The EU a year after the UK referendum: new momentum and optimism?

With the EU issue in the UK far from settled, reports of the demise of the EU and the Eurozone have been greatly exaggerated

Simon BulmerIt is now exactly 12 months since the British people voted to leave the European Union and this week Brexit negotiations finally started.  While Theresa May’s minority government seeks to sort out its negotiating strategy on Brexit, it is clear that the referendum did not resolve the EU issue for a generation amongst the British public, and certainly not within the Conservative Party. The motivation behind the general election, namely to strengthen the prime minister’s negotiation hand domestically, has done precisely the reverse. But whilst the situation in the UK is unclear, what has happened to the EU over the last 12 months since the referendum?

Ahead of the referendum it is fair to say that the EU was not exactly portrayed in the UK in a good light.  It was a drain on UK finances.  The Eurozone was likely to break up.  The EU was besieged by refugees largely entering from the south-eastern route via Turkey.  Euroscepticism was on the march in several EU states to the extent that the contagion-effects of the Brexit vote were a concern elsewhere in the EU.  It was even speculated that the EU itself might collapse.  All this was part of the argument for why the UK was better outside the EU. A year on from Brexit is a good moment for an assessment of these issues. Is the EU (or the Euro) nearer to collapse?

First, the Eurozone economy has been picking up, with first quarter figures for 2017 exceeding estimates and registering the best growth performance for two years.  The picture is not uniformly positive – the figures for France and the Netherlands were slightly lower growth in that quarter – but there was a return to growth for Greece.  A survey of purchasing managers in May suggested business activity was at the highest level for six years.  Eurostat data indicate unemployment in the Eurozone is at the lowest level since 2009 and at the lowest rate in the EU-28 since December 2008.  These are positive signs but they need to continue for a longer period to demonstrate sustainability of growth in southern Europe.

Meantime the protracted search for compromise to enable a third tranche of rescue funding for Greece seems to be making progress.  German Finance Minister Wolfgang Schäuble was still holding out against IMF recommendations that Greece be given some debt relief as the Eurzone ministerial meeting on 15 June approached.  With a federal election in Germany on 24th September domestic calculation in Berlin on how to proceed will have been important.  The compromise between Schäuble and other ministers was to agree in principle to the granting of €8.5 bn of financial aid.  Notably, the German parliament, which secured strong scrutiny powers earlier in the Eurozone crisis, still has to give its approval.  The decision on granting debt relief has been pushed back, perhaps until after the election.

The broader policy context in relation to the future of the Eurozone relates to the debate initiated by the June 2015 Five Presidents’ Report on Completing Economic and Monetary Union.  The Commission recently put forward its proposals, at the heart of which are: creating a ‘genuine financial Union’; further economic and fiscal integration; and reforms to the governance of EMU so as to reinforce accountability.  One of these proposals is for an EU ‘Treasury’, with a dedicated Euro area budget and perhaps an EU Finance Minister. Chancellor Merkel has responded positively to these ideas.  The possibility of a new Franco-German agreement on the way forward could break the policy logjam between northern and southern Eurozone states that persisted while President Hollande was in office.  It could also revive the Franco-German motor and renew dynamism on other key policy issues.  On the Eurozone it seems fair to conclude it is moving towards finding a stronger basis, rectifying its weak foundations that were exposed in 2010.

The refugee crisis continues but on a much reduced scale.  In the first quarter of 2017 the figures for first-time asylum seekers were down to 165,000: a significant drop since the high point of the crisis in the second half of 2015, when the figures were in excess of 400,000 per quarter.  The bilateral deal with Turkey appears to be holding despite the political risks associated in diplomacy with President Erdoğan.

Nevertheless, the difference compared to the Eurozone crisis is that no new policy regime to address the refugee crisis has been agreed.  A plan for re-distributing refugees was agreed but has had little impact.  The European Commission has introduced infringement proceedings against Hungary, the Czech Republic and Poland for failing to implement agreed policy and take some of the 160,000 refugees under a 2015 plan agreed to by a qualified majority vote (over-ruling these states) in the Council of Ministers.  These legal proceedings link up with concerns about a slide to authoritarianism in Hungary and, unsurprisingly, Prime Minister Orban has fought back by dismissing the chances of a single migration policy.  The EU has also already launched proceedings against Hungary in relation to its higher education legislation and its impact on the Central European University.  Hungary’s defiance of some the EU’s basic values is escalating and a worsening clash is brewing.

It has been long understood that external actors may have a profound impact on regional integration.  During the Cold War the USA in a positive way and the USSR in a negative way at various times helped the dynamics of European integration.  The UK’s referendum vote for Brexit and the external relations of the Trump presidency appear to be having a mobilizing effect on what the EU is and stands for, as might further conflict with Prime Minister Orban from within the EU.

Before the UK general election the EU had agreed its bargaining priorities.  It also insisted on first negotiating Brexit and only then turning to the future arrangements between the UK and the EU.  On sequencing, the EU has prevailed over the UK’s wish simultaneously to negotiate Brexit and its new EU trade relationship.  Meantime the May government has called and lost an election; David Davis’ Department for Exiting the EU lost half its ministerial team on the eve of negotiations; and now the Chancellor, Philip Hammond, has seized the moment to advocate a ‘business-friendly Brexit’.  Continental Anglophiles have begun to wonder what will happen next.

By contrast with the situation in the UK, the EU’s political mood has gained greater confidence as a result of the setbacks suffered by populist Euroscepticism, notably in the Netherlands and France.  The EU White Paper, launched to coincide with the sixtieth anniversary of the signing of the Rome Treaties, has opened a debate about the future of the EU.  The election of President Macron has raised hopes of a revival of the Franco-German tandem that has been so central to integration since the 1950 Schuman Plan.  In the coming months we shall see if these two states can find a compromise whereby Macron’s promised structural reforms in France are matched by Germany offering greater financial solidarity with EU partners.  It is not just Germany’s insistence on states taking responsibility for their own debt problems but it is also now under pressure for the size of its current account surplus (in excess of 8 per cent of GDP) and a reluctance to recognize that it is symptomatic of German economic imbalance.

President Trump’s planned US withdrawal from the Paris Accords on climate change has led to fierce criticism from Merkel, Macron and Italian Prime Minister Gentiloni.  Also to be discussed further in the EU, and given greater salience by the implications of Brexit and Trump’s criticism of states not contributing the 2 per cent GDP norm to NATO, will be the scope for greater defence policy integration in the EU.  These discussions had already begun at in September 2016 at an EU summit held in Bratislava, without UK participation.

When the former president of the European Parliament, Martin Schulz, was selected to be SDP’s chancellor candidate running against Merkel in September’s election there was a positive ‘Schulz effect’ for the party’s poll figures.  Four months later and the standing of Angela Merkel and the Christian Democrats has been not only restored but strengthened in opinion polls (although another Grand Coalition is the best bet for the next government in Berlin).

While British politics are centrally focused on Brexit, elsewhere in Europe there are straws in the wind suggesting a more galvanized EU in the coming years.  The view from continental Europe is one of worry about British politics.  And levels of public support for the EU have risen.  To paraphrase Mark Twain, reports of the demise of the EU and the Eurozone have been greatly exaggerated.