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Europe Stretched to Limit of its Policy-Making Capacities

22/12/2015 15:44 GMT | Updated 21/12/2016 10:12 GMT

After years of corrosive economic crisis, the EU will struggle to respond to a mounting border-control crisis.

This year we have moved into a new chapter of Europe's rolling crisis. The first stage was dominated by economic issues. The focus is now shifting to problems concerning borders, sovereignty and security. The November 13th terrorist attacks in Paris crystallise already-heightened concerns about border controls in the EU; these concerns represent a threat to European integration. We expect an erosion of the Schengen area, which will be starker than the limited restrictions imposed on free movement on capital during the euro zone crisis have been.

The bloc's default policy response will remain one of "muddling through", with member states re-imposing national border controls on an ad hoc and inconsistent basis while region-wide policies and resources are put in place. We expect this messy process to avert a substantial unwinding of EU integration, but it will further sap the political legitimacy of the EU's supranational institutions and policies.

The immediate consequences of last month's terrorist attacks in Paris will be felt domestically in France and Belgium, but at the European level the implications are broader. Elements of EU integration--notably the borderless Schengen area, in which 22 EU member states currently participate--are now under profound strain. Policy-makers will struggle to prevent a strengthening assertion of nation-state prerogatives.

A crisis of sovereignty, security and identity

There are strong links between the migrant crisis that has roiled Europe this year and the security crisis triggered by the attacks in Paris. As far as the impact on European integration goes, however, both are secondary to a deeper crisis relating to national borders, an issue that goes to the heart of the legitimacy and sustainability of the process of European integration. It is a tacit assumption of the European "project" that the borders of nation-states should have steadily diminishing significance. This year, however, an increasing number of nation-states have begged to differ. First in response to surging levels of immigration and then to the Paris attacks, border checks and barriers have been re-appearing across Europe with remarkable speed and frequency. Just days before the attacks, border controls were re-introduced even in Sweden--with Germany, the EU member state most open to refugees--as the number arriving reached levels that were deemed unsustainable.

The contrast with the way in which the euro zone crisis has evolved is stark. During the euro zone crisis, there has been significant resentment at the policy responses that have been required of states that have found themselves in economic distress. But there has also been a remarkable degree of compliance--rules have tended to be stretched gradually rather than broken outright. With this year's border-control crisis, however, states haven't sought refuge in creative ambiguity in the same way. They have openly re-instated their national borders and they have done so unapologetically.

The reasons for this are straightforward. The fiscal issues that have dominated the euro zone crisis are largely instrumental--they relate to what political entities do. Borders, on the other hand, are essential--they define political entities and the people who belong to them. Therefore the current months-old border crisis may pose a more fundamental challenge to the process of European integration than the years-old euro zone crisis.

In addition, although Europe's financial and border crises are distinct, they are related in important ways. For one thing, chronology matters. The intractability of the border crisis is compounded by the fact that it has erupted after years of grinding financial crisis. Many voters are tired, insecure and disaffected with their political elites, a fact that has already led to a steady--and sometimes sharp--rise in the popularity of non-centrist parties across the continent. Even before the Paris attacks, France was one of the prime examples of this process, with the far-right Front national frequently coming first in opinion polls. This is precisely the kind of environment in which a crisis of national borders and sovereignty might be expected to have dramatic consequences, such as a collapse of the principle of free movement of people.

A changed political dynamic

Before turning to the nature of the policy response that we expect, it is worth pausing to highlight the potential impact of recent events on the decision-making process in Europe. In our view there are two key impacts.

1. The first of these is a general fraying of intra-EU solidarity, defined minimally as an ability to make and uphold collective decisions. This will not amount to a rupturing of the EU--and it may well be interspersed with instances of significant collective action; for example, in areas such as intelligence sharing--but as national policy-makers seek to respond to the demands of their electorates, we expect to see a gradual ebbing of their willingness to compromise at the EU level, particularly on core issues related to security, sovereignty and identity.

There has been a strong north-south dimension to the euro zone crisis, and east-west currents have underpinned responses to the migrant crisis, but the geography of Europe's difficulties is less clean-cut than this suggests. The more important trend is the willingness in recent months of member states all across the EU to act unilaterally when they have perceived their borders to be threatened.

2. The second way in which recent events will affect supranational decision-making is by reducing the ability of Germany to project its political preferences across Europe. As the bloc's largest and strongest economy, throughout the euro zone crisis Germany has been a clear first among equals. It has determined the official account of the reasons for the crisis and, therefore, has been instrumental in shaping the policy response. Admittedly there has been some policy slippage, and much resentment, but the extent to which debtor countries have fallen into line with Germany's requirements has been striking.

The same is not true of the border-control crisis, for at least the three following reasons. First, as discussed above, member-states are much less willing to cede control in policy areas that touch on the essentials of statehood. Germany will continue to be a key policy-maker on the migrant crisis in particular, but it will face greater pushback from other member states than it is used to. Second, whereas the German chancellor, Angela Merkel, enjoyed significant domestic support for her stance on the euro zone crisis, she has over-reached domestically with her open-arm response to the migrant crisis. If current refugee numbers persist, at some point Germany's stance will begin to resemble its neighbours' policies, rather than vice versa. Third, while Germany is an unrivalled economic power-house in the euro zone, in military and diplomatic terms it is a second-rank power within the EU. Insofar as the Paris attacks cause a shift in the EU's policy focus away from economic issues and towards security and foreign policy issues, France and the UK rather than Germany will be the dominant players.

Undermining Schengen will come at a cost

There is no potential policy response open to Europe's leaders that would neatly resolve the border-control crisis. We expect Syria to be in violent turmoil throughout our medium-term forecast period, even if a step-change in the extent of western military involvement were to lead to a rapid degradation of the capabilities of the jihadist Islamic State (IS) group. This means that Europe will continue to receive large inflows of refugees. On the basis of the evidence thus far, we do not believe that the EU's member states will be able to agree a workable system of redistributing refugees across the bloc. As a consequence, the policy line of last resort will remain the re-imposition of national border controls, whether in a continued ad hoc manner as at present, or with a more formal agreement to roll back aspects of the Schengen Agreement.

Neither a partial nor a complete erosion of Schengen would represent a fatal blow to the EU, but either would be damaging. There would be a direct economic impact on member states seeking to restore control of their borders, although our view is that this would consist of a range of frictional costs--such as interruptions to integrated labour markets and supply chains--rather than a macroeconomic shock. There would also be substantial opportunity costs--unwinding Schengen would be a major distraction from the other policy challenges facing Europe's leaders, particularly as most of these are widely agreed to require a response involving more rather than less integration.

The EU will struggle to remain relevant

More generally, weakening Schengen would represent a symbolically important decision to curtail one of the fundamental pillars of the EU. The consequences are shrouded in uncertainty; and that in itself is a significant risk as it hinders everyone's ability to plan for the future. In the same way that one of the risks of "Grexit" is that no-one can be certain that the process of euro zone integration is strong enough to withstand a period of moving backwards rather than forwards, so a curtailment of free movement across the EU creates significant uncertainty as to whether there will be centrifugal spill over effects in other policy areas.

There have been restrictions on the free movement of capital during the euro zone crisis, but these have been highly localised and they have been implemented as a last-ditch measure after numerous other policies have failed. The pace of events during the border-control crisis--first in response to refugee inflows, more recently in response to IS terrorism--has been very different: numerous member states have moved swiftly and unilaterally to reinforce their borders, regardless of whether or not this is compliant with their obligations under EU law. If this pattern were to persist, it would soon raise existential questions about the future of European integration. The EU has a history of working well in functional policy areas where long-lasting compromises can be crafted slowly. If we are moving into a period characterised by swift unilateralism driven by issues of security and identity, then the EU will struggle to remain relevant.