EIU: Multiple Crises Facing the EU Mean it is Stretched to the Limit

A potential Brexit, instability in Greece, and the migration crisis could all come to a head in mid-2016, and if that happened it could push the EU over the edge.  This is the key finding of a new report, ‘Europe stretched to the limit’, published by The Economist Intelligence Unit.

The report is published amid growing nervousness about the UK’s position in the EU. The “remain” campaign has suffered a turbulent few weeks of self-inflicted damage. David Cameron has now twice allowed an air of crisis to settle over the UK government, first with a botched budget and a senior resignation, and then with Cameron's fumbled response to the Panama leaks. The EIU still expects the UK to stay in the EU, but the risk of a Brexit has risen.

Europe's crisis was primarily economic in character to start with, but it has deepened since then. The economic issues haven't gone away, but they are now compounded by even more fundamental questions relating to borders, sovereignty, culture, security and democracy. The EIU's new report explores the key challenges that the region faces over the next five years.

The much-reported migrant crisis is a graver risk to Europe than the financial and economic crisis that preceded it. The euro zone responded to financial crisis by repeatedly “kicking the can down the road”, but that’s not an option when thousands of refugees and migrants are arriving every day.

The report says the the EU-Turkey deal has bought some breathing space, but it is beset by formidable political, legal and practical problems. "If it collapses, we are back at square one and facing a crisis with the potential to pull the EU apart."

The EIU expects that national governments and supranational institutions will manage to "muddle through" most of Europe’s crises over a medium-term horizon, albeit at a significant political and economic cost.

Greece is the exception to this rule: it is more likely than not (60%) that Greece will have left the euro zone by 2020. It is questionable whether any Greek government, of any political complexion, could implement the measures required under the third bail-out programme.  A Grexit would represent a huge political failure for the bloc, with potentially destabilising consequences: the principle of irreversibility would have been shattered.

The biggest risk facing Europe

However, the biggest risk facing Europe, according to the EIU, is that multiple challenges will come to a head simultaneously, overwhelming the region’s policymakers. This could happen as soon as mid-2016, when the UK votes on whether or not to remain in the EU, Greece has large debt payments falling due and this year's migrant influx is likely to peak.

"Policymakers appear increasingly unable to understand and respond to the desires of their electorates,” says Aengus Collins, Country Forecast Director at The Economist Intelligence Unit.  “Nowhere are people more jittery about electoral risk right now than in the UK.”

The EIU is sticking with its years-old forecast that in June the UK will vote to remain in the EU—the pull of the status quo will strengthen as the vote draws closer and the risks of Brexit crystallise. “But all the momentum has been with the "leave" campaign in recent weeks and nothing can be taken for granted."

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