A map for the future of the euro

Navigating political conflicts through an informed and practical framework

Aug 17, 2018 | Invesco

Executive Summary

  • We believe that the future of the euro and the future of the EU are essentially one and the same now that the UK plans to leave the EU after having opted out of the euro. The euro and the EU are being shaped by a number of conflicts, tensions and dynamics.
  • We argue that these challenges are to be found both within and beyond Europe. They include the US’s inward turn, Russia’s expansionist ambitions, Brexit and the spread of populism and nationalism within the EU and the eurozone.
  • We suggest that Franco-German relations will drive European progress now more than ever. However, we posit that a shift in the balance of power between the two demands that all member states reassess where they stand, what they might ask of the EU for themselves and what they might require of other member states.
  • We expect the euro and the EU to survive, but three broad scenarios remain real possibilities: deeper integration; the status quo; and even eventual disintegration – despite several decades of European economic integration and nearly two of monetary union. 
  • We infer that the persistence and rising prominence of such different possibilities point to greater diversity and variability in country risk premia in the coming years, in stark contrast to the convergence that was the hallmark of the euro’s first decade and the divergence of its second. 

“Who do I call if I want to talk to Europe?” – Henry Kissinger

Variations of the above quote are habitually aired when the pros and cons of ever-closer European ties are debated. Originally viewed as a criticism of Europe’s failure to adopt a single foreign policy, it has gradually come to encapsulate disinclination towards meaningful European integration – let alone decisive leadership. Kissinger himself has long cast doubt on whether he actually said it, although he did once concede: “It’s a good statement, so why not take credit for it?” 

Speaking at an event in Warsaw in 2012, at the height of the eurozone crisis, America’s arch proponent of realpolitik commented on the enduring relevance of the remark. “Even if a telephone exists and even if they answer it,” he said, “the answer is not always very clear. Europe has the capacity to be a superpower, but it has neither the organisation nor – so far – the concept to be a superpower. And that is a challenge for the European idea.”

This “idea” has seldom proven easy to realise, for no confederation of nations can ever fully escape the problems of interstate politics. The fundamental notion of a united Europe has been beset by growing pains ever since the signing of the Treaty of Rome in 1957, and the all-consuming question of how “widening” can be made compatible with “deepening” is still with us today. The situation is in many ways becoming increasingly complex and urgent, as World Economic Forum founder Klaus Schwab acknowledged last year when he observed: “Europe has been in almost constant crisis since the eruption of the global financial crisis, yet no shared sense of what needs to be done and in what order has yet emerged.” 

It still seems reasonable to suggest that the euro, the eurozone (EZ) and the European Union (EU) will continue in some form. This remains an immensely significant political undertaking – even if the prevailing philosophy has often appeared to be one of merely “muddling through” – and its total derailment is unlikely. It is also right to say that Europe is capable of influencing the world when it presents a united front, especially with regard to low politics and soft power: see, for instance, the effective extraterritoriality of EU regulations and their acceptance in other jurisdictions.1 Yet quite what shape the European project might take in the years ahead is much harder to determine.

In this paper we look at the conflicts and tensions at play. We consider the changing nature of the crucial relationship between Germany and France; we examine the growth of Europe’s political “wings” – represented by 
the political right and left and the geographic north and south – and their potential impact on longstanding interstate dynamics; we assess the roles of the US and Russia in shifting the balance of power within and around Europe; and we delineate the implications for the region in general and the EZ in particular. 

We do not pretend – less still guarantee – that the scenarios we attempt to analyse here will inevitably come to pass. We do, though, argue that they reflect structural risks that need to be recognised and confronted; that they are likely to influence the organising principles underpinning the longer-term fate of the euro, the EZ and the EU; and that they must be explored and understood if Europe’s epic “to do” list is at last to be defined by a genuine sense of perspective and progress.

1. The Markets in Financial Instruments Directive and the General Data Protection Regulation are two recent examples of the EU’s success in regulatory export. In a subsequent paper we will explore in more detail the growing importance of Europe’s ability to present a united front to the world – at least when it comes to economic policy, if not in politics and foreign policy.

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