European Disharmony

2 mins read

Oliver Smith

Investment Director

Expectations for the third round of trade talks, beginning this week, between the UK and EU, are understandably low. Britain demands tariff free trade, while the EU fears competition from across the channel, insisting on a level playing field for environmental and competition standards and labour markets. With Boris Johnson unlikely to accept this, a new trade treaty agreed before the December deadline appears ambitious, though is still possible.  

Yet while the EU will put on a united front at the trade talks, there are clear signs that the institution itself is under considerable pressure.

Tensions between the EU member states have always simmered away, with the indebted south, struggling with an uncompetitive exchange rate, unable to pursue reflationary policies, and falling short of Germany’s strict balanced budget goals.

The coronavirus crisis has again illustrated that a collection of sovereign states with neither political nor economic unity, is both slow to make decisions and even slower to adopt significant changes.

In the past three months Italy felt notably aggrieved when other European nations declined to help in providing vital PPE equipment for its health service, while just last week the German Constitutional Court (GCC) in Karlsruhe questioned the legality of the ECB’s sovereign debt buying, because ‘proportionality’ had not been verified.

According to George Soros, who was interviewed on Monday, the GCC had consulted with the European Court of Justice (a higher court under EU law) and then decided to challenge it, which will only embolden nations such as Hungary and Poland in pursuing their own national goals. 

While legal wrangling will continue, the EU has a tough choice to make in the coming weeks and months. Collapsing tax receipts, escalating unemployment and unprecedented government spending are going to require largescale debt issuance, with Italy looking increasingly unstable in the bond markets.

To get through the next few months, Europe will need greater solidarity than at any point in the last 50 years, or else the Eurozone could be placed under intolerable strain.