By Andrea Montanino on 12 January, 2017

The European Union is on Shaky Ground - Can it keep it's footing?

By Andrea Montanino
Andrea Montanino is the Director, Global Business and Economics Program, Atlantic Council. He leads the Atlantic Council’s work on global trade, growth, and finance.
What do you see as the biggest opportunities and biggest risks in 2017 for US businesses in Europe?

2017 is a crucial year for Europe, there are a number of important political events happening throughout the year. The four founders of the European Community will likely have general elections before the end of the year. I believe this is the first time since the founding of the European Community that all four founding nations have elections in the same year. [Elections took place in The Netherlands in March; they will take place in France and Germany beginning in April and September respectively; and in Italy, elections are likely to take place before the end of the year.] These elections drastically alter the political landscape because there are a number of populist movements rising in these countries, which can either lead governments outright or have important roles in politics. This will, in turn, impact the business landscape. Obviously, it is never certain how new governments will behave towards foreign businesses looking to operate in their country.

The European economy will likely perform relatively well this year. Growth is neither extremely strong nor homogenous across countries, but it is significant. Germany is clearly leading the pack in terms of growth, with other countries lagging behind. Another positive element I see is that monetary policy continues to be accommodative. The Euro will devalue against the US Dollar, so there will be a strong dollar for US companies that want to invest in Europe, not so much for export, but particularly for foreign direct investment. I would look at Germany, of course, and Italy, because the political system is stable and there are many good companies to partner with.

“EU members need to stick together in order to have a bigger role.”

What do you see as the most likely outcome of the elections you highlighted, and the political trends in the region (e.g. Brexit, various populist movements across Europe)?

Europe is at risk because it is not delivering enough jobs and growth for its citizens, so the risk I see is that each EU member state will go its own way, thinking it is strong enough to have a role in the world economy as an individual entity, which is not the case. EU members need to stick together in order to have a bigger role. From a US business perspective, the stronger Europe and European institutions are the better, because if the EU stays together, it can handle crises in ways an individual country could not. For example, Greece would not have survived as an individual nation, and would be very different today if it did not have the umbrella of protection offered by European institutions. European institutions and democracies are strong enough to handle the rising tide of populism. However, if the trend of low growth continues and countries decide to do something different, such as in the case of Brexit, American businesses will be hampered by a more complicated regulatory landscape.

What would continued fracturing in the EU mean for American businesses looking to interact in the European marketplace?

If the fracturing persists, things will become more complicated. Take, for example, the Schengen Area. The absence of customs in the area greatly reduced construction costs for both European companies and the American companies they supply. Further fracturing would disrupt the cohesiveness of the European economy, thus increasing costs, and disadvantaging both American businesses and consumers. It is important for Americans to work to convince Europe to continue to integrate its markets as much as possible.

How do you see the new US administration impacting US business on an EU/Brussels level and on the individual member state level?

Everyone is trying to approach the new administration and show that they are better than their competitors, which is a mistake. They should come to Washington with a unique voice, and try to present their vision of what a relationship between the United States and EU would look like. President Trump needs to delve deeper into US-EU relations. The new administration should approach Europe in a way that shows an understanding of how it functions. If the US simply pursues bilateral relationships, it will weaken the EU, and eventually the US. It does not make sense for the US to pursue bilateral relations with individual nations, because they are too small to provide any significant support alone (France and Italy each make up 3 percent of global GDP, while Europe makes up 20 percent).

The other issue is trade relations. The Transatlantic Trade and Investment Partnership (T-TIP) will be put on hold, and should be completely rewritten. Ideology should be set aside, as the T-TIP is not about ideology, but rather trade, growth, job creation and strategic alliances. Anything that creates obstacles to trade will be problematic for American companies. Take the Tesla S, most of its sophisticated components are made in Germany and Italy. These components cannot be replicated easily in the US. And this dynamic exists in the opposite direction as well, and it needs to be maintained.

Some have predicted that President Trump will have to back off his tough talk on trade agreements from the campaign trail. Do you think he could potentially reconsider his protectionist stance?

The Trump Administration will likely realize that America is stronger when it is an open economy, because of its world class technologies, goods, and services. There is no reason for reducing the role of the United States in the world. On the contrary, there are opportunities to increase this role. President Trump should have conversations with business leaders and realize the need for open markets. A policy of protectionism can have some success in the short-term because it might protect certain sectors, but will ultimately be a failure in the long-term because it limits innovation and market access for sophisticated technology products made in the United States.

“We need American technology, and Americans need European technology.”

Is there any upside to a more protectionist marketplace, such as an increased sense of European identity?

It’s difficult to say, the trend of the last few decades has been to reduce barriers and open markets, and it is hard to see a reversal of this trend. Europe needs American technology, and Americans need European technology. Europe needs American capital, and America needs European specialized manufacturing. Given the exchange of benefits, it is difficult to see any upside to a reversal of this trend. The upside of protecting an industry from competition is obvious in the short-term, but over time this industry will lose its expertise, and eventually shrink.

What are the most important lessons from 2016 to keep in mind for companies considering breaking into the European market?

Europe demonstrated resilience in 2016, showing the Continent is strong enough to handle problems and deliver solutions. It still makes sense to invest in Europe, and US direct foreign investment is still very strong because European institutions are solid.

What do you see in the near term from Brussels regarding privacy?

One should follow what is happening with the European Single Digital Market and the development of e-commerce. There are still barriers across EU member states in the digital market, so I think having comprehensive and transparent rules might help American companies enter the European market through e-commerce. The second thing is that Europe is developing an investment plan, so there are lots of opportunities to invest in infrastructure using state guarantees. The third area is capital markets, which are still underdeveloped in Europe. Efforts in Brussels to make capital markets more efficient could help financial investors to enter the European market.

What are some of the 2017 priorities of the Atlantic Council that companies should keep an eye on?

We are trying to help shape the attention towards Europe, to explain to members the importance of continued growth and investment in Europe, for both economic and geopolitical reasons. I want to galvanize the American community to push Europe to implement what is needed for the mutual benefit of both Europeans and Americans.

Topics: GetGlobal Guide, Interview Series, EU, Politics

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