Ever since the Maastricht Treaty went into effect, the world began to speak of Europe as if it were a single entity governed by the European Union. This was never really true. Nevertheless, the world began to take it for granted, though European countries differed in their approach to the bloc.
This was always a tenuous position, more psychological than institutional. We have long regarded the ambiguity in governance to be the Achilles' heel of Europe's political arrangements. This was partly because it was difficult to understand and agree on the boundaries of the EU's authority and that of the nations. But even more, the Achilles' heel was that the Europeans were incapable of clarifying the EU's role. They couldn't clarify it, because they didn't agree on what it should be. Nor could they. The EU was a series of compromises between irreconcilable views. And inevitably, at some point, one of the members would throw up their hands and leave, revealing the basic truth of the EU: it is neither a federation nor a confederation. It is simply a treaty organization that can only survive as long as its internal contradictions don't become unbearable.
Our forecast on the EU said that it would last until about 2020. We hold with that, in the sense that the EU continues to function. But we see over the next few years that the bloc's ability to function will deteriorate, followed by the onset of a new European reality that is actually an old one. The nation-state will return as the fundamental organizational principle of Europe, and with it ad hoc alliances and treaties will emerge, designed to allow nations to pursue their interests on the basis of temporary arrangements of convenience.
It is important to understand what a failed institution is. It does not mean the EU will cease to exist. It simply means that it will be irrelevant to developments in Europe. The League of Nations became irrelevant in the 1930s although it continued to exist. The Holy Roman Empire was irrelevant by the 18th century, but it continued to exist. So too, the European Union will exist in some form, but will no longer be a decisive force. The EU began to decline when it failed to deal with the 2008 crisis and when nations began ignoring EU regulations during the refugee crisis.
We forecast two directions for the EU's trajectory leading up to 2020. There will be increased indifference to its decisions. In addition, other trade and investment relationships will emerge. These will develop within regions - in northwestern Europe, in Central and Eastern Europe, in Mediterranean Europe and among the Nordic states and Britain. These will not be exclusive groupings nor will they be confined to economics. They will be dynamic in terms of scope and commitment. However, these new entities will be the locus of international coordination. The EU will still exist and may even have a council and commission, with presidents and staff. But it will not have an independent reality. Following 2020, events will unfold as described in The Next 100 Years. European fragmentation will increase, and the declines of Germany and Russia will thrust new powers, like Poland, into positions of authority.
It should not be assumed that the fragmentation of Europe will change economic patterns. The EU did not create the trade and investment patterns that dominate Europe. Had there been no EU, trade between countries would have developed much as it did. Patterns of investment, within Europe and outside of Europe, developed not out of some institutional framework, but around the economic needs and reality of tens of thousands of businesses and millions of people.
The features of the European economy that will change will do so as a result of structural instability. The greatest unstable power in Europe is Germany, and it faces disaster when the next U.S. recession occurs, which will be sometime in the next two years. The Germans maintain their internal social stability by relying on exports for 45 percent of their GDP. In fact, the country has increased its dependence on exports since 2008. Germany relies so heavily on exports because its production exceeds domestic consumption. It is therefore in danger if trouble strikes, as German customers will not be able to replace export demand. Every 5 percent decline in exports reduces Germany's GDP by roughly 2.25 percent. Right now, the U.S. is a critical customer and the rest of the world is at best maintaining a stable level of imports. In the next recession, not only will the U.S. reduce consumption, but so will all other countries selling to the U.S. German exports will drop, so will its GDP, and the result will be a dramatic rise in unemployment. At this point, Germany's ability to manage the European system will further evaporate.
The Russians, facing a different economic crisis revolving around low oil prices, will move to stabilize their geopolitical situation, in particular by attempting to recover Ukraine as a buffer against what they see as Western aggression. The fragmentation of Europe will be an opportunity for the Russians to develop relationships with nations no longer bound by the EU (but still by NATO, which is also losing relevance). They will succeed in most cases. However, we continue to expect that Russia will weaken around and after 2020 to the point that Moscow's ability to control its own system will be dubious.
The U.S. will remain the dominant global power, with a reasonably functioning economy. Fearing the possibility of alignment between Russia and Germany, it will increase its activity in the Baltics, Poland and Romania. It will also develop even closer economic relations with the U.K. and with selected other countries, particularly military allies. These relations will be outside of NATO, since NATO will fragment along with Europe.