reflections

Jul 16, 2014 | 23:08 GMT

5 mins read

Political Divisions and Financial Fears Return to Europe

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

The heads of state and government of the European Union met July 16 to discuss two of the most important issues on the bloc's agenda: the EU-Russian standoff and the designation of officials for some of the most important portfolios in the EU Commission. In recent months, these issues have been troublesome for the European Union as countries struggled to find consensus. Wednesday's meeting was no different.

Since the beginning of the Ukraine crisis in late 2013, and particularly since Russia's annexation of Crimea early this year, the debate on how to react to Moscow's moves has generated substantial tension within the European Union, because it highlights the deep differences in strategic interests within the bloc. Central and Eastern European countries such as Poland and Lithuania, which historically have been invaded or annexed by Russia, demand a tougher stance against Moscow, while countries in Western Europe such as Germany and Italy are interested in preserving their trade and energy ties with Russia. Some additional measures (including broader sanctions to target entities and persons, and blocks on multilateral loans) were approved Wednesday, but only after weeks of negotiations and steps to avoid sanctions on sensitive sectors of the Russian economy.

The European Union's internal divisions are also affecting the negotiations over key positions in the EU Commission, the bloc's executive arm. The Italian government wants its foreign minister to become the new head of European diplomacy. However, countries in Central and Eastern Europe feel that an Italian foreign affairs minister would be too soft on Russia because of Rome's economic ties with Moscow. This is the clearest indication of the extent to which the events in Ukraine are affecting political decisions in Europe. It is also a reminder that, while the members of the EU Commission are supposed to represent the interests of the bloc as a whole, member states remain interested in appointing their nationals to the most important portfolios. The EU members failed to reach an agreement on this issue July 16 and postponed the decision for late August.

Another key position under discussion is the commissioner for economic and monetary affairs. France wants to appoint its former finance minister, Pierre Moscovici, to this sensitive position, but this idea is making waves in Germany. Last week, German Finance Minister Wolfgang Schaeuble expressed doubts about Moscovici's adequacy for the post due to France's ongoing problems to reduce its budget deficit. On July 16, Ralph Brinkhaus, a leading expert on financial issues and a lawmaker from Chancellor Angela Merkel's Christian Democratic Union party, said that commissioners cannot "wear national spectacles" and should respect Europe's fiscal targets. These statements are relatively unusual because Germany is interested in preserving cordial ties with France, at least on the surface, since the Franco-German alliance is the cornerstone of European integration.

The statements also come a few weeks after another German official, Deputy Chancellor Sigmar Gabriel, said that countries should be given more time to meet their deficit targets. This forced Berlin to issue a quick press statement explaining that Gabriel did not mean to question the EU Stability Pact. For months, Paris has been pushing for a relaxation of the bloc's fiscal targets and for measures to weaken the value of the euro — two ideas that Berlin opposes. The European Union has been de facto accepting softer targets for countries such as France and Spain, but Berlin is worried that countries in Mediterranean Europe could team up to tear down the structure of budget controls and economic oversight that Germany has been building since the beginning of the crisis.

Germany is also worried about other developments in the eurozone. Doubts about the stability of the banking sector in Bulgaria and Portugal recently generated fears of a new European financial crisis.

Banking crises are basically crises of confidence. During the past two years, the Europeans have tried to strengthen their banking sectors by applying new regulations and giving banks cheap financing from the European Central Bank. They have also tried to break the link between banking sectors and central states. Before the Cypriot crisis, it was understood that in case of a banking crisis the central government would come to the rescue. However, when Cyprus' banking sector collapsed in March 2013, the Europeans for the first time forced the banks and their shareholders and customers to bear the burden.

The European Union has also moved forward with its plans to create a banking union. In November, the European Central Bank will begin supervising big banks in the eurozone. The next step will be a common mechanism to prevent banks in trouble from dragging down governments, as happened with Ireland in 2010. However, the Europeans are still debating this issue, and it is not clear how the bloc would react if a new crisis emerged. On July 9, Berlin approved draft laws protecting taxpayers from having to foot the bill when a bank gets into trouble. This was meant to send the message that eurozone countries are developing the necessary tools for the orderly resolution of troubled banks. In the coming months, other members of the eurozone will be under pressure to do the same.

The problem is that it will take more than institutional reforms to solve Europe's financial problems. With unemployment at record high levels and economic activity still weak in most countries, non-performing loans keep piling up. Countries from Italy to Greece have recently tried to address this issue, with very modest results. Last week it only took bad news from a Portuguese bank to reignite fears of a EU-wide contagion. A significant part of the solution to Europe's problems — from the fragility of its economy to its lack of a coherent foreign policy — will require political agreements and very difficult compromises, principally between Germany and France. Recent events, including the July 16 summit, show that these kinds of agreements are becoming harder to reach.

Connected Content

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview

OUR COMMITMENT

To empower members to confidently understand and navigate a continuously changing and complex global environment.

GET THE MOBILE APPGoogle Play