Iron And Clay Mixture: Is The EU About To Rupture?

Is The European Union About To Rupture?

Tuomas Malinen

The possible, even likely, collapse of the European economy would inflict some heavy costs to present European institutions. In this entry, Dr. Peter Nyberg and I detail why we believe we are likely to see some rupturing of the European Union (EU) as originally conceived.

This may occur in two ways: Either the European Union disintegrates completely, or it mutates into something unrecognizable to its original purpose. This comment concentrates on some of the factors causing disintegration.

The functioning of the EU has, until recently, been built on two political pillars that now appear to be crumbling. Primarily, German growth has made possible the joint financing (through low-cost debt, the EU budget, and the central banks’ clearing system) of unsuccessful economies without the EU forcing them to commit to politically unacceptable reforms. Beneficent global developments have made possible the concentration on economic integration while going slow on the much more contentious integration of cultural, social, and foreign policies.

The deterioration of the global economy, together with EU policies, now threaten industry and living standards in EU member states, reduce the scope of joint economic support, and force member states to rapidly evaluate their readiness for possibly radical reductions in their political self-determination. This is most evident in Italy.

The yields of Italian sovereign debt have reached levels that can be considered unsustainable, given the country’s high indebtedness and low rate of economic growth. For example, the yield of the Italian 10-year bond breached the 4 percent line late this past week. The maturity structure of Italian debt is also rather unfavorable. At the end of June, for example, Italy had issued only 52 percent of its needs for external financing in 2022. In addition, 35 percent of her outstanding debt will come due already in 2024. Half of her total debt will come due within five years.

Without active country-specific support from the European Central Bank (ECB), which the newly introduced Transmission Protection Instrument is designed to facilitate, Italian debt is unsustainable at current yields. Disagreements among member states on the wisdom of filling the ECB with Italian bonds is bound to weaken the glue keeping the EU together as before.

The energy crisis is also sowing seeds of serious inner conflict. The politics in the EU are becoming less forgiving as difficulties mount.

Both Hungary and the Czech Republic have objected to the plans for a price cap of Russian gas, which now looks unlikely to be enforced. The European Commission is also planning to cut funding for the Hungarian government of Victor Orban due to “rule-of-law concerns.” This is unlikely to increase the incentives of Hungary to stay in the union. More generally, as funding is made conditional on countries meeting the test of adhering to “European values,” one can expect the list of such essentially political requirements to grow as economic conditions worsen and demands for uniform policies grow.

For example, Poland is fed up with constant extra demands from the EU, like the demand to walk back from the changes Polish government was planning to the judicial system, considering the distribution of funds from the Recovery Fund to its government. Krzysztof Sobolewski, the governing party’s secretary-general, has warned that without a clear change in the actions of Brussels, “We will have no choice but to pull out all the cannons in our arsenal and open fire.” Since a number of contentious decisions still require unanimity, such a threat might be unwise to take lightly.

Fault lines are also emerging regarding the Russia sanctions.

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