The Spread of Euroskepticism

By Jacob L. Shapiro

Two polls were released on May 9 that go straight to the question of the future of the European Union. In Italy, a television programed called Piazzapulita commissioned a poll that reported the Five Star Movement (a political party with a founder who has described himself as a populist and who wants to hold a referendum on whether Italy should remain in the European Union) was the most popular political party in the country ahead of local elections scheduled for next month. A poll by British research group Ipsos MORI appeared on the same day and reported that of the nine EU countries surveyed, representing roughly three-quarters of the EU’s total population, 45 percent believed that their country should hold a referendum on whether to remain in the EU.

Reuters tried to explain the Italian poll numbers as relating to a spate of scandals that have undermined public confidence in current Prime Minister Matteo Renzi’s Democratic Party. But this is Italy we’re talking about, the same country that brought us Silvio Berlusconi. The country is no stranger to political scandals. A few instances of corruption would not be enough to make an anti-establishment party like the Five Star Movement as popular as it has apparently become.

The problem in Italy, as we forecast at the end of last year, is economic. Unemployment in at least four of Italy’s southern provinces is over 18.8 percent, and in the other southern provinces is between 12 percent and 18.7 percent, according to Eurostat. And Italy hasn’t found a way to deal effectively with its non-performing loan problem to the satisfaction of the European Central Bank (ECB) and its own population. Italy has made some of its own depositors liable and it has tried to bend ECB rules as much as possible. The result has been a series of half measures that haven’t changed the fundamental reality.

There are two simultaneous phenomena occurring here. The first is disillusionment with the Italian government. What was an economic problem has become a political problem, and since Italy is a democracy, its leaders can be voted out of office. The next general election is not until 2018, but if developments continue to unfold in Italy as we have forecast, the situation is only going to get worse for mainstream political parties.

However, the second, deeper question is about whether Italy should stay in the European Union. This is a Euroskeptic party becoming the most popular political party in the eurozone’s third largest economy. Whether that translates into real political power remains to be seen, but that caveat should not suspend one’s capacity for wonder at the reality.

This is also where the Italian poll intersects with the British research company’s poll. The sample size of the Ipsos MORI poll is small (around 6,000 people total were surveyed in the EU and Britain) but even so, one of its most striking results was that 58 percent of Italians wanted a referendum on EU membership and 48 percent would have voted to leave the EU. In France, one of the twin pillars of the EU, 55 percent of survey respondents agreed a referendum should be called and 41 percent said they would vote to leave.

Much of the attention being paid to the upcoming British vote on whether to leave the European Union has focused on what the consequences will be for Britain – whether Scotland might push for another independence referendum and join the EU on its own terms, or whether and how much in terms of money and jobs the U.K. would lose as a result of a decision to exit. But what has been less well covered is how Britain’s stand against the EU and the public debate is already affecting the rest of Europe. In February, Prime Minister David Cameron negotiated a series of exceptions so that even if the U.K. remains, it will have a new set of understandings with Brussels. If the U.K. stays, other countries may be even more emboldened to openly flout more EU regulations than they already are. If Britain leaves and does not revert to an apocalyptic depression, the numbers in the Ipsos MORI survey might begin to trend upward – and they don’t have a long way to go to become the majority in some of the EU’s most influential states.

At the center of the European Union – as well as the Italian poll, the Ipsos MORI poll and even Brexit – is the question of Germany. The International Monetary Fund said yesterday in a statement that it was “a bit more optimistic” about the outlook for Europe’s largest economy. Geopolitical Futures, in partnership with Mauldin Economics, will be publishing a detailed study of the German economy in the coming week. But suffice it to say for now that we believe the German economy has thus far been able to avoid the crisis of the exporters that has affected every other major exporting country in the world, from the producers of manufactured goods like China and South Korea to commodity exporters like Russia and Saudi Arabia.

Just two weeks ago, the U.S. Treasury Department announced that the U.S. had placed five countries on a monitoring list for potential currency manipulation: China, Japan, Korea, Taiwan and Germany. The report noted that Germany has built up a significant bilateral trade surplus with the U.S., in addition to holding the second largest current account surplus in the world, at approximately 8.3 percent of GDP, according to an April OECD report. It isn’t currency manipulation that has Germany on this monitoring list. It is the fact that as European and Chinese demand for German products has fallen, the U.S. has become the destination for Germany’s exports in order to make up the difference.

There are a number of factors besides exports that go into Germany’s current account surplus. Germany has become a significant creditor, rising from almost zero net foreign assets in the 1990s to almost 40 percent of GDP by the end of 2010, according to economic scholar Jörg Bibow. Interest rates are low, and German banks are viewed as a safe haven in the European Union for stashing money. But since Germany is a creditor, many of the assets on German books are the unpaid debts of other eurozone countries, which means Germany is deeply exposed to a eurozone that still has not meaningfully recovered from the 2008 crisis.

Most of the time, one would look at a current account surplus and see it as a positive. If Germany has a surplus of 8.3 percent of GDP, why not use that surplus to stimulate domestic demand? Germany must be either unwilling or unable to use the surplus to stimulate domestic demand, in part because Germany is a creditor and invests abroad and in its own banks and companies. And this gets at the root of the entire problem. Germany exports almost half of its GDP. Germany imposed austerity on the EU after 2008, which has resulted in stratospherically high unemployment rates in southern Europe. Demand has not returned to pre-financial crisis levels. Germany has been able to skirt the crisis while most of Europe is either still suffering or is in the doldrums. There are limits to U.S. demand or tolerance of German exports to the U.S. market. Exporting to the U.S. is a Band-Aid on a deeper wound.

Yesterday was one of those rare days when a number of important pieces of information all appeared around the same time. The Italian poll, the British research poll and the IMF’s hollow optimism about Germany offer different prisms through which to see how the European Union’s connective tissue is fraying as the bloc’s economic logic becomes increasingly illogical.