Europe on a Knife Edge

A few hours from now British Prime Minister Theresa May will face a no confidence vote from her own party, and as of this moment I’d bet she will lose the vote and be ousted. Whether this will lead to a general No Confidence vote of the entire House of Commons, which would result in an immediate general election, is harder to forecast. Much will depend on whether the Tory Party can unite around a successor, and even more so on the attitude of their coalition partners, the Northern Ireland Unionists, that provide the Tories with their bare working majority in the House. It is hard to imagine that their interests and opinions would fare better under a Labour government headed by IRA cheerleader Jeremy Corbyn, but you never know.

The chaotic scene in Whitehall is matched by the chaotic scene on the streets of Paris, and the teetering government of Emmanuel Macron. Macron is an object lesson in the ignorance of the next generation: he actually channeled Jimmy Carter in his address to the nation Monday night, saying that France was suffering from a “malaise.” The only thing missing was a cardigan sweater.

Cardigan sweaters may become a lot more expensive in France and throughout Europe if Britain exits the European Union in a few months with no deal at all, but that is only the beginning of the broader peril of the moment. Over at Bloomberg Tyler Cowen explainshow Macron’s “reforms” are driving France steadily out of conformity with EU fiscal rules:

Western societies, including France, are being transformed by immigration beyond what many of their native-born citizens had expected. The rising prominence of terror, migration and security issues have boosted some of the less salubrious sides of the right wing. Add to that mix wage stagnation and the increasingly common view — held by 91 percent in France — that today’s children will not have better lives than their parents. Finally, the decline of organized religion, especially pronounced in Western Europe, has created a spiritual vacuum and a crisis of meaning.. .

[C]onsider Macron’s response to the protests, outlined in his recently televised speech. In lieu of ideas, or for that matter cold-hearted technocracy, he served up abject financial pandering. He promised to boost the minimum wage by 100 euros per month, but at no cost to employers. He also promised no taxes or charges on overtime in 2019, and he requested employers to pay year-end bonuses, which would be tax-exempt, and he canceled the charges on some pensions.. .

The effect of these fillips are explained in another Bloomberg piece by Ferdinando Giugliano:

These policies are expected to cost about 10 billion euros ($11.3 billion), according to some initial estimates. Macron wants to crack down on tax avoidance, but the smart money is on his package being funded mainly via extra borrowing. France’s budget deficit was expected to rise to 2.8 percent of gross domestic product next year, largely because of one-off measures, and fall to 1.4 percent in 2020. It may now climb to as much as 3.5 percent, according to Les Echos, a French newspaper.

The European Commission will find it hard to turn a blind eye. France had already pledged to reduce the structural deficit by 0.2 percent of GDP next year, according to the Commission’s estimates, less than what Brussels expected. If sustained over time, the new giveaways could turn this reduction into an outright increase, putting France in the same camp as Italy. Hardly the way to convince Berlin that Paris has abandoned its old ways.

But back to Tyler Cowen:

France now runs some chance of becoming the next Italy, complete with fiscal irresponsibility, and it is hard to see the nation as having the political strength or domestic consensus to hold the European Union together. The French have an amazing country: high labor productivity, a quality civil service, incredible vacations, and perhaps the most refined level of cultural taste in the world. Yet all that, sadly, is not enough. A quick comparison with 19th-century French culture, with its emphasis on progress, utopia and the rationalization of social systems, shows just how much the forward-looking perspective is lacking.

Italy is already in defiance—quite proudly so—of EU fiscal regulations, and if France follows it will likely launch a new Eurozone crisis. Already the Eurozone economy is slowing and showing signs of weakness.

What this all means is that the EU is certain to impose harsh conditions on Britain in a no-deal “hard” Brexit, so as to provide a lesson to any other nations thinking of following them. But one can easily imagine Marine le Pen winning an outright majority at the next French general election on a platform of “Frexit.” And then Italy would likely follow. And then Germany starts making tanks again?

Responses