Europe in the coming weeks will be facing a host of political and economic challenges that are spooking international investors, endangering American interests and worrying even the most pro-European voices that their historic union has reached its limits in pooling sovereignty and burying historic resentments.
The world is understandably focused on the U.S. political drama circling around President Donald Trump ahead of midterm elections on November 6, and after this week’s mercifully failed letter bombs against Trump opponents. The full impact is also not yet known from the Jamal Khashoggi murder story, the focus of my last two columns, after Saudi officials this week conceded the journalist’s killing had been premeditated – without saying who ordered it.
Yet for all the significance of those two unfolding stories, the cumulative threats now facing the European Union could be of longer term and greater geopolitical significance. That’s because the same brand of nationalism and populism that unifies Trump’s voters, and inflames his detractors at home and abroad, is a far more fundamental challenge to one of history’s great experiments, the European integration project that evolved after World War II.
Whatever happens in the United States in November, it’s a fair bet that California will remain in the union and that Texas will continue to use the dollar as its currency. However matters unfold in Saudi Arabia, the monarchy itself is likely to survive. In Europe, however, the very nature of the project is in question that ended war, bound the continent together as a growing community of common purpose, prosperity and democracy – 28 countries with a combined GDP of $18.8 trillion.
In the coming days, three stories will take center stage in this drama: in Italy, Great Britain and, possibly of greatest consequence, Germany.
With Italy, the European Union took the unprecedented step this week of rejecting the budget presented to it by the newly elected, populist government in Rome.
Italy now has three weeks to provide a revised, more fiscally prudent budget, though it may well be financial markets that call the final shots. If Italian bond yields rise too far, that poses a serious financial risk not only to Italy but the larger Eurozone. The spread between Italian and German 10-year notes last week hit 3.3%, the widest gap in five years.
However, current Italian leaders were elected to defy Brussels, and their public support has increased thus far through the showdown. Italian Deputy Prime Minister Salvini, leader of the Northern League, jokes about bonds that “spread” is what he puts on his breakfast bread.
Yet if ratings agencies move Italy’s debt to junk status, and Moody’s has cut it to just one level above that, all bets are off for the European Union’s fourth largest economy, holding the world’s third highest level of sovereign debt.
Even if a budget deal is made that quells the current risks, what won’t go away is the fact that the popularly elected Italian leadership, which has turned its vote-getting attacks on African and Muslim immigrants, now has shifted public animus to European officials.
Second, regarding Brexit, Britain and the EU failed this month to finalize terms of their divorce settlement at a summit of European leaders.
At a stormy meeting of Prime Minister Theresa May’s cabinet this week, she seems to have lost control of the warring factions of her cabinet over the draft agreement. With this coming Monday’s UK budget meeting approaching, “Britain seems headed for a no-deal Brexit at worst or many months of crisis at best,” the Economist wrote last week.
However the UK exits, it will leave the European Union as a poorer and less influential global player, removing from its ranks its second largest economy and its most reasonable, pragmatic, liberal and pro-American voice on trade, foreign policy and security issues.
The European elephant in the room is Angela Merkel’s Germany ahead of Sunday’s crucial elections in the federal state of Hesse, home to Germany’s financial capital Frankfurt am Main.
Alongside France, Germany since World War II has been the driver of European integration and transatlantic bonds. Yet now it is politically adrift and fragmented with its political center, commonly known as Volksparteien, imploding.
If polls ahead of Sunday’s general election are correct, Merkel’s CDU will suffer one of its worst-ever outcomes in Hesse in more than 50 years. A bad result for her and the junior partner in her grand-coalition, the SPD could be the final blow for Merkel, who has been Europe’s glue and most influential leader for more than a decade, just six weeks before she stands for party re-election.
With European parliamentary elections in the summer of 2019, what lurks beneath these stories is a growing divide between populist and non-populist governments, with France, Germany, the Netherlands and others on one side, and the Italians, Poles and Hungarians on the other. An even larger risk, however, could be that Europeans more widely are losing their sense for a shared fate and mission.
What one shouldn’t underestimate is both the stakes for the United States in Europe – and the role the Trump administration has been playing, either by design or indifference.
What’s too little understood in Washington and Europe alike is the crucial role the U.S. played in the development of a unified, secure and economically strong Europe. Indeed, today’s modern, prosperous, democratic European Union of 28 states – including some eleven former members of the Soviet bloc – is one of the United States’ greatest foreign policy accomplishment.
There’s even less appreciation in Washington of the current dangers facing Europe and their potential impact on U.S. global interests, given their role as America’s crucial, go-to partners throughout the past seven decades as well as it being America’s largest trading partner.
Some senior European officials have privately said to me that they believe Trump’s approach to Europe goes beyond benign neglect to that of actively sowing divisions – through his support for Brexit and Italian populists, through his trade policies and potential targeting of German automobiles, through his approach to issues like Iran and, most recently, through his withdrawal from the Intermediate-Range Nuclear Forces agreement of 1987.
Though one can debate the merits of some of these moves, for European officials they add up either to strategic indifference or divisive intention. There is no doubt Trump’s election has been an inspiration and model for European populists. Indeed, former administration official and Trump advisor Steve Bannon has worked to galvanize them, though with limited success.
The future of Europe lies primarily in Europe’s hands, but it would be a historic mistake to underestimate American influence. After midterm elections, Trump would be wise – as part of his increased focus on the seminal challenge of our age from China – to recommit the United States to European integration at a time when this enduring U.S. strategic accomplishment is in peril.
This piece originally appeared on CNBC.com
Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on Twitter @FredKempe. Subscribe to his weekly InflectionPoints newsletter.