Upcoming elections in the Netherlands, France, and Germany will be held in what is arguably the most febrile political environment since the European Union’s creation. The post-war liberal democratic order is under threat everywhere, but particularly in Europe, where the EU is confronting challenges that include an increasingly aggressive Russia, the constant threat of terrorism, democratic disenfranchisement, and uneven economic growth. Following the United Kingdom’s Brexit referendum and Donald Trump’s election as US president, the question facing Europe is straightforward: Will populist and nationalist forces exert the same influence in core countries of the EU?
According to the 2016 Democracy Index almost one-half of the world’s countries can be considered to be democracies of some sort, but the number of “full democracies” has declined from 20 in 2015 to 19 in 2016. The US has been downgraded from a “full democracy” to a “flawed democracy” because of a further erosion of trust in government and elected officials there. The “democratic recession” worsened in 2016, when no region experienced an improvement in its average score and almost twice as many countries (72) recorded a decline in their total score as recorded an improvement (38). Eastern Europe experienced the most severe regression. The 2016 Democracy Index report, Revenge of the “deplorables”, examines the deep roots of today’s crisis of democracy in the developed world, and looks at how democracy fared in every region.
The 2016 December European Council will discuss a bundle of measures to strengthen the EU’s security and defence policy. While the Brexit vote and the US elections raised the ambitions of some member states, the measures largely represent a readjustment and repackaging of existing policies rather than a conceptual overhaul. With or without the UK, EU member states continue to have diverse views on the relationship between the EU and NATO, the priorities of the EU’s security and defence policy and the level of EU involvement in defence in general. However, if implemented, the proposed steps may help member states to coordinate their capability development plans and to jointly finance research into and procurement of key defence technologies. This development would not question NATO’s role in defending Europe but, on the contrary, would help contribute towards transatlantic burden-sharing. As some of the member states are more ambitious in pooling defence capabilities, the emergence of a multi-speed Europe in defence matters is a real possibility. This could deepen the divides that already exist between the member states.
The European Union Committee and its six sub-committees publish a report a day for six days, focusing on key issues that will arise in the forthcoming negotiations on Brexit. The House of Lords EU Committee – Parliament’s largest body responsible for scrutinising the European Union – will publish six reports on Brexit in six days, starting on 12 December. The reports will identify key issues across a broad range of policy areas, making recommendations to the Government on what it should prioritise in Brexit negotiations. These six reports will be followed in the New Year by further reports, ahead of the Government’s proposed deadline of March for triggering Article 50. Taken as a whole, this programme of work will be the most extensive and thorough parliamentary scrutiny of Brexit.
Despite an improved global economic backdrop, mounting uncertainties will weigh on companies in 2017—especially given the election of Donald Trump as US president. Two surprising and contradictory events took place in early November, with important ramifications for business in 2017. First, the Paris Agreement on Climate Change entered law, sooner than many foresaw as recently as a year ago. Shortly after this, Donald Trump, an avowed climate-change sceptic, was elected US president. This report, which brings together our 2017 forecasts for six industry sectors, is not primarily about Mr Trump. However, as the surprise result sinks in, it is clear that his administration could bring huge changes for all six industries: automotive, consumer goods and retailing, energy, financial services, healthcare and telecoms.
Although it might seem theoretically possible to cherry pick a number of sectors and negotiate trade agreements for specific domains, there is considerable linkage between the sectors. It has taken a quarter of a century to negotiate the single market as it exists today and could take nearly as long to renegotiate a new arrangement on a sectoral basis. The practical problems of negotiating agreements that cover the majority of our trade would not only take years but the uncertainty thus generated would hold back investment and damage the economy. Whether the UK is inside or outside the single market, EU regulations cannot be avoided if Britain wishes to trade with the European Union. What can potentially be decided is the form of compliance, either though EEA rules, FTA equivalence or firms individually complying with standards for their exports. The more regulatory independence the UK tries to carve out, the more difficult it is likely to be for British firms to export to the EU without facing trade barriers. The broader economic impact of having more restricted market access also has to consider secondary effects. Industries such as real estate could be affected if the landscape for foreign direct investment changes. Furthermore, foreign investment into key British industries such as manufacturing may also be affected by restricted access if investors end up having less certainty in the ability of their assets to generate income domestically and abroad.
The World Energy Outlook 2016 sees broad transformations in the global energy landscape. As a result of major transformations in the global energy system that take place over the next decades, renewables and natural gas are the big winners in the race to meet energy demand growth until 2040, according to the latest edition of the World Energy Outlook, the International Energy Agency’s flagship publication. A detailed analysis of the pledges made for the Paris Agreement on climate change finds that the era of fossil fuels appears far from over and underscores the challenge of reaching more ambitious climate goals. Still, government policies, as well as cost reductions across the energy sector, enable a doubling of both renewables – subject of a special focus in this year’s Outlook – and of improvements in energy efficiency over the next 25 years. Natural gas continues to expand its role while the shares of coal and oil fall back.
As right-wing movements have mounted increasingly strong challenges to political establishments across Europe and North America, many commentators have drawn parallels to the rise of fascism during the 1920s and 1930s. Last year, a French court ruled that opponents of Marine Le Pen, the leader of France’s National Front, had the right to call her a “fascist”—a right they have frequently exercised. This May, after Norbert Hofer, the leader of Austria’s Freedom Party, nearly won that country’s presidential election, The Guardian asked, “How can so many Austrians flirt with this barely disguised fascism?” And in an article that same month about the rise of Donald Trump, the Republican U.S. presidential candidate, the conservative columnist Robert Kagan warned, “This is how fascism comes to America.” “Fascist” has served as a generic term of political abuse for many decades, but for the first time in ages, mainstream observers are using it seriously to describe major politicians and parties.
With the United States’ presidential election on November 8, and a series of elections and other political decisions fast approaching in Europe, now is a good time to ask whether the global economy is in good enough shape to withstand another major negative shock. The answer, unfortunately, is that growth and employment around the world look fragile. A big adverse surprise – like the election of Donald Trump in the US – would likely cause the stock market to crash and plunge the world into recession. There is always a great deal of insight in the International Monetary Fund’s semi-annual economic outlook, which is based on detailed data from around the world. And, because the latest version was published in early October, it is particularly relevant.
The upturn in Germany and the euro area continues. The German Council of Economic Experts (GCEE) expects real gross domestic product in Germany to grow by 1.9% in 2016 and 1.3% in 2017, with the decline in growth primarily due to calendar effects. As the underlying growth momentum will remain essentially unchanged, the German economy will move further into overutilisation. The GCEE forecasts real growth for the euro area of 1.6% in 2016 and 1.4% in 2017. The ECB’s unusually expansionary monetary policy has been a key factor in the euro area upturn. However, the upswing cannot sustain itself given the considerable structural problems that persist in the region.
There is little effort to reform and some member states lack the required budget discipline. ECB monetary policy masks these problems and increasingly threatens financial stability. The extent of monetary easing in the euro area is no longer appropriate given the region’s economic recovery. Consequently, the ECB should slow down its bond purchases and end them earlier.
“The euro area member states should now use the tailwinds of the economic upturn to carry outstructural reforms,” said Christoph M. Schmidt, Chairman of the German Coun-cil of Economic Experts. “Even the German Government did not sufficiently use the positive economic growth of the past few years for market-oriented reforms.”
Given this, the GCEE singled out a number of areas for reform in Europe and Germany.
Reforms for Europe:
The principle of subsidiarity must be reinforced. More integration is needed in climate, asylum and domestic security policies. Fiscal, labour-market and social policy should remain sole responsibility of national governments.
Delaying the integration of EU migrants into social security systems is appropriate. However, the four fundamental freedoms should not be called into question.
The EU should conclude free trade agreements with Canada and the USA.
The leverage ratio for banks should be increased to at least 5%. Higher ratios should be set for systemically important banks.
There need to be rules for restructuring government debt in the event of crisis.
Reforms for Germany:
Fiscal leeway should not be used for higher spending, but to reduce the debt ratio and to conduct tax reforms to increase efficiency.
The statutory retirement age should be linked to longer life expectancy in the statutory pension insurance system. Moreover, occupational and private pension provision needs to be bolstered.
Entrenched unemployment, low wage mobility and the need to integrate refugees re-quire a flexible labour market, not more regulation.
A more targeted education policy could improve equal opportunities and thus also in-come and wealth mobility.
About the German Council of Economic Experts
The German Council of Economic Experts is an independent academic body advising German policy makers on questions of economic policy. The Council consists of five members (currently Prof. Dr. Christoph M. Schmidt (Chairman), Prof. Dr. Peter Bofinger, Prof. Dr. Lars P. Feld, Prof. Dr. Isabel Schnabel, and Prof. Volker Wieland, Ph.D.).