There are many different ways the European Union could fall apart in the coming weeks, but all of them have a
common thread: the inability of national politicians to adopt a European perspective when confronted by common European
This is as true of the crisis surrounding the U.K.’s membership of the EU and the migration crisis, which will
dominate a crunch EU leaders’ summit this week, as it is true of the eurozone economic crisis, which have burst back on
the agenda following recent moves in financial markets.
Yet the draft deal that EU leaders will discuss does nothing of the sort. It consists of a series of carve-outs for
the U.K. carefully crafted to stop other countries taking advantage of them. Indeed, EU officials are clear that if
other member states try to make use of a controversial “emergency brake” that will allow the U.K. to restrict welfare
payments to EU migrants for four years, the deal with the U.K. government would fall apart.
The deal may fall apart anyway: European Council President Donald Tusk has warned that the process is “fragile”.
Mr. Cameron can’t even be sure he will achieve even his limited objective of persuading key figures in his party to back
his deal, complicating his efforts to win the referendum, which he hopes to hold in June.
Either way, the deal looks likely to make the EU harder rather than easier to manage. The price of trying to keep
Britain in the EU has been to put in question core EU principles including nondiscrimination against EU citizens, the
free movement of workers and the integrity of the single market rule book. That looks like a recipe to embolden
nationalists across the continent, showing that unilateral threats can deliver results.
Similarly, nationalist thinking lies at the heart of the difficulties in managing the migration crisis. Northern
and Eastern European politicians blame Southern Europeans for failing to control their borders or implement agreed
Southern European politicians blame overgenerous Northern European welfare systems, which act as a magnet to
migrants. Angela Merkel stands almost alone among national politicians in insisting that migration is a common European
challenge that requires a common response.
Yet so far, her calls for stronger border controls and greater sharing of the burden of processing applications
have achieved little other than to undermine her own domestic political position. Instead, Greece now finds itself
threatened with suspension from the Schengen passport-free travel zone, which some European governments now fear could
trigger a domino effect, leading to an unraveling of wider EU integration.
But it is in the economic sphere that nationalism may yet wreak the greatest havoc. Last week’s volatility in
global markets has been widely attributed to a loss of confidence in central banks. That is particularly worrying in the
European context because the European Central Bank has consistently proved to be the one institution in Europe with the
power and the willingness to act in what it perceives to be the wider European interest.
Through its liquidity operations and more recently its government bond-buying program, the ECB has so far held the
eurozone together and helped engineer a modest recovery but it hasn’t been able to engineer a return to inflation to its
target of close to but below 2%, which would ease concerns about the eurozone’s large debt burden.
Now the market appears to fear that the ECB is running out of ammunition: Steps it might take to boost inflation
may actually make the economic situation worse, not least through what the market now clearly believes to be the dire
consequences of negative interest rates on the banking system.
If the ECB now finds its credibility in question, much of the blame can be laid at the door of national politicians
who for years failed to internalize the implications of membership of a single currency. If growth is weak and inflation
is low in the eurozone, that is in part because national governments failed to use the time gained via ECB action to
take steps to tackle debt overhangs and improve productivity and potential growth via reforms to labor markets,
insolvency regimes, product and services markets and public administrations.
Worse, rules designed to encourage governments to modernize their economies have clearly failed, as the governors
of the German and French central banks acknowledged in a joint op-ed column last week. Instead, national governments
under pressure from voters are increasingly threatening to reverse previous reform achievements, not least in Portugal,
whose 10-year bond yield rose above 4% at one point last week–despite the support of the ECB’s bond-buying program.
Can the EU reverse its drift to nationalism? More than the stability of its financial system is at stake.
(END) Dow Jones Newswires 02-14-161439ET Copyright (c) 2016 Dow Jones & Company, Inc.