Calm Seas in Europe in 2014?

Compared to most predictions, not much happened in Europe in 2013. Yes, the Cyprus rescue and the restructuring of its banks were mishandled initially by European policymakers, producing the first capital controls implemented in the euro area. But there were no bank runs, and no euro area member collapsed into anti-establishment extremism. Indeed economic growth gradually returned in the second half of 2013, and unemployment rates stabilized. The euro area thus appears more shock resilient than during the volatile days of 2010–12, when the dreaded “contagion” spread from Greece to the entire region.

This is not a big surprise. It roughly corresponds with my forecast from a year ago. But will this relative tranquility last? My prediction is that it will in 2014, though as we saw at the last European Union Council meeting in late December, the risks of complacency have not disappeared.

No Electoral Upheavals Are in the Offing

No major EU elections are scheduled in 2014. In Italy, a new electoral law is unlikely to be agreed upon before it takes over the rotating EU presidency in the second half of 2014. By tradition, countries in that position refrain from holding national elections. Rather, European Parliament elections in May will be the political highlight of 2014. As discussed earlier, there is a risk that angry voters will turn out and elect some colorful non-mainstream members to that body. Still, there seems little risk that the European Parliament will become a “Weimar Parliament” with a majority of anti-EU members. Instead the established European parties seem likely to prevail with a smaller majority, ensuring that Europe remains governable.

With their increased representation, the question of what the anti-EU parties want (aside from their daily parliamentary allowances) will arise. Much has been written about the alliance between Marine Le Pen, leader of the French National Front, and the leader of the Dutch Freedom Party Geert Wilders. But theirs is little more than a photo-op coalition, posing limited political risks. There are inherent limitations on the ability of nationalist parties to collaborate across borders.

The European Parliament elections, though, may also indirectly influence the choice of the next president of the European Commission. In an attempt to broaden the democratic appeal of the European Union, the European political parties have suggested that they each propose a pan-European spitzen-kandidat for the post and then let the European voters decide. Of course, this is a naked—if well-intended—power grab by the European Parliament, as the right to select the Commission president resides with the EU member states according to the EU Treaty. And they are unlikely to surrender this right. At the same time, it will be very difficult for the EU member states to ignore the winning side in the European Parliament election. The heads of states will hence likely be compelled to at least choose a new European President from the side of the political aisle that won the most votes in the election. Their selection power will thus be constrained.

Another looming election is the referendum on Scottish independence due in September 2014, but the voting is certain to support the status quo. Scottish nationalists have been unable to credibly describe what an independent Scotland would look like, making it likely that most voters will avoid the risk of change. Rejection of Scottish independence is likely to affect Catalonia, where the regional government has announced it is holding a referendum on independence in November 2014. But the Spanish government has vowed to block the referendum as unconstitutional, and it seems unlikely to take place. As with Scotland, no one knows what an independent Catalonia would look like.

Catalan independence is a move that will be politically and administratively opposed by the rest of the euro area. An independent Catalonia should not expect to be grandfathered into the euro, or to host financial institutions that have access to European Central Bank (ECB) liquidity. The reason is straightforward, as the euro area takes over more functions of the member states (hence facilitating the breakup of countries), but on the other hand is still made up of member states. They will not want to send the signal to anyone in their own countries that breaking off is an easy thing to do, or that it automatically yields the benefits of EU and euro membership afterwards.

Look for the Stress Tests to Inflict Stress

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