STRATFOR: Europe – Annual Forecast 2016

Europe

Germany and France Move to the Right

This will be a transition year for Germany and France. Both countries have elections in 2017, and politically both are moving in a more nationalist and Euroskeptical direction. The foundation of the European Union, the Franco-German relationship, will show signs of cracking as the interests of Paris and Berlin inevitably begin to diverge. Germany will oppose France’s proposals to deepen continental integration (especially among eurozone countries) and increase spending across the bloc. Berlin and Paris will find it increasingly difficult to find common ground on measures to protect the European Union.

German Chancellor Angela Merkel will come under pressure as divisions widen between conservative and progressive members of her coalition. Regional elections in March will serve as a popularity test for Merkel’s Christian Democratic Union. Should her party perform poorly in the elections, calls for her resignation will grow louder.

Thanks to pressure from the conservatives, border controls will remain frequent, and Berlin will look for ways to prevent people from arriving in Germany. The conservatives will also compel Berlin to take a tougher stance on Greece, especially because Athens, in an effort to avoid social unrest, will drag its feet in enacting economic reforms.

Greece Remains Troubled

In Greece, the government of Prime Minister Alexis Tsipras faces two main problems: political fragility and social unrest. The Greek economy has another year of negligible growth and extremely high unemployment ahead of it. This will lead to repeated protests and frequent conflicts within the government, which in turn will force the administration to slow the process of reform.

A collapse of the Greek government cannot be ruled out because Tsipras leads only a very small parliamentary majority. However, the Greek establishment wants to avoid early elections, so even if the government fell, it would be replaced by a technocratic or coalition government that would still be able to approve legislation.

In 2016, Greece’s main threat will be social unrest, not debt repayments. A repeat of the 2015 crisis seems unlikely because Greece does not face a particularly pressing calendar of debt maturities. This means that the risk of a Greek default or exit from the eurozone is lower than in 2015. But Germany’s tenacity and Greece’s resistance will make every bailout review tense, and negotiations over potential debt relief will probably be delayed until late 2016. We do not expect Greece to exit the eurozone in 2016, but Greece’s problems are far from resolved. Increasing resistance to reforms, initially among the public but then in the political sphere as well, set the country up for another inevitable confrontation with its creditors down the line.

Political Fragility in Southern Europe

In Portugal, a fragile coalition of left-wing parties will struggle to remain in power, and early elections are likely. Following Dec. 20 elections, Spain will spend the first weeks of the year trying to form a sustainable government. An agreement will finally be reached, but Spain’s limited experience with coalition governments will make decision-making slow and cumbersome.

Neither Portugal nor Spain will return to the financial instability that defined the early years of the European crisis. Most of the main political parties in both countries are pro-market and defend the membership of their countries in the eurozone, so political frictions will not lead to a dramatic change of direction in Lisbon or Madrid. In addition, a combination of low oil prices and the European Central Bank’s intervention in debt markets should prevent an escalation of the economic crisis in the Iberian Peninsula.

However, both countries will probably reverse some of the reforms that were applied by their predecessors. In the long run, this will re-create the conditions that led to the crisis in the first place. The behavior of countries in Mediterranean Europe will also make the European Commission increasingly ineffective.

In Italy, the government of Prime Minister Matteo Renzi will seek a balance between introducing economic reforms and increasing public spending. One of the main challenges for Rome will be the introduction of reforms in the pension system to make it more sustainable. Italy will also hold a referendum in the second half of the year on the constitutional reforms that were approved in 2015.

Renzi will continue to deal with resistance within his own party, but the prime minister will probably manage to make his reforms. A key event to watch for in 2016 is the evolution of the center-right as conservative and Euroskeptical forces try to form a common front to compete in the next elections (which are technically scheduled for 2018 but will probably happen before then). Italy’s underlying economic situation will continue to deteriorate; Rome will increase spending while failing to deal with its debt problems, creating problems for itself (and Europe) in the near future. But although increasingly troublesome indicators are likely to arise — such as rating agency downgrades or intensifying problems in the Italian banking sector — no systemic crisis is expected in 2016, mainly because of the European Central Bank’s ongoing bond-buying program.

The British Question

One of the main issues in 2016 will be the British referendum on EU membership. The vote is expected in late 2016 or early 2017. Some of London’s proposals for EU reform, such as reducing red tape and increasing competitiveness, are uncontroversial and are likely to produce an agreement among member states. The United Kingdom will probably also be promised protection for non-eurozone countries against measures that affect the currency union, and London will even receive the ability to opt out of the concept of an “ever closer union.” The United Kingdom’s push to reduce in-work benefits for immigrants will prove more troublesome and will require London to compromise.

London’s proposals for EU reform will produce different alliances over different issues. Some countries, including the Netherlands and Poland, will support the demands to give national parliaments veto power over EU legislation. Other countries, mostly in Northern Europe, will support the demands to restrict access to welfare for immigrants, but countries in Central and Eastern Europe will resist them. Countries in Central and Eastern Europe (specifically Poland, Hungary and Romania) will defend policies to protect non-eurozone countries from eurozone decisions.

As a result, British Prime Minister David Cameron is likely to make compromises and present them as a political victory at home. Though opinion polls show very different results when it comes to British citizens’ view of EU membership, London will try to keep the United Kingdom in the bloc. If there is a referendum on the issue in 2016, the “in” side will win.

The Migration Crisis Risks Reigniting the Balkans

The immigration crisis will continue its cyclical behavior: During the early months of the year, cold temperatures and bad weather will probably lead to a reduction in the inflow of people into Europe. The flow will increase as summer approaches, but asylum seekers will find a different Europe in 2016. Border controls will become more frequent, and countries along the so-called Balkan routes will be less tolerant of immigrants crossing their territories. For the first time since its creation, the Schengen Agreement will not end the year as it began it; either free movement will be somewhat constrained, or fewer countries will be members.

As a result, asylum seekers will find it harder to reach Northern Europe. Some of them will be forced to look for new routes while others will be stuck in the Western Balkans. This will increase the probability of violence in the region as some people become involuntary immigrants in countries already experiencing high unemployment, ethnic tension and fractious politics.

The Eastern Front

2016 will be intense for Poland and Romania, the largest countries on the eastern EU border. In Poland, the conservative government will push the European Union to maintain a hard-line stance on Russia and will criticize Germany’s handling of EU issues, including immigration and relations with Moscow. Berlin will argue that the Minsk peace agreement is not being completely respected and will pressure Southern European countries that have more flexible relations with Russia to continue the sanctions. At the same time, Berlin will try to protect its energy ties with Moscow (for example, by defending the Nord Stream 2 project), which will antagonize Germany’s eastern neighbors.

Poland will demand a greater NATO presence in Central and Eastern Europe while trying to develop stronger ties with the Visegrad Group (which also includes Hungary, the Czech Republic and Slovakia) and Romania. As Poland becomes more distant from Brussels and Berlin, it will draw closer to the Visegrad countries and occasionally the United Kingdom. Warsaw will also make controversial moves at home, such as lowering the retirement age and creating special taxes on sectors such as banks and supermarkets. These policies will invite criticism from both the European Union and foreign investors.

In Romania, the technocratic government will have an auspicious start but will lose steam over time. Bucharest will remain committed to its alliance with the United States and its membership in NATO and the European Union. Romania will also continue to support Moldova’s path to EU accession and maintain a cold relationship with Russia. However, political support for the government will erode gradually, especially as the parties that support the technocratic administration begin making their own calculations ahead of the general elections in December.

Countries along the European Union’s eastern border will spend 2016 trying to improve regional cooperation and to boost NATO’s engagement in the area. During a NATO summit in Warsaw in July, Poland and others will request a permanent NATO presence in Eastern Europe. Some members of the alliance, most notably Germany, will resist this idea, as will some Central and Eastern European countries that prefer to stick to troop rotations as they try to manage relations with Moscow.

Annual Forecast 2016 is republished with permission of Stratfor

https://www.stratfor.com/forecast/annual-forecast-2016