The Vix “fear” index is at a two decades low. Investors appear to believe that geopolitical risks are modest and/or containable. Europe itself seems to be in a more favorable position than it has been in a long time: the economies of all 28 EU Member States are growing (albeit at low rates in some cases); the populist threats in Austria, the Netherlands and France have been resisted (at least for now); there is hope that newly elected French President Emmanuel Macron will be able to implement his economic reform program and resuscitate the Franco-German motor on which European integration has traditionally depended; Brexit has resulted in an uncommon degree of unity among the EU27; the Greek debt crisis is being managed (although is far from being addressed effectively); and the threat of massive migration inflows is under control (for the moment).
But that does not mean that the risks to Europe are low. There are a number of external pressures on Europe that could undermine the stability from which investors in and exporters to Europe benefit.
The first risk is that the Trump administration will downgrade the support that the United States has shown – on a bipartisan basis for 70 years – for European integration. Although recent declaration from the administration promise continued partnership with the EU, the President’s early statements (and those of his advisers) indicate a skepticism about the future of the EU and its effectiveness as a partner. There is a clear preference to deal bilaterally and transactionally with individual states, above all the United Kingdom.
There are a number of external pressures on Europe that could undermine the stability from which investors in and exporters to Europe benefit.
Second, there is a risk that the Trump administration will reduce the economic and political support that the United States has been giving to Ukraine. If this occurs, the prospect of an independent, stable, democratic and prosperous Ukraine would recede; Russia would seek to exploit its leverage; and Europe would be hard pressed to avoid instability there, with significant consequences for its “neighborhood” policy.
Third, there is a risk that the Trump administration will downgrade the emphasis on anti-corruption, good governance, stability and a pro-Western trajectory in the Balkans. The EU would be hard pressed to fill the vacuum; Russia would increase its successful policy of using dirty money and disinformation to promote its interests.
Fourth, while the United States appears likely to continue it strong support for NATO, including the Article V mutual assistance guarantee as its bedrock, there is a risk that Turkey continues to become an extremely awkward member. It is possible that the EU-Turkey deal on migration will collapse, leading to far higher outflows of refugees to Europe. Similarly, greater instability in Libya would lead to far higher outflows of refugees from Northern Africa. This would reignite very serious debates within Europe about burden-sharing.
Finally and more broadly, the risk of a collapse in the Brexit negotiations (or a "hard Brexit) should not be dismissed -- with serious impacts on business. Europe will be challenged to respond to the Trump Administration’s hostility to the multilateral rules-based order, especially in world trade. While European business could benefit from higher US growth, there are risks of serious transatlantic trade disputes if Washington pursues unilateral trade restrictions.
Anthony Gardner is the former US Ambassador to the European Union. He will be appearing at the upcoming FundForum International event in Berlin, 12-14 June to discuss the US prospects for security in Europe: Russia, NATO, Turkey & the refugees of the failing states of the Middle East.
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