As the French National Front barrels into the first round of local elections this weekend, the international media is sure to latch onto its anti-European (or Euroskeptical) rhetoric as a sign of the times. Indeed, given the raft of Euroskeptical parties like the UK Independence Party (UKIP), the Alternative for Germany, the True Finns, the Sweden Democrats, the Dutch Party of Freedom (PVV), and the Italian Northern League, it is easy to jump to the conclusion that Europeans have lost confidence in ‘Europe’ as a political project. One look at the travails that European leaders have faced responding to the macroeconomic crisis and it is not hard to see why that is the case.
Two of the most important macroeconomic stories today are dollar strength and euro weakness. The dollar strength story is important because it threatens to sap momentum from the U.S. economic recovery and to give pause to monetary policy makers on the federal open markets committee of the U.S. Federal Reserve as they consider when to start raising interest rates. The euro weakness story is important for the opposite reason, because it promises to breathe life into the euro area economies even as it lowers the pressure on the Governing Council of the European Central Bank. My point in this note is not to deny the significance of these reflected narratives, although I do think they warrant qualification; rather I want to focus attention on the currencies (and economies) caught in between.
The second Minsk accords have succeeded in fostering a cease-fire and yet the Russian government continues to support the armed separatist movement in eastern Ukraine, small acts of violence continue to take place, and the peace is fragile. The challenge for western policymakers is to come up with some greater incentive for Russia to embrace a lasting peace settlement. The threat of large-scale western military assistance for the Ukrainian government is unlikely to be sufficient. Russia has the advantage of proximity and a greater stake in victory than the west. If anything, overt western military involvement could cement support behind Putin in Russia and lead to further escalation in Ukraine.
The alternative sources of western leverage over Russia are only slightly more attractive and the prospects that any new sanctions will find agreement in a European Council that includes Cyprus, Greece, Hungary, France, and Italy are slim. Nevertheless, there is one financial sanction that seems to be gaining traction in conversations on both sides of the Atlantic. That sanction is to exclude Russian banks from the financial messaging service known as SWIFT — the Society for Worldwide Interbank Financial Telecommunication. British Prime Minister David Cameron raised this prospect last August suggesting that excluding Russian banks from SWIFT would offer considerable leverage over the Russian government. He returned to the idea late this February.
Two of the great risks facing the European Union (EU) economy are the exit of Greece from the euro area and the exit – or distancing – of the United Kingdom from the European Union. It is easy to think of these threats as similar, even if only because they have similarly catchy names to use in popular debate. But Kings College London Professor Anand Menon reminded me in a recent conference call that they are actually very different. His point was that any British exit from the European Union – or ‘Brexit’ – would be a long, difficult, and conflictive process. My argument here is that any Greek exit from the euro – or ‘Grexit’ – would centre on a short, punctuated event.