World Economic Forum’s Europe 2020 Competitiveness Report is published this week.

Image: People watch a board displaying provisional results of the European Parliament election at the EU Parliament in Brussels May 25, 2014. REUTERS/Eric Vidal

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