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European Union Challenged from Right and Left

The heinous ISIS attack in Paris is a game changer in Europe. In addition to the horrific amount of individual casualties, the attack has also threatened severe damage to the long term survivability of the European Union as a political entity. Based on the unpopularity and unfeasibility of immigration controls under the EU's Schengen Plan, the events have opened up the Union to renewed attacks from the right, just as its support from the left is crumbling as a result of opposition to EU-mandated fiscal austerity. This two-front onslaught may be too much for the Union to endure.

Over the decades, Western Europeans had come to rely on the power of the United States to shield them from the chaos of the East. But it has become abundantly clear that America, particularly under President Obama, is not up to the task. Obama's now infamous claim that ISIS was merely a "JV Team" combined with his enduring lassitude in dealing head on with the growing threat of a radical Islamist proto-state in the heart of the Middle East has forced Europeans to consider taking the reins of their own defense.

Unlike the lone wolf attacks in Boston and underwear bombers on planes in the United States, the Paris attack last week (as well as the Charlie Hebdo attack earlier this year) was highly sophisticated. (The explosives used in the attack, while simple to produce, are extremely difficult to handle once they are in their final form. The fact that its use was coordinated in simultaneous attacks while evading detection by anti-terrorist signals monitoring demonstrates an alarmingly high level of planning and control.) Initial evidence suggests the strategy was conceived in Syria, planned in Belgium and executed in France, reinforcing the idea that a high degree of transnational reach was available to the terrorists.

In this environment, EU border control has become an issue of vital security. But the border control regulations that are part of the fiber of the European experiment are simply inadequate to stop the free flow of terrorists, both into the EU from abroad, and within the EU. Germany's stated goal of accepting 800,000 refugees from Syria this year, a policy that throws the door wide open for the immigration of potential terrorists, cannot coexist with the Continent's growing concern about Islamist terror attacks.

In France, President Francois Hollande appears to have wrested from a hesitant President Obama the leadership of a frustrated West. France has now taken the lead in airstrikes against ISIS positions and has shown a greater willingness to work with Russia to do so. However, with regional elections in three weeks, Hollande faces a renewed challenge from Marine Le Pen, leader of the right wing National Front (NF) party. Despite facing charges for an anti-Islamic remark, Le Pen stands to make large electoral gains based on her Eurosceptic anti-immigration stance. The FN has been gaining traction for years, and last week's attacks could provide them with the fuel to become the most powerful party in France.

In particular, it is surprising how the NF has also taken up some of the anti-EU sentiment usually reserved to the left wing. Le Pen has called for greater government welfare spending, austerity reductions, and increased trade protectionism, causes that have been championed by the left, especially in Southern Europe.

Last week, Portugal's center-right minority government led by Prime Minister Pedro Passos Coelho was forced out of office after just two weeks. The prospect of continued EU-mandated austerity forced Coelho's Socialist partners to leave the coalition to join forces with the Communist and Green parties.

Germany, Europe's economic engine long-admired for efficiency, high productivity and sound monetary views, recently has experienced a major internal political shock. Chancellor Angela Merkel emerged last year as the most powerful woman in the world and the undisputed leader of the 503 million people of the European Union, the world's third largest population after China and India. However, Merkel appears to have miscalculated massively with her pledge to accept so many refugees from the war-ravaged Middle East. In response to horrified public opinion, her center-right coalition has appeared to break political ranks, giving the impression even of chaos within Merkel's administration.

The immigration situation is so bad that it has encouraged discussion of a possible early German election. The prospect has been raised that Finance Minister Wolfgang Schaeuble, a very tough moneyman keen on austerity, might re-challenge Merkel for the leadership of their Christian Democratic Union party. Replacement of the pro-EU Angela Merkel by Wolfgang Schaeuble likely would increase austerity pressures and ignite further strong left wing feelings against the EU. Austerity measures in Portugal and Greece are exposing already increasingly deep-seated Eurosceptic feelings.

Further, the planned December EU summit meeting faces increasing opposition to the further integration of a single state. Increased German focus on internal politics will divert energy from forging a closer EU. Without German support, the Eurozone may quickly become a thing of the past.

Rising Eurosceptic feelings and voting power are storm clouds for international investors. Increased doubts about EU solidarity could threaten even the perceived future of the euro, now the world's second currency. Signs of weakening EU cohesion could affect the value of many investments within the EU and around the world. In particular, absent their ECB subsidy, the prices of sovereign bonds of highly indebted periphery EU nations could come under intense pressure and thereby cause liquidity problems for EU banks.

Even before the attacks in Paris, the world appeared to be entering a period of slow growth, with Japan, the Eurozone, and even the United States flirting with recession. Given the slowing trajectory economy, it is logical to suggest that the attacks in Paris could help pave the way for even greater activism from The Bank of Japan, The Federal Reserve, and the ECB. The monetary authorities would surely seek to help bolster economies that are being rocked by fiscal, political and strategic crises. In other words, the era of permanent global stimulus may continue for the foreseeable future.


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John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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