By Elwin de Groot, Head of Macro Strategy at Rabobank
Watch the flanks!
Last week, one day before the European Commission published its “Spring Package” in which it reprimanded seven Member States for flouting the budget rules, Hungary launched its Trump-inspired slogan for the upcoming 6-month European Council presidency starting 1 July: “Make Europe Great Again”. With that presidency spanning the US elections and its immediate aftermath, the irony of it wasn’t lost on some observers, especially when Hungarian EU Affair Minister János Bóka argued that “It actually shows manifest the expectation that together we should be stronger than individually but that we should be allowed to remain who we are when we come together. It also portrays the idea that Europe is able to become an independent global actor in our transforming world.” Of course, if anything, Hungary has more often than others acted as a stumbling block for more integration and projecting unity.
It the meantime, the good news is that there is now an agreement on who will get the top jobs in the EU following the elections for European Parliament earlier this month. Those elections showed a shift to the far-right (but not as much as feared by some) and losses at the Greens and particularly the Liberals. But the center (signified by the two biggest parties, the EPP and S&D) held better-than-expected. The political turbulence that followed has been largely of a national making rather than stemming from the direct consequences of the change in composition of the European Parliament.
Hence the quick decisions by the mainstream center parties to have their European ‘management team’ ready. As expected it will consist of Ursula von der Leyen as head of the European Commission President, former Portuguese PM Antonio Costa leading the Council (representing the national leaders) and Estonian PM Kaja Kallas in charge of EU foreign policy.
Hungary’s Viktor Orban hit out on X: “Instead of inclusion, it sows the seeds of division”. Italy’s PM Meloni has also objected to the quick decisions, arguing this team does not reflect the political shift observed in the election, but according to reports Italy has been promised an important post in the Commission. In contrast to Orban, perhaps, there is a strong case for keeping Meloni on board, as she more or less represents the moderate (or, at least, economically rational) voices among the extreme right parties in Europe. The heads of Parliament and the Council will only stay on for the first half of the 5-year parliamentary session and so that could serve as another carrot for the moderates on the right.
In our pre-election report we highlighted two risk scenarios in which the shift from the center towards the far-right could scupper the EU’s increasingly ambitious plans to strengthen its strategic autonomy. The first, and perhaps highest risk, is a form of ‘stasis’ that would make legislation in the next five years sluggish, preventing further integration and potentially leading to a slow but steady demise of Europe in an increasingly hostile (economic and military) environment. The other scenario we called ‘unbalanced policy’, for example due to excessive social spending or spending on non-productive sectors, leading to more inflation but not the desired long-term results.
However the thinking in this piece was that if the political shifts would not be too significant, the centre could still broadly agree with the strategic policy agenda and push through (some of) the required bold changes that would come with it. Yet it increasingly seems that the risks are not so much coming from the center of European power (the EU institutions) but – in football terms – from the flanks, represented by the national satellites (as represented by the Council).
The first example is of course the political turbulence in France since Macron called snap elections for 30 June and 7 July. However you slice and dice it, it is hard to see the center in France not losing ground after these elections. And in the past years President Macron has showed himself as being one of the staunchest supporters of European unity.
The second weak point may well turn out to be Germany. Yesterday we suggested that Germany’s intent to negotiate with China on reduced tariffs on European car imports in exchange for not pushing through the tariffs on Chinese EV’s announced by the EU could still backfire in the longer term, even if it were to bring relief for European car exporters in the near-term. But yesterday there was also further evidence that Germany has succeeded in taking joint financing for military spending in Europe, through ‘defense bonds’, off the table. According to Bloomberg, citing a draft EU strategy document, there is no longer any mentioning of joint borrowing. Instead, the bloc will use “innovative options” to finance an increase in defense spending. Whatever that means exactly is unclear but it’s not joint financing.
We have been arguing for some time that if Europe really wants to get its act together it should not shun more radical changes, including joint financing and the active involvement of European institutions, including the ECB. Further integration clearly has become more difficult with the political shifts in European Parliament and “Make Europe Great Again” coming from the EU’s enfant terrible may sound like a pretty incredible statement, but the biggest challenges right now are actually coming from the flanks of Europe.
Turning to the other side of the globe, Australia’s inflation rate rose to 4% in May, a more than expected increase (from 3.6% in April and with 3.8% expected by the consensus), driven by higher transport and housing costs. Last week the RBA kept rates on hold but warned that there is still a possibility that it may have to hike. Indeed, this piece of data supports our off-consensus view that the next step by the RBA is more likely to be a hike than a cut. Aussie dollar rose 0.4% against the US dollar, despite warnings from Michele Bowman that the Fed may have to keep rates elevated to contain upside risks to inflation.
