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Business Analysis & Features

Global view: Interesting times ahead in Brussels

Italy, with its demands for a softening of austerity, is likely to clash with dominant power Germany

Triumphalism has been in short supply in Europe’s corridors of power this week. The cries of “I told you so!” instead rang out from the political fringes, with populist leaders including Nigel Farage in Britain and Marine Le Pen in France raising their glasses to unprecedented success in European Parliament elections after years of stagnant economic growth and stubborn unemployment.

Given the sombre mood among his fellow leaders, it’s unlikely that the Italian Prime Minister, Matteo Renzi, engaged in much gloating when the 28 heads of state sat down to dinner on Tuesday. The new Italian leader had, however, turned up one of the rare surprises of election night, beating off a challenge from anarchic comedian Beppe Grillo, whose Five Star Movement campaigned on an anti-EU platform and advocated a referendum on pulling Italy out of the single currency.

That voters opted for Mr Renzi’s more sensible platform of reforming Italy’s notoriously rigid labour market while implementing targeted tax cuts to stimulate growth, should make other EU leaders sit up and take notice. Of course, Mr Renzi is not the first Italian leader to try to overhaul the spluttering economy. His success could in part be down to novelty value – the 39-year-old came to power in February – and weak opposition to his Democratic Party.

But timing is on his side. Italy is taking over the rotating presidency of the European Union in July, which gives the host country a leading role in guiding the agenda of the bloc. It seems opportune that a voice advocating a softening of austerity and a shift towards growth will be at the centre of the debate as the European Union embarks on its lengthy bout of soul-searching.

Silvia Francescon, the head of the Rome office for the European Council on Foreign Relations, writes on her blog that Mr Renzi’s success at a time of defeat for Europe’s traditionally strong voices like David Cameron and the French President, François Hollande, means “his leverage in Europe will be high”.

“Renzi’s amazing triumph has given him a strong mandate and a huge burden of responsibility – both in Italy and in the most eurosceptic Europe ever,” she wrote.

However Mr Renzi was not the only incumbent to triumph. The German Chancellor, Angela Merkel, also clocked a convincing victory, but voters backed her for very different reasons. Berlin has been the cheerleader of the austerity policies  that have pushed up unemployment and battered social spending in countries like Italy, and these policies have proved popular with a German electorate resistant to their taxes propping up struggling eurozone states.

While Ms Merkel has expressed shock at the swing to the far right elsewhere in the EU and conceded that “a course that focuses on competitiveness, growth and jobs is the best answer”, she is unlikely to endorse a radical overhaul of the bloc’s fiscal policies.

“Why would Germany change the European fiscal rules? For what reason?” asks Zsolt Darvas, a senior fellow at the Brussels-based Bruegel think tank. “Due to the reason that the National Front became the dominant party in France? That’s not a strong argument for that. Policymakers in Germany do believe that the recipe they have is the right one.”

And he reminds us that we have been here before. “There was already a lot of talk about growth and jobs – two years ago there was a compact for growth and jobs initiated by Mr Hollande,” he says. “But they couldn’t come up with a decisive programme. I don’t think they will come up with a decisive programme now either.”

The Renzi-Merkel divide is not the only contradiction coming out of the European Parliament elections. The anti-establishment parties that won about 30 per cent of the 751 European Parliament seats did so on very different platforms on the left and right. So while Mr Cameron may take the Ukip win as impetus for pushing through deregulation, “a lot of the leftist parties want a protectionist agenda”, says Mark Leonard, director of the ECFR.

And while Italy is flavour of the month right now, it could end up threatening the recovery of the rest of the eurozone unless it can rein in its public debt and deliver sustainable growth.

So while token measures like giving Italy, Spain and France more time to get their public finances in order might gain some traction, the EU is likely to end up doing what the EU seems to do best in times of crisis: talk up a storm while delivering very little change at all.

Protectionism? Trade deals with US may be under threat

 Europe’s leaders appear united over one panacea for reviving the bloc’s economy: the successful negotiation of the US-EU free trade pact, known in Brussels by the acronym TTIP. Proponents say the deal will generate an extra £180bn annually for the US and the EU, but this is one policy area where the new intake of anti-establishment MEPs could make a difference.

TTIP has been beset by criticism from the right and the left since negotiations began last year. Environmentalists warn it could flood Europe with genetically modified produce, while consumer advocates worry about a provision that allows foreign companies to challenge government decisions through an independent arbitration process rather than national courts.

On the right, one of its biggest critics of the pact is Ms Le Pen of the Front National, who has argued for re-enacting trade barriers and implementing more protectionist policies for French industries. A surge in anti-American sentiment after the NSA spying allegations last year means she can also count on support from some on the far left as well.

The moderate blocs on the centre right and left still dominate the European Parliament, which has to ratify new trade deals, and they insist they have the support to push TTIP through. But noisy opposition could certainly delay negotiations, especially if national governments like Mr Hollande’s decide to adopt some of the rhetoric of the parties that gave them  a pasting.