2018 was the year of unending disorder in Europe. Even its core, which used to be considered a source of political stability, was affected by it: Germany, France and Britain, the three traditional powers of Western Europe. Currently, all three countries are governed by a weakened executive power and the problems at home make the executives focus inwards instead of on the European project.

Theresa May recently won a vote of confidence from Conservative MPs and, under party rules, she cannot be formally challenged again for another 12 months. However, what is more relevant is the crisis that Britain now faces. Theresa May has less than 100 days left to get the Brexit withdrawal agreement to pass her parliament. Chances are slim that she will succeed and the cabinet has already decided to ramp up preparations for a no-deal Brexit amid uncertainty over the fate of May’s proposed EU exit deal. A no-deal Brexit would have grave consequences for the U.K. economy. All trade deals the U.K. currently benefits from would be disrupted, the car industry would be affected, the financial industry would be hit as financial institutions would have to establish bases in other EU countries and tariffs and transaction costs could hurt profits of British companies, as 70% of FTSE earnings come from overseas. These challenges could lead to a U.K. recession.

The French leader Emmanuel Macron finds himself in the midst of the biggest political crisis of his presidency. While his 2017 election victory temporarily outshined the divisions in the country where almost 50% of people backed extremist candidates, the end of 2018 confronted Macron with a month-long revolt against his reforms: demonstrations by Yellow Vest protesters. This month, his approval rating fell to 23%. In order to defuse the crisis, he offered tax reductions and wage increases to the working class. These budget concessions haven’t abated the anger of the protesters and, what is more, with these concessions, Macron risks budgetary indiscipline as France is already barely able to follow the EU 3% guidelines. Not only does this cloud over hopes of Macron providing decisive leadership at home, but likewise for Europe.

The French-German alliance at the heart of European integration is in trouble, as Merkel is also in a position of weakness. She is stepping down as leader of her party and will not stand for reelection. She is already officially a lame duck. Thus, Europe’s longest-serving democratically elected leader is forced to decelerate her efforts on European affairs.

Weakened political leadership in the U.K., France and Germany especially complicates region-wide coordination and decision-making. This will mean a weaker bloc in the wider international arena. For instance, it compromises transatlantic affairs. Unstable leadership in the three countries during a time of global challenges such as a trade war, a resurgent China, an assertive Russia, and a possible new crisis in Libya sparking a wave of migration to Europe, poses a risk for Europe. The deteriorated positions of Merkel, Macron and May and the fact that they are urged to look inward instead of operating in unity, point to the beginning of a fragmentation scenario.

However, the theme of weak executives transcends the traditional Western leaders. In Spain, government majority is thin and popular anger is rising over issues of migration in the form of an upcoming far-right party, Vox. In Sweden, after more than three months of political deadlock following elections, no new government will be formed in 2018 anymore. Earlier this month, Belgian Prime Minister Charles Michel signed the Marrakesh pact, despite losing four ministers from former coalition partner the New Flemish Alliance and could be forced to hold elections in February if he fails to win parliament’s backing after his decision to back the deal brought down his ruling coalition. In the meantime, in Hungary, thousands took to the streets of Budapest. Prime Minister Viktor Orbán’s Fidesz government faces protests against a “slave law” allowing employers to force employees to work overtime. But aside from a repeal of that law, the protesters are also demanding independent courts and free media and opposition parties are collaborating on a joint strategy to put further pressure on Orbán. Furthermore, the Czech Prime Minister Andrej Babis survived a no-confidence vote amid corruption allegations in November, but several thousands of protesters demanded that he step down. Finally, Italy will be Europe’s biggest problem child for the coming year in terms of financial risks. Italian Prime Minister Giuseppe Conte, who is not even the leader of his own government, has had to give in a little to avoid sanctions from Brussels and reach an agreement with the European Union to allow Italy to run a budget deficit of 2.04% next year. However, according to Valdis Dombrovskis, the EU’s most senior official dealing with the euro and financial systems, the deal “is not ideal”. The agreement is rather a pause than an end to the risk of a clash between Rome and Brussels. Europe’s weak growth, especially Italy’s weak economy, is seen as the biggest risk for Europe in 2019.

The next test for Europe will be the European Parliament elections in May next year. Eurosceptic alliances might use this momentum to organize, such as the Alliance of Conservatives and Reformists in Europe that was established last month. This month, a poll revealed that one in four Europeans support populist parties, a number that has tripled over the past 20 years and a force that will challenge the established political order across the continent. Establishment parties have already been struggling to present a compelling case for European unity over the last years. It makes life more difficult for pro-European politicians wanting reforms and would mean a break with the four-decade rule of European social democrats.  

RISKS MARKED ON THE RISK RADAR AS NUMBER 2: weak Southern European Economies, large-scale migration

The Risk Radar is a monthly research report in which we monitor and qualify the world’s biggest risks to watch. Our updates are based on the estimated likelihood and impact of these risks. This report provides an additional ‘risk flection’ from a political, social, economic and technological perspective.
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