Pasty agreements, Berlusconian drugs, and geopolitical boxing

Before long we can expect rising European tensions rather than surging markets.

To start off with THE European leader, Angela Merkel now heads a Grand Coalition which consists of her conservative CDU/CSU and the social-democratic SPD.

A broadly supported agreement is a good thing but comes at a price. Parties have not so much picked over the bones of the accord as thrown a bone to the putative coalition partners. The Frankfurter Allgemeine Zeitung called the agreement overcooked mush that will be easy for everyone to digest.

There is a risk that, to please the electorate, the government will backtrack on many of the reforms that previous (SPD) Chancellor Schroeder implemented. The retirement age will be lowered to 63 (if people have paid pension contributions for 45 years). In addition, the job market threatens to become less flexible. This could damage Germany's competitiveness and slow down economic growth. In regard to the Eurozone, not much has changed: tough reforms and a prudent budget policy continue to be on the cards.

It was  slightly surprising that investors welcomed the "GroKo agreement" with open arms. There is little new under the sun and the few changes that have been made do not bode well for the markets. Among others, the service sector is not opened up and the pro-European stance is not entirely convincing. Perhaps markets were enthusiastic because they envisage a broadly supported, stable coalition that can be expected to rule for four years. (One of the reasons is that the minimum wage will only become unconditional in 2017, so there is a low chance the SPD will leave the coalition early).

Political stability is positive, but  Germany risks becoming too passive when it comes to streamlining its economy or creatively addressing Eurozone problems.

Berlusconi continues to intoxicate Italy

In Italy, Berlusconi has been thrown out of the Senate because of his fraud conviction. Berlusconi may be barred from public office but that does not mean he will step down as political leader. Beppe Grillo of the M5S (runner-up in the most recent elections) does not have a seat in parliament either. In any case, the former three-time PM will not hesitate to trip up the government to serve his personal interests.

That Berlusconi’s party has broken up means that Letta’s cabinet has become less vulnerable. Yet, Italy is struggling even without a government crisis. As Barbara Spinelli wrote: “Berlusconism is still here. And it will not be easy to wean ourselves off this drug that has fascinated not only politicians and parties, but the entire society…. Without a profound look deep into our conscience, this legacy will continue to intoxicate Italy.”

At the time of the Costa Concordia disaster in January 2012, Italy experienced a bout of self-castigation. The coastguard who tried to order commander Schettino back on board was seen as a hero whereas the Costa captain stood for everything that was wrong with Italy.

In politics, not enough has changed in the two years since then. It would also not be realistic to expect Italy to make a clean sweep in the space of a couple of years. Recent economic data is a case in point. The jobless rate is almost 13%%. Youth unemployment is at 42% and rising.

Rising tensions and Europe’s shortcomings

Broader trends are also a cause for concern. Across Europe politicians are making populist, isolationist, and protectionist statements or presenting proposals to pander to these sentiments. Some even seem to display racist tendencies.

The economic foundations under the European integration project – freedom of movement for goods and services, capital and individuals – are crumbling. Some areas were never that free in the first place (Germany, which is supposedly exemplary, guards some segments of its services sector).

Europe's shortcomings when dealing with the outside world are increasingly evident. The EU is losing clout because it appears divided, inactive, and weak. More than ever before, the economic/political crisis causes states to look inward and become suspicious of each other. This has been a contributing factor in the Ukraine slipping out of Europe's grasp into Moscow’s hands. In its divided state, Europe was not strong enough to take forceful action.

The chain of events shows that Germany is not all-powerful. Ironically, it was the first time that Germany went out on a limb to champion an EU policy in eastern Europe that was guaranteed to irritate Russia. Whereas Merkel usually gets her way, this time she – and with her the entire EU – came off worst.

A fragmented Europe also means that one-sided and narrowly defined national interests are hampering progress towards a banking union, towards a meaningful CO2 emissions pact etc.

In short, Europe faces major problems at national and EU level. This makes it harder to tackle the political and economic crises. More of these issues will come to light with further attempts to form a banking union, stress tests on the  largest banks and looming European elections.

Andy Langenkamp is political analyst at ECR Research and ICC.

[[{"type":"media","view_mode":"media_original","fid":"3504","attributes":{"alt":"","class":"media-image","height":"112","width":"112"}}]]