European Commission Offers 5 Scenarios

Later this month, Europe celebrates the 60th anniversary of the Treaty of
Rome, which established the European Economic Community. 
Very near to
the anniversary, which was not one of the original members,the UK will likely begin
the process that will lead to its exit.  This,
coupled with some reluctance of some new members in Eastern and Central Europe
to embrace liberal values of the west, and the ongoing economic adjustment in
the EMU has posed an existential crisis for European integration. 

The European Commission offered a white paper that suggests five future
scenarios for the future of Europe.
  It will be a discussion point in
the coming months, with Juncker’s State of the Union speech in September will
likely focus on it before preliminary conclusions are made at the heads of state summit at the end of the
year. 

This note is to present the scenarios so that the general framework can be appreciated by investors. The scenarios
address the question of what Europe may look like in 2025.  They are
designed to cover a range of possibilities.  They are not mutually
exclusive or exhaustive.  

1.  Carrying on:    It is not simply the status quo but assumes the implementation of reform
agendas.  Free movement of people
remains, though security is reinforced
Some border frictions remain

2.  Single Market:  EU members do not agree on new policy
areas to integrate.  The focus is on
the single market.  Free-movement of people
becomes more difficult.
This returns
the EU to its roots. 

3.  Multi-Speed:   The white paper does not use the
multi-speed terminology but discusses “coalitions of the willing”
that could pursue greater integration on a range of specific policy areas, such
as defense, internal security, or social issues.  This is a recognition of different appetites for integration. 

4.  Narrower Focus:  The Commission calls this scenario
“Doing Less More Efficiently.” 
Rather than a broad range of activities, the EU narrows its focus to policy
areas where it is perceived to add value.    This is a smaller form of integration
and represents a recognition that some limit has been reached.  It is consistent with a strengthening of
national identities. 

5.  Enhanced Integration:  More power, resources, and
decision-making are shared
Deliberation process is expedited and
decisions on the European level are made more quickly and implemented by
national authorities.

These scenarios are meant to launch the year-long discussion of the
future of the European project. 
The EC will issue several more
discussion (reflection) papers.  Some European officials were wary of the
white paper ahead of the spate of elections beginning with the Dutch in a
couple of weeks.   It is possible, and we consider likely, that
populist-nationalist forces are not part of the next governments in the
Netherlands, France or Germany.  The
power of national identities should not be under-estimated, and its influence
on policy debates may exceed the electoral success. 

Populism-nationalism does not appear to be reducible to pure
macroeconomic variables.
  Where it has enjoyed initial success has
mostly been in economies that are doing relatively better like Hungary, Poland, and the Czech Republic.  The US
and UK emerged from the Great Financial Crisis better than most other high
income countries.  The US and UK economies were larger than ever, and by at least conventional measures,
the labor market was well on its way to full employment. 

Many had worried that the UK decision to leave the EU was going to lower
the barrier to exit and encourage other countries to leave.
  The
elections are still ahead of us, but the opinion polls suggest that to the
contrary, support for the EU has risen.  The project has been attacked, and it is as if the wagons are
circling.   Just like the desire for national identity cannot be reduced
to a macroeconomic variable, European
integration is not simply about economic.  Since the Greek crisis first
surfaced in 2010, the lack of appreciating the non-economic considerations,
especially political will, saw pessimism and cynicism cloud investment decision and led to speculation of the collapse
of EMU and the EU. 

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