“Breakthrough” and “crisis”. These are the words most frequently used today to sum up pretty much any discussion about the European Union. On the one hand, we keep hearing about ground-breaking meetings, ground-breaking summits, and ground-breaking decisions; on the other, many voices speak of consecutive crises related to the influx of migrants, Brexit, or the Eurozone. Although the entire history of European integration has comprised such crises and breakthroughs, many of these events were not actually that ground-breaking – in contrast to May 2018. This will undoubtedly go down in history as one of the most turbulent months in more than 60 years of EU history. Unfortunately, this only marks the beginning of the storm season. During the upcoming EU Council summit, on 28 and 29 June 2018, Italy may bring about the end of the Union as we know it.
It’s difficult to choose only one event that best illustrates the uniqueness of recent weeks – there have been so many. At first glance, they seem unrelated, but on closer inspection they are all part of a wider process. Understanding the essence of this process will be key to understanding the direction in which the Old Continent is heading.
A series of unfortunate events
- Cohesion Policy to experience cuts
on 2 May, the European Commission presented its first proposal for the EU’s new budget, known as the Multiannual Financial Framework 2021-2027. According to the most recent version, which was released on the 29 May, the countries in our region will be hit hard by cuts in the Cohesion Policy budget: Czech Republic, Estonia, Lithuania and Hungary will each lose 24%, Poland 23.3%, Slovakia 21.7%, Latvia 13%, Slovenia 9.2% and Croatia 5.5%. On the other hand, the countries that will benefit if the current proposal is implemented include Bulgaria, Romania, and Greece (8% each), Italy (6.4%) and Spain (5%). It should be noted that this does not include a possible 15% cut to the Common Agricultural Policy (CAP) budget .
- Trump plays against European capitals
Less than a week later, on the 8 May, Donald Trump pulled out of the Iran nuclear deal. He did this against the will of the three largest European countries – Germany, France, and the United Kingdom – whose leaders in April had made pilgrimages to Washington in a last-ditch effort to save the agreement. Each of these countries – including the UK (currently leaving the Union) – signalled its readiness to uphold the 2015 pact, even at the cost of US sanctions.
- Is France seeking an alternative to NATO?
On 5 May, ahead of Trump’s decision to scrap the Iran deal, UK Minister of State for Defence the Earl Howe expressed his support for a French proposal to create the European Intervention Initiative (EII), a military wing of the EU’s Common Security and Defence Policy (CSDP). The EII project is intended to provide a counterweight to the weakly defined – and from the French perspective unambitious – PESCO (Permanent Structured Cooperation in the field of security) initiative introduced in December 2017.
One cannot help feeling that the new initiative, to be based on the involvement of a “coalition of the willing”, and which might start this June, is an attempt to build an alternative to NATO military structures. Although the Germans were not particularly happy with Macron’s idea, in the face of Europe’s growing conflict with Washington, both Berlin and London have declared that they will join the EII.
- Macron brings things to a head
The pace didn’t let up in the third week. On 17 May, during the EU-Western Balkans summit in Sofia, French president Emmanuel Macron warned against expanding the Union without first deepening cooperation within the bloc – once again referring to his proposal for closer Eurozone integration. In the same speech he said that he was “eagerly awaiting the German answer”, and that “the summer ahead of us will be a moment of truth.”
It is worth noting that Macron had publicly unveiled his expectations towards Germany a few days earlier – in his Charlemagne Prize acceptance speech in Aachen on 10 May. In this address he said that Germany should abandon her policy of budget and trade surpluses, as seeking to attain these objectives harmed other countries, particularly those in southern Europe.
It is worth noting how Macron’s remarks from Sofia appear to be a response to a statement made by the German finance minister, Olaf Scholz, on 15 May. This speech could be summed up by the words: “no dreams, gentlemen, no dreams.” During a budget debate in the Bundestag, Scholz made clear that Germany will not green-light a radical Eurozone reform, nor the introduction of a “Union of transfers” and a significant increase in the European budget; it will also veto any proposals to save banks using money belonging to German taxpayers. Finally, he admitted that limiting the scope of the EU’s activity should reduce costs, so that a smaller budget will be sufficient to cover the funding of its priorities.
- Putin observes and benefits
This Franco-German ping-pong paused when Angela Merkel arrived in Russia on 18 May to meet Vladimir Putin. Berlin couldn’t have planned a worse date given that Putin has just used transatlantic tensions to his advantage: as Trump scrapped the Iran deal, Russia and Germany found themselves on the same side. In these circumstances, the discussion about the political preconditions for the construction of the Nordstream 2 pipeline had to be confined to a clichéd statement about the commercial nature of the project.
Analysing this situation from a Polish perspective, it is impossible not to notice a paradox: the actions taken by the United States, commonly perceived as the guarantor of our energy safety, might actually expose us to great danger.
Just as Nordstream 1 was a ‘child’ conceived in the wake of a transatlantic crisis, begun at the outbreak of the Iraq War in 2003, Nordstream 2 might eventually materialize because of a conflict over Iran.
- Woe in Italy, woe in Greece, yet more woe in Spain
Not enough? This rollercoaster isn’t braking. Another week gets off to a turbulent start. On Monday, 21 May, Europe’s worst nightmare came to pass as Italy’s anti-establishment Lega Nord (LN) and Five Star Movement (M5S) put forward a candidate for prime minister in their coalition government. This began a 10 day saga with many plot twists, in which the main character was Paolo Savona, a candidate for finance minister. This 82-year-old economics professor, a proponent of Italy leaving the Eurozone, certainly doesn’t find favour in the eyes of European leaders. Their objection to his candidacy has been so strong that it caused President Sergio Mattarella to refuse to appoint Conte’s government.
Instead, he entrusted Carlo Cottarelli with the mission of forming a technocratic administration, which had absolutely no chance of winning a vote of confidence. The leaders of the coalition parties, Matteo Salvini and Luigi di Maio, once again put forward Conte. This time, President Mattarella, whom M5S had threatened with impeachment and early elections, on 31 May appointed a new government, which included… Paola Savona, who eventually became the Minister of European Affairs. Salvini took the job of Interior Minister, which suggests that Italy will likely harden its immigration policy. Di Maio, who comes from the poor southern Italian Campania region, assumed the office of Minister of Economic Development, Labour and Social Policy. Once he starts fulfilling his campaign promises, we can expect the launch of mass social transfers and a greater Italian public debt. This has already given European decision-makers – who are doing their best to ensure the survival of the Eurozone – many sleepless nights. Their insomnia is unlikely to be alleviated any time soon.
To complete the picture of the situation in the south of Europe, we observe that 30 May marked the start of a general strike in Greece, as trade unions protest against austerity measures introduced by Alexis Tsipras’s government. In all fairness, Tsipras himself had no say in the matter. The main precondition for the launch of the third financial assistance programme for Greece, which ends on 20 August, was that the country subject its economic policy to the supervision of international institutions (European Commission, European Central Bank, and International Monetary Fund).
Finally, Spain’s centre-right government, led by Mariano Rajoy, was overthrown amid corruption allegations on 1 June. This cleared the way for socialist leader Pedro Sánchez to take over as Prime Minister, with early elections now more than likely. If we remember how difficult it was to appoint a government in Spain two years ago, it’s easy to conclude that the EU’s fourth largest economy, an integral part of the “troublesome South”, is entering a period of political destabilization, which certainly will not be alleviated by conflict between Madrid and Barcelona.
Three dimensions of European crisis
What are the main take-aways from this sequence of events? Given that the Greek word krisis may be translated as “division”, we’re dealing with three crises (divisions).
- The downward spiral of the transatlantic partnership
President Trump has started a poker game in which he keeps on raising the stakes in the hope that European (and other) leaders will sooner or later fold and accept America’s hegemonic role. He fails to acknowledge is that it is 2018 and not 1956, when Eisenhower could simply demand Britain and France’s immediate withdrawal from Suez.
The President of the European Commission, Jean-Claude Juncker, has already said that the EU will not hesitate to retaliate by imposing tariffs on US goods. Merkel has made a similar declaration. While there’s no proof that the Kremlin exerts any influence in Washington, it is impossible not to notice how the Western world is falling apart, much to the delight of Vladimir Putin, whose Sochi meeting with Merkel reflects this process.
It is often said that history does not repeat itself, but one can’t rule out the possibility that, following the 2018 World Cup, Putin will try to test the unity of a divided West by resuming one of Russia’s ‘frozen conflicts’ (Transnistria, Donbas, Abkhazia, South Ossetia, Nagorno-Karabakh, maybe even Latvia or Estonia?), as he did after the 2014 Winter Olympics in Sochi. He might also adopt a completely different strategy – playing the role of world order stabilizer, persuading Russia’s European partners to speed up construction of Nordstream2, and seeking the lifting of sanctions on Russia.
Perhaps Russia will even join the “coalition of the willing” and work towards the implementation of the European Intervention Initiative? Paradoxically, the scenarios of escalation and reset are not mutually exclusive – one need only think of the Georgian War and what happened afterwards.
- Countries of the South are on an ineffective drip
Cuts to the Cohesion Policy will further reinforce the division between “old” and “new” EU member states. Contrary to popular opinions often repeated in Polish public debate, this has nothing to do with the negative impression that Brussels has of the Polish and Hungarian governments. This poor image will, at most, make it easier for European decision-makers to silence our objections. They have been thinking of incorporating these changes into the new EU budget since 2014-2015, when the ‘pro-European’ Civic Platform (Platforma Obywatelska, PO) was still in power. The reason is very simple – Poland’s level of GDP per capita (per person) is now higher than Greece’s and on a par with Portugal’s.
The problems that southern European countries struggle with do not stem directly from their participation in the EU Single Market, which was the main reason for the introduction of the Cohesion Policy. A year after the Single European Act (establishing free movement of goods, services, capital, and labour) had come into force, the author of the Cohesion Policy, Jacques Delors, said that the Cohesion Fund was a compensatory ‘flanking policy’ for countries that would bear the costs of the single market.
Since the internal market in services is not yet completed, from which poorer member states benefit most (now more restricted due to Macron’s initiative resulting in the revision of the Posted Workers Directive), compensation payments within the framework of the Cohesion Policy paid out to central European countries should at least remain at the current level. One especial reason is that the countries that finance the Cohesion Policy have always also been beneficiaries by way of, for example, public procurement contracts (vide highway construction programmes) or higher domestic demand in countries benefitting from EU funds.
From where do the problems of southern European countries then stem? The flawed structure of the Eurozone – because of an insufficient level of transnational mobility of workers and a lack of redistribution or solidarity mechanisms – is incapable of dealing with rising current account imbalances.
Unlike the US, the EU is not (and will never be) a federal state, where it would be possible to introduce a mechanism whereby richer regions automatically support the poorer ones.
It is therefore hardly surprising that France and Italy expect Germany to push through a radical reform of Economic and Monetary Union, which for many reasons Berlin doesn’t intend to do. If such reform was implemented, Germany would be required to finance the South’s debts from its taxpayers’ money. It would also have to deal with the ‘release’ of real wages, which Germans perceive as a problem that is likely to harm their economy’s competitiveness and, in the long-term, increase unemployment.
Even if these concerns are economically unjustified, the political cost of a ‘union of transfers’ is simply too high. We cannot rule out that German voters – already finding difficulty with 2015’s Willkommenskultur towards refugees from the Middle East and North Africa – may send the Grand Coalition packing and vote for Alternative for Germany (AfD) instead.
The paradox is that the south of Europe perceives the Germans as their ‘economic executioners’, while Poland’s western neighbours consider themselves as benefactors and can’t understand the ingratitude of ‘lazy’ Greeks, Italians, and Spaniards.
This is exactly why German commissioner Günther Oettinger, responsible for the draft of the new EU budget, decided to transfer a section of Cohesion Policy funds to southern EU countries. The intention is to mitigate their problems, without inflaming the German voter (Germany, the Czech Republic, and Hungary stand to lose the most). What is more, the structure of the Cohesion Fund has been changed in such a way that the funds do not go directly to regions, but remain at the disposal of central governments, further confirming the thesis about the true intentions behind the mooted changes.
Nonetheless, you can’t have your cake and eat it. These several million euros will merely serve as a drip to the countries of southern Europe – a drip that will keep the patient alive for a few months until the next crisis comes along. As the French Finance Minister Bruno Le Maire correctly pointed out in his response to Scholz’s remarks, the Eurozone will not survive if the imbalance between member states continues to grow. Thorough reform is therefore an absolute necessity.
- Liberal democracy in question
We have reached the third crisis, associated with liberal democracy’s failure to address the negative consequences of globalization. This helplessness results in aggression, which drives localism and the forces of disintegration. The best illustration of this process is Oettinger’s recent comment, “the markets will teach Italians how to vote.” Statements about suspending EU funding to countries that refuse to take in refugees, or are perceived to be in breach of the rule of law, should be interpreted similarly.
Obviously, this doesn’t mean that the Union shouldn’t defend its values. The problem, however, is that it uses the worst possible methods to do so. Its strategy results in either the rise of Eurosceptic tendencies (Italy) or resignation from the fight for power, which today has barely anything to do with governing power in the traditional sense (Greece under the Troika).
I purposefully avoid the examples of Poland and Hungary, and not because I believe it was right to pursue the controversial reform of our judiciary. It is rather because our influence on European politics is relatively minor compared to that of Italy.
In truth it is not our region that will give the Union a new direction, and it appears the Commission is slowly realizing this. Punishing Poland in a spectacular way is not going to make the societies of southern Europe suddenly fall in love with the European institutions. Suffice it to say, it was Hungary and Spain that defended Poland in the EU Court of Justice hearing about extraditing a suspect under the European Arrest Warrant (EAW), after an Irish judge refused to do so because of rule of law concerns.
Furthermore, the potential mainstay of liberal democracy, the middle class, has after 2008 emigrated from the south of Europe to seek better employment opportunities elsewhere. According to estimates, there were about 400,000 thousand citizens who left Greece out of a population of 11 million within that time, which implies a similar scale of migration to that which Poland experienced after joining the EU in 2004. Just with our country, this drain on human capital will have a long-term negative effect on the pace of economic recovery in Greece, Spain, Portugal, and Italy.
What is most important, however, is that the consequences of our third crisis are not noticeable at once. They are more like a tsunami, which remains unnoticed while rolling in from the ocean. It is only when the wave reaches the coast that its deadly force becomes apparent. It seems that our tsunami is looming. It is hard to tell how large it is, when it will reach the coast, and what consequences it will bring.
Italians could overturn the European table
The European Council summit on 28-29 June in Brussels could provide us with a definite answer. Going by its assumptions, it will continue the process begun at the summit on 15 December 2015. This process aimed to establish a European Monetary Fund, replacing the current European Stability Mechanism, and completing the third stage of building a banking union encompassing a European Deposit Insurance Scheme. However, there is no mention anywhere of redemption or sharing of debt. President Macron has been trying to break through with the much more modest idea of a separate Eurozone budget for the past year.
Imagine, though, that Italy’s new Prime Minister and Europe Minister decide to overturn the table at their first summit to gain credibility on the domestic political scene. An earthquake in the EU this summer cannot be ruled out, especially since this stunt could be adequately prepared in advance. ‘New’ Foreign Minister Enzo Moavero Milanesi – who previously held this post both in Mario Monti’s (!) technocratic government and in Enrico Letta’s cabinet – is known for his ability to navigate the political shoals of Brussels. For the best proof of Italian diplomatic effectiveness in the EU, consider that Italians hold three leadership positions: Federica Mogherini (the EU’s unofficial foreign minister), Mario Draghi (President of the European Central Bank), and Antonio Tajani (President of the European Parliament).
In these circumstances, it cannot be assumed that Germany will remain as unyielding to Italian blackmail as to light pressure from France. Ultimately, Berlin cannot afford an Italexit that meant the de facto sudden death of the Eurozone, of which Germany is the greatest beneficiary of. A potential compromise could involve other concessions towards the new Italian government, namely deciding not to extend sanctions against Russia, due to expire on 31 July, by another six months.
Poland is against a geopolitical wall
What does all this mean for Poland? Although the dispute with the European Commission over Article 7 of the TEU certainly does not improve our negotiating position, Rome now holds the cards in the battle for the future of Europe. The reform of the Eurozone and adoption of the new EU budget at the summit in Sibiu, Romania, on 10 May 2019, before the European elections, will depend on the new Italian government’s negotiating strategy. This is unlikely, but if it happens, Poland – by staying outside the Eurozone – will in practice be pushed out of the EU. If this does not happen, the chances of reforming the Eurozone before a new, most probably eurosceptic, European Parliament is elected will fall to zero. It will be the beginning of the end of the EU as we know it. In the worst case scenario, the EU budget for 2021-2027 may turn out to be an insignificant scrap of paper.
The choice of scenario is completely beyond our control, however. These days, nobody in Brussels is particularly interested in what the Czechs, Hungarians, or Poles think. We can only prepare a strategy that mitigates the effects of potential turbulence. It needs to be spelt out: since we are not politically or economically ready to adopt the euro, there is no meaningful answer to the question: “What will we do if the Italians and French convince the Germans to reform the Eurozone?” We can only hope that this will not happen.
In the case of the second scenario, building strong relations with Germany (Poland’s most important economic partner) and other countries in the region, will be key. Reaching a compromise in transatlantic relations will be fundamental too. For both economic and security reasons, Berlin cannot afford a conflict with Washington in the long run. Unlike the French, Merkel is still seeking a way out of the impasse, although German political elites have been eyeing the US with increasing aversion in recent years. Four proposals are on the table: reform of the WTO, a return to talks on TTIP, opening the European market to American LNG, and increasing Berlin’s defence spending, which could in practice mean purchasing American equipment.
Fortunately, almost all these points align with Poland’s raison d’état (except for TTIP, but there is scope for negotiation). Warsaw and Berlin must first, therefore, convince EU leaders to respond to US tariffs gradually (faced with the triggering of Article 7, we unfortunately cannot do this alone). Secondly, we must resolve the dispute over the 2018 amendment to the Act on the Institute of National Remembrance as quickly as possible and appease the American president at the Three Seas Initiative summit in Bucharest. Covering the operating costs of the US military base in Poland could be part of the negotiations.
Both tasks seem fiendishly hard, and yet without them, Poland’s economic and military security may fall hostage to fate. We can but press on and hope that Berlin will not yield to Rome.
Translation from Polish: Aleksandra Wróbel; Anthony Goltz
This publication has been cofinanced by the Ministry of Foreign Affairs of the Republic of Poland within “Cooperation in Public Diplomacy 2018” programme.
This publication reflects the views of the author and not the official stance of the Ministry of Foreign Affairs of the Republic of Poland.