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2019 annual forecast

Nov 27, 2018 | 20:43 GMT

8 mins read

Europe

To the west of Eurasia lays Europe, a region predisposed to division. It is surrounded on nearly all sides by islands and peninsulas that make it difficult for Europe to cohere. The northern half of the continent, moreover, sits on a plain whose short, meandering rivers tend to empower countries without forcing them to work with others. The southern half is situated on more mountainous terrain that has historically impeded the creation of strong, unified economies. As a result, Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.
Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.
(canadastock/Shutterstock.com)

Key Trends for 2019

Risk in the Eurozone

Italy will remain the main source of financial risk within the eurozone. Rome could make cosmetic changes to its fiscal policies to delay sanctions from the European Commission over its 2019 budget, but the real threat to the country's financial stability will come not from Brussels but from the financial markets. Rome's fiscal policies will create uncertainty among investors about the sustainability of its debt. 

If Italy's political and financial turbulence continues, Southern European countries could suffer increased borrowing costs.

The billions of euros in Italian debt held by its banks leaves them vulnerable. Should those banks require assistance, Rome may have no choice but to negotiate a rescue program with the European Union. At the same time, disputes within Italy's coalition government could prompt early elections, adding to political uncertainty. Italy's political and financial turbulence will increase the chances of higher borrowing costs and of banking uncertainty in other Southern European countries. Read more about what's motivating the Italian government's policies.

A chart showing Italian debt ownership
A chart showing Italian banks' debt

The Year of Brexit

While there is no shortage of disruptors around the Brexit process, London and Brussels will work to minimize the economic effects of the United Kingdom's exit from the bloc. London's first choice will be to leave with a comprehensive exit agreement, but it may take more than one vote to persuade the British Parliament to approve it. If lawmakers ratify the deal, the United Kingdom will remain in the EU single market in 2019. But even if Parliament rejects it, London and Brussels will still reach temporary agreements, or in some cases act alone, to contain economic disruptions as much as possible. Such measures could include extending the negotiation period under Article 50, to delay Britain’s exit. Still, a British parliamentary veto would throw the logistics of the bilateral relationship (from trade to commercial flights to migration) into flux

To make Brexit even more interesting, the sitting British government could fall at any point in the negotiations and a new election could be scheduled.

No matter how Brexit happens, the United Kingdom and the European Union will discuss a permanent post-withdrawal trade arrangement, and London will hold free trade talks with other countries, including the United States. Considering their complexity, those negotiations will likely extend beyond 2019. Read about why fragmentation in Europe's financial system will grow after Brexit.

Trade in Focus

The European Union will not sign a comprehensive free trade agreement with the United States in 2019, but it will be willing to discuss a more modest agreement that covers industrial goods. Brussels will also be open to talking about the elimination of some nontariff barriers to trade. With these gestures, the bloc will try to dissuade the United States from introducing higher tariffs on vehicles produced in the European Union. Should the White House raise the tariffs, the union would retaliate with its own countermeasures. At the same time, it will try to keep the United States engaged in multilateral forums such as the World Trade Organization, and it will side with the White House when it pressures China on issues such as state subsidies and foreign investment limitations.

The EU will continue to seek opportunities with countries such as Australia and New Zealand, South America's Mercosur trading bloc, and even look to open new export markets in South and East Asia.

Brussels will also see Beijing as a counterbalance to the United States when it comes to defending multilateralism. But large economies such as Germany and France will resist China's penetration into Europe — especially in sensitive areas such as technology and infrastructure — while smaller states will welcome Chinese investment as an opportunity to boost their economies. In other trade issues, the European Union will hold talks with Australia and New Zealand, seek to complete negotiations with South America's Mercosur bloc, and look to open new export markets in Asia. Issues such as agriculture and geographic descriptors for food products will prove difficult to solve, but the union will try to make as much progress as possible in its trade talks. Read more on EU-U.S. trade disputes.

A graphic showing Europe's major car exporters

The Battle for the EU Leadership

Elections for the European Parliament in May will produce a fragmented legislature; pro-EU parties will retain control, but nationalist and Euroskeptic forces will have a strong following. These divisions will, in turn, make it harder to pass legislation. The selection of the new European Commission president will follow and lead to ideological disputes within the bloc. A conservative commission would probably focus on such issues as trade agreements and reducing immigration from outside the bloc, while a progressive one would more likely focus on ensuring greater economic cohesion within the bloc. 

Regional disagreements will slow the pace of policymaking and reduce the possibility of major reforms.

Southern Europe will push for a commission that promotes higher spending and deeper risk-sharing across the bloc, while Northern Europe will push for a body that promotes fiscal discipline and risk reduction. EU governments will also select a new European Central Bank president. The south will push to continue the bank's expansionary monetary policies, and the north will push to reverse some of them. The regional disagreements will slow the pace of policymaking, reducing the chances of significant reforms. Read more about the competition for EU institutions.

A graphic showing the battle between EU institutions

Trouble in Germany and France

As Germany's governing parties seek to set themselves apart, the country's politics will be stretched further to the left and right, hollowing out the center. Conflict within the government will reduce its efficacy and could lead to early elections. A new vote would again produce a fragmented parliament and lead to complex coalition talks, further reducing Berlin's EU leadership role. In France, the government's push for institutional and economic reform, including a drive to overhaul the pension system, will lead to protests, some of which will disrupt the economy. Paris will succeed in implementing most of its plans, but citizens will be increasingly vocal in rejecting their government's policies. Domestic issues and France's dependence on others to get things done in the bloc will limit Paris' influence on Continental affairs. Read more about the implications of political uncertainty in Germany

The East-West Divide

Countries in Central and Eastern Europe will take advantage of the global environment to preserve, and potentially deepen, their political and military ties to the United States. The White House will look to Poland and Romania to help increase its presence or even to serve as hosts for American missile systems as the arms race with Russia intensifies. At the same time, Poland, Hungary and Romania will selectively challenge EU institutions and rules, while also making sure not to do anything that puts their memberships in the bloc in jeopardy. These countries will also look to deepen cooperation with their neighbors on issues that vary from energy diversification to infrastructure, and they will get together to resist cuts in EU agricultural and development funds. Read more on Poland's geopolitical strategy

A chart showing European operating budgetary balances

The Push for Autonomy

EU countries will tighten cooperation on defense, through initiatives such as Permanent Structured Cooperation and the European Defense Fund. France will lead the push to enhance Europe's military capabilities, but disagreements between member states could slow progress. To streamline decision-making, the bloc will try to switch its voting system so changing foreign and taxation policies would require majority approval instead of unanimity. But that will probably fail, because changing the voting mechanism requires unanimous approval, and several countries will want to preserve their veto power. 

The European Union's ambitions will be hampered, in classic fashion, by convoluted leadership and the curse of consensus.

The bloc will also discuss ambitious plans to create international payment channels independent of the United States, replace the dollar with the euro as the world's reserve currency and increase capital market integration among member states. But a leadership vacuum at the Continental level and the complexity of their implementation will prevent the bloc from realizing them in 2019. Read more on Europe's push for strategic autonomy.

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • March 29: The United Kingdom's scheduled exit from the European Union.
  • May 23-26: Elections across the European Union for members of the European Parliament.
  • Aug. 25-27: A G-7 summit is scheduled to be held in France.
  • Late October: Deadline for EU governments to select the presidents of the European Commission and the European Central Bank.
  • November: General election in Poland.
  • November: Selection of the new president of the European Council.

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