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The European Union is facing the most severe internal crisis in its history. A long period of success, which peaked last decade, was arrested with the onset of the euro zone crisis. This subsequently led to a period of stasis, in which there was little meaningful integration. Then last year, stasis turned to crisis as countries around the EU abandoned the Dublin and Schengen agreements.

 

The causes of the EU’s crisis are complex. At the most fundamental level, the union no longer has a clear raison d’etre. It was formed in response to various factors that prevailed in the second half of the twentieth century such as the desire to tie down Germany; the Cold War and the threat from the Soviet Union; the retreat from globalisation caused by decolonisation; and, in the post-communist period, the American commitment to a ‘Europe, whole and free’. However, most of these factors no longer apply. Germany has been tamed, the Cold War is over, Eastern Europe is free and democratic, and the old Third World is now a land of booming markets with which Europeans want to re-engage. This limits the extent to which individuals and nations are willing to make sacrifices for the European project.

 

Added to this are defects in the EU’s design. The most serious of these is the excess of integration and the insistence that all states move in lockstep towards ever closer union. Given that the EU consists of multiple nations, each with their own culture, history and institutions, this inevitably means that union-wide policies, which suit some states, do not suit others.

 

The most serious ramifications have been in the area of economics. Liberalism has worked well in northern Europe but, in Central Europe and the Balkans, its adoption has destroyed the basic social contract that prevailed during the socialist period. Similarly, the creation of a single currency has helped the EU’s rich and competitive north, which benefits from a weak euro and unfettered access to the entire European market; but has saddled the less competitive economies of the Mediterranean with an overvalued currency that prevents them from trading their way back to solvency, without any compensating system of Europe-wide fiscal transfers. Added to these are severe tensions caused by migration (both within the EU and from outside) and the related issue of terrorism, which has undermined peoples’ faith in the EU to provide security.

 

Last year, one of the EU’s largest members, the United Kingdom, voted to leave the union, turning the existing crisis existential. Not only is Brexit a clear vote of no confidence in the EU. But it also sends a number of portentous messages to its advocates in Europe: that leaving the EU is possible; that it can be decided at national level, peacefully, democratically and without serious economic damage; that a pro-European majority in parliament is no defence against exit if the question of membership goes to referendum; and, since Euroscepticism is prevalent everywhere, that other countries could follow the UK out the door.  

 

This has subsequently provoked a debate about the need for reform which almost everyone recognises is essential to sustain the EU in the longer term. The difficulty is that there is no apparent consensus on what shape this reform should take: the EU’s northern states are resisting the integrationist steps which would stabilise the euro zone on a permanent basis while individual governments across the union, for reasons of ideology and vested interest, are opposed to any loosening of the union, which would release states from policies that are harming others’ interests.

 

The demise of the union will have massive political and economic implications for Eastern Europe, which is politically invested in the European project and heavily integrated with the EU via trade, investment, financial systems and labour markets. Those countries already in the EU, from the Baltic States, through Central Europe to the eastern Balkans, could lose the structural and cohesion funds, which typically constitute around 3% of GDP, and their populations could lose the right to work in the rest of the EU. Meanwhile, the region has lost  its international political orientation, undermining efforts at democratisation and liberal economic reform. In extremis, there is a risk of renewed conflict in some parts of Eastern Europe since the collapse of the EU would give Russia a much freer hand in the Baltic and Ukraine and leave a dangerous power vacuum in the fractious Western Balkans.

 

Forecast

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The difficulty – perhaps impossibility - of internal reform leaves only two possible paths for the EU. One is its sudden collapse, which could occur if a major state such as France or Italy decided to withdraw. Both countries contain strong Eurosceptic movements, which are exerting a powerful influence over mainstream political parties and could force their respective governments to put the issue of EU membership to referendum, as was the case in the UK. Both are also facing electoral tests in the near future. Italy held a referendum on a package of constitutional reforms last December, which could allow Eurosceptic parties into government by 2018 at the latest. Meanwhile, France faces presidential elections in May which could bring to power a president with a Eurosceptic agenda that lays down an ultimatum to the EU – a new relationship or exit. If either Italy or France left the EU, the overall construct of the union would be critically undermined, leading to probable further departures in short order.

 

The alternative to collapse is steady internal decay, in which states unilaterally withdraw from areas of policy they dislike, without actually leaving the EU. This slow unravelling could potentially take years, especially if states continue to believe in the value of EU membership in principle, even as aspects of it harm their interests in practice. In this scenario, the institutions of the EU would continue to function. The Commission would continue to initiate policy, the Council and Parliament would continue to meet, and member states would continue to profess their support for the European cause. In reality, however, the EU would become increasingly irrelevant as a place where politics was conducted and decisions were made. Instead, member states would abide by the EU’s dictates only when it suited them, ignored them when it didn’t and increasingly asserted themselves as sovereign actors in the international sphere. Enlargement would be off entirely.

 

At some point, the defective design of the euro zone would generate a new financing crisis in a troubled Mediterranean states such as Greece or Italy. If fellow euro zone members refused to bail the state out, as they threatened to do with Greece in 2015, then the currency union would be vulnerable to collapse, seriously threatening the integrity of the EU as a whole.

 

 

Immediate Impacts

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• The absence of an EU perspective could cause a loss of momentum for reform in aspiring member states, which have hitherto accepted reform as a condition for joining the EU.

 

• Failure to accede to the EU by aspirant states implies the loss of funds for the development of regions and infrastructure typically worth around 3% of GDP.

 

• The demise of the EU will deter investment by private companies, which demand the legal certainties that membership provides, and lead to higher financing costs for governments.

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Potential Impacts

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• Non-integration into the EU of fragile, multi-ethnic states, especially in the Balkans, risks their eventual disintegration, potentially violently.

 

• Former Soviet states could be re-absorbed into the Russian sphere, provoking conflict with anti-Russian constituencies living within those states.

 

• Economies across Eastern Europe could suffer a severe indirect shock as a result of a renewed crisis in the euro zone, caused by contagion from Italy and Greece.