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The UK and other EU governments will both face major difficulties finding a mutually-agreeable negotiating stance, increasing the risks of stalemate, which would further undermine confidence and intensify demands for stronger growth. German popular opposition to ECB policies and the slide towards populism will also increase pressure for more radical policies. Overall, there is a strong likelihood that fiscal policy will be boosted substantially over the next few months.
As EU leaders return to work following the summer holiday period, political stakes are continuing to increase with two extremely important and inter-connected issues causing major stresses. The EU27, excluding the UK, met in Bratislava on Friday in an attempt to form a cohesive negotiating stance and find a way ahead for the remaining countries.
The countries agreed on a roadmap of measures in defence, security, and economy, which is scheduled to be approved in March.
Migration may have faded slightly as a media focus, but it remains an extremely important issue, especially with the number of migrants flowing across European land borders expected to increase again during the winter as sea routes become even more dangerous.
The Visegrad countries of Slovakia, Hungary, Poland and the Czech Republic remain opposed to EU plans to fine countries for not accepting refugees. The Hungarian government launched an aggressive attack on Luxembourg after the foreign minister called for Hungary to be thrown out of the EU over its treatment of refugees.
Overall, security issues are an increasing focus across the Euro-zone. The migration crisis is also having an extremely important impact on domestic German politics with Chancellor Merkel’s popularity in steady decline ahead of Federal elections next year. Merkel’s vulnerability risks increased instability ahead of next year’s election and her loss of authority within the Euro-zone will inevitably lead to other members starting to push their own agendas more aggressively.
Finance Minister Schaueble has criticised the ECB monetary policies and blamed them, in part, for the rise in popularity of the right-wing AfD party with the German population opposing very low interest rates, which undermines savings.
All these issues are also tied closely to the UK referendum vote to leave the EU. Officials are refusing to open formal negotiations until the UK government triggers Article 50 and many EU governments want to take a hard-line stance on UK talks, especially given the need to prevent other EU countries also considering leaving the union.
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