For outside observers, 2019 might have looked somewhat like a head spin in European politics. First and foremost, Brexit was postponed.
Meanwhile, elections in Spain saw the continuation of a hung parliament. In contrast, in Greece, polls resulted in the return to a rather traditional-looking center-right government, and in Denmark the result was a typical center-left minority rule. Without any voting, meanwhile, Italy has ousted its purely populist government. On top of that, the European Parliament election results displayed new levels of fragmentation, and the rise of the Liberals (propped up by French President Emmanuel Macron’s new movement) and the Greens provided for a difficult backdrop for negotiations over the EU’s new leadership line-up. In the end, however, the bloc managed to agree on a tableau of leaders in which, for the first time, the two most powerful jobs, the presidencies of the commission and the ECB, went to women.
How do we make sense of these seemingly random (and by no means exhaustive) series of developments over the year? And what, if anything, can they tell us about what might be ahead? Will 2020 be the year in which new trends come together to give us a better idea of where Europe is heading politically? And what will that mean for companies and markets?
For all the talk of a leaderless Europe, what is really going on is a shift in the political coalitions carrying the European project. While this entails a period of volatility, the new contours are already starting to take shape – notably the strengthening of the Green-Liberal camp and increasing polarization vis-à-vis the other camp that is here to stay, nationalist populism. This new shape of politics matters beyond the noise produced by this sharp standoff, and beyond repeated fears of a populist takeover and the consequences for the integrity of the single market and the euro.
What we are already seeing is a redefinition of market-relevant economic, fiscal, welfare, and regulatory policies in the centrist camp, too, for instance, the move from traditional welfare transfers to the unemployed to policies that focus on productivity and competitiveness by training people for the changing economy. On top of that, the growing political realization of an acute climate crisis is reshaping the way in which centrist (i.e. often Green-Liberal) parties are looking at investment policies. Depending on the industry, this can mean new risks for companies from regulation and taxation, or it can mean new business opportunities as the dominant political coalitions in Europe are doubling down on addressing the climate crisis.
New Focus on Security Issues
All of this is happening against the backdrop of the UK’s departure from the EU and Russia’s ongoing return to assertive, big-power status. As France has realized that it cannot (quickly) move Germany towards a more fiscally expansive stance on the Eurozone, the new focus is on another area in which Germany is spending less but could potentially do more: defense. This is one of the reasons for France’s high hopes for Ursula von der Leyen – Germany’s former defense secretary – as the new Commission president. But while France has already restructured its domestic party politics, Germany is only at the beginning of that process. In the traditionally more polarized, formerly communist east of the country, regional election results of 2019 saw the traditional catch-all parties of the center left and the center right getting squashed in between a remarkably strengthened far right and a Green Party that had long struggled to make any inroads in these states. But the grand coalition in Berlin is staggering on for now, making it hard to see how both partners would muster the political will for the bold moves President Emmanuel Macron has been hoping to see on the other side of the Rhine.
Businesses should watch Europe’s inevitable reorientation towards strategic and security issues. Still, a fundamental reconsideration of Berlin’s stance on security policy would likely require a combination of a direct strategic challenge to Europe and an outright U.S. retreat. This, in turn, is the backdrop against which Europe looks at the combination of China’s arrival and uncertainty surrounding the role of the U.S. – in a crucial presidential election year across the pond. From the preparation of retaliatory tariffs against potential U.S. auto tariffs, to a new skepticism regarding Chinese digital hardware, many of the EU’s business-relevant policies have been changing fast and will continue to do so against an evolving global backdrop.
But Europe’s positioning is not straightforward. On the one hand, a new skepticism has replaced the previous focus on China solely as an economic opportunity story. In that sense, Europe and the U.S. remain on the same page: they are worried that China might use its growing technological leadership for more than just commercial goals. The Europeans in that sense agree with the motives driving the U.S. administration’s position towards China: to react to China’s rise with a much more strategic response.
At Odds with Washington
At the same time, the Europeans could not be more at odds with Washington over the actual measures that are being used. Of course, one of the biggest concerns is that the American trade war is not only directed against China, but against surplus countries and alleged “currency manipulators” in general. For Europe, this is especially dangerous after a decade in which northern, exportoriented countries have made a greater focus on competitiveness in global markets the precondition for Eurozone rescue packages. But now it is this northern European – and especially Germany’s – mantra itself which is coming under pressure from the U.S. The fear of the imposition of further tariffs on some of the most important European export products is one of the key driving forces behind Europe’s positioning in this ongoing standoff with the U.S.
The big concern is that measures implemented to win time – such as EU Commission President Jean-Claude Juncker’s promises on soybean and LNG imports – will not last long enough politically to appease the U.S. administration. Germany is under additional pressure as the Nord Stream 2 pipeline to import Russian gas is nearing completion (a project of economic but also strategic relevance in Berlin); despite the ongoing sanctions against Russia, there remains the conviction that not all economic ties should be cut with the continent’s largest country and that the continuation of certain commercial relations is in fact the best guarantee to at least remain in contact with a country that is too close and too powerful to be allowed to turn exclusively into an adversary. That approach is far from consensual across Europe, but it does hold some sway over many in Berlin and elsewhere.
A perhaps related point at which the Europeans differ from the U.S. approach to the new big power competition is the wider question of multilateralism. That is why Europe will continue to push for WTO reforms and to make progress on thorny commercial issues with China through multilateral agreements, rather than backing the tariffs approach driven by Washington. The broader motivation by the still-almost-exclusively centrist governments in Europe is their interest in countering populist politics; in many ways, this logic differentiates them from the current U.S. administration, which has been elected precisely in departure from, and in opposition to, a more conventional centrist pitch. This also explains why the Europeans and the U.S. seem to have such a different outlook on the very business-relevant topic of taxation.
Increased Global Competition
Whether it is the digital tax or the ongoing, broader debate around global minimum standards for corporate taxation in general, the shifting debate in Europe’s rich democracies has triggered a gradual European movement in the direction of introducing minimal standards – again, not least to keep the political allies of the U.S. president’s political movement away from power in Europe. But while Germany, for instance, has been fearing both U.S. retaliation and the implication for the global competitiveness of European companies, France has been especially active in this area. In a deal with the U.S., it was agreed that France would go ahead with its national initiative for a digital tax, and that Paris would reimburse companies if a solution could be agreed with Washington on the global stage (such as the OECD tax effort) within two years.
Whether such an agreement can be reached is questionable against the backdrop of continued global competition. The bigger question to watch might be how Germany responds to a continued French push for a digital tax and other measures, if no agreement can be reached with the U.S. The only thing that is safe to say is that both international cooperation, as well as domestic drivers will continue to be propelled decisively by political calculations.
For companies and investors alike, it will be crucial to keep a close eye on the domestic politics driving these confrontations – and not to get caught in the idea of single “deals” resolving the underlying issues. There are many angles from which we can consider the new geopolitical setup, whether we look through a strategic lens, or view it from the perspective of domestic winners and losers of globalization. But in any case, relations between the three big actors in the world economy – China, the EU, and the U.S. – will continue to remain politicized. In 2020, we will likely see more of this, from speculation on EU-U.S. trade talks, to continued vigilance in Europe vis-à-vis Chinese investments, including all the consequences this will have for the internal governance of the single market, for instance in the fields of industrial, tax, and competition policies.