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The 2024 European Union parliamentary elections saw the continuation of a strong leadership, with Ursula von der Leyen as European Commission president, Kaja Kallas as EU high representative, and António Costa as European Council president. Despite an effective commission and an ambitious plan for the upcoming institutional term, there is a sense of defeatism that is spreading across the EU. Europe is confronted with a crisis at large, ranging from political divisions, sinking national budgets in many European countries, a shrinking and ageing population, and severe disruption of European gas markets. To add to it, Europe is facing major challenges of instability in its neighbourhood. The two deadly wars unfolding at the borders, migration and refugee processing, and terrorism across the porous borders of the Union, bring in further unrest and eventually wane Europe’s global standing.

Germany, is in its second year of recession and in an unprecedented turn of events has seen a collapse in its traffic-light coalition government, creating a political vacuum in Berlin. France, with its political uncertainties, is also in pursuit of a more autonomous geopolitical discourse. Just when the EU needs a decisive leadership, the Franco-German motor fails to provide an impetus to EU’s stabilisation and integration efforts. ^[1] Europe seems to be spiralling towards a chaotic turn as on the one hand, its biggest economies continue to fight political as well as economic battles at home, and on the other hand, we see emerging new EU power brokers like Poland. This article explores the multiple facets of crisis in Europe and the need for navigating a renewed and reformed Europe amidst the evolving geopolitical landscape.

Economic Crisis

Europe’s economy has been grappling with uncertainty about persistent core inflation, policy changes, and geopolitical conflicts. This has not only led to perennially weak productivity, but also a limited scale in business dynamism. Business activities in Germany as well as France have declined in their respective manufacturing and services industries. The EU, also in pursuit of decoupling from the Chinese markets, faces an adverse impact on its internal employment and innovation. For the Eurozone as a region, the business activity in the single currency area has also noticed a decline. A brief analysis of the purchaser’s management index (PMI) data- a reliable and closely watched index of a region’s business activity- is a clear indication of a rather sharp slowdown in Europe’s traditional growth drivers. In Germany, the PMI fell from 48.4 in August to 47.2 in September, a seven-month low and below the average expectations of 48.2. In France, meanwhile, the composite PMI hit an eight-month low of 47.4 in September, down from 53.1 in August, below average expectations of 50.6. Similarly, in the case of the Eurozone, the PMI decreased in September for first time in seven months, falling to 48.9 in September from 51 a month before. ^[2] It is important to note in this context that a reading above 50 indicates expansion, while a figure below that suggests contraction in business.

Europe’s biggest economy, Germany, has barely grown since 2019, with a reported fall in its exports by 4 percent in 2024. ^[3] Being Europe’s too-big-to-fail economy, Germany is big enough for its economic woes to drag on Europe’s overall growth. In addition, the massive financing requirements during the pandemic was also coupled with a decline in energy-intensive businesses, Germany’s abrupt cut-off from the Russian natural gas supply had created a significant shock to its economy, not only adversely impacting the consumers but also leading to a subsequent sluggish GDP growth rate. As a result, European economy seems to have entered an uncharted territory.

With the upcoming second term of Donald Trump, possible trade wars between the transatlantic alliance as well as between United States and China could worsen the situation. EU counts the US as its largest export market and a major strategic ally. If Trump follows through on tariffs, it could be Europe’s worst nightmare, and the worst hit would be Germany and its car industry, the economic engine of Europe. ^[4] This opens up the opportunity for the Union to become more multilateralist in this backdrop, dominating the WTO and global trade policies in case of a US withdrawal.

In the context of the economic downturn, policymakers are required to stabilise macroeconomic policies to facilitate the navigation of European businesses and firms through uncertain environments. This would mean transitioning towards a more neutral monetary policy while reducing possible economic deficits, and strengthening sustainability. ^[5] The EU must also look to diversify its trade partnerships and finally negotiating a much-awaited India-EU Free Trade Agreement must be on the cards. The incoming president of the European Council António Costa with his half-Indian origin and Indian heritage could possibly play a role in fast-tracking of the agreement and also help Europe redefine its relationship with Asia. The need of the hour is a new European fiscal governance strategy, one which addresses the rising expenditure needs as well as secures market confidence. It is important for the EU to stay together, despite internal divisions and fragmentations, in order to avoid an impending financial crisis. The new Labour Government in the United Kingdom with its efforts to reset and recreate policy linkages between the UK and the EU is a strong indicator for the Union to avoid any future Brexit-like situations. There is a need for a stronger EU for European countries to compete at the scale of the US and rising Asia, as they continue to be a much bigger engine of growth than Europe is.

Population Crisis

Europe is on the brink of a major demographic shift as significant population decline is predicted by the end of the century, terming it as ‘demographic suicide’. ^[6] The estimates have signalled that the bloc could see its population shrink by over 6 percent, or 27.3 million people, by 2100. After two years of persistent decline of population, owing to the pandemic, the mass influx of Ukrainian refugees saw a brief recovery in population in 2022. However, the baseline projections of Eurostat indicate that from 2026 onwards, there would be a sharp shrink in the population and immigration will not help anymore. ^[7] The possible reasons for a declining and ageing population include higher number of deaths than new births, with Europeans having fewer children than before. In addition, far too many people are leaving their countries of origin in Europe for economic reasons, in the form of brain drain. In this context of disappearing Europeans, immediate action is required as 2026 is just around the corner.

During the same period as the population of Europe staggers, the population of Africa is likely to increase multi-fold, creating a migratory pressure on Europe, greater than ever. In this context, it is important to note that former European colonial powers like France and Italy have strong policies on migration, which have subsequent domestic political implications too. Such a scenario would create a twin-shock for the continent, an implosion within its borders and an explosion outside. Europe’s demographic challenges are likely to cause Europe 4 percent of its GDP by 2040, lowering the production output, as well as tax revenues, becoming a ticking bomb for the region’s economy. ^[8] The graver problem, however, is the fact that not many in Europe are talking about this aspect of crisis, let alone do something about it.

Lessons are to be learnt from Japan and South Korea, who have already dealt with the issue of a steady decline in their working-age population. Although an immediate effective policy to raise birth rates would only bear fruit in its impact on the labour force after 15 years or more, Europe must seek to reverse the trend of fertility rates, through policies that encourage child-rearing. Expanding childcare and increasing the female participation rate in the workforce could be the possible options for Europe to salvage their population and GDP. Increasing the working hours and raising the retirement age of the existing working-age population, though unpopular, are also factors to be considered in the face of the looming disaster.

Security Crisis

Europe is facing its biggest security crisis since 1945. The EU has been proud of its historical mission as a peace project, which is now under threat. While its states are at peace, war is firing up in its neighbourhood, which has exposed the limits of Europe’s defence architecture. The equation has become clear that Europe is not secure if Ukraine is not secure. Although EU has been consistent in its unwavering humanitarian support for Ukraine, manifesting through financial aid packages exceeding €100 billion over the course of the conflict there have also been certain outliers. For instance, Hungary, a landlocked country highly dependent on Russian gas and oil supplies, has undermined EU efforts to support Ukraine against Russia’s military aggression, going against the Copenhagen Criteria- rules on stable institutions, functioning market economy, and acceptance of EU obligations- that determine if a country can join the EU. Budapest has been blocking the disbursement of Kyviv-bound assistance under the European Peace Facility (EPF) for more than a year, causing frustration among other Member States. ^[9]

The external security threats have been unprecedented, that the EU’s ability to respond to them has been outpaced. European efforts have often been slow, fragmented, and sometimes both, critically undermining Europe’s collective voice. Although Member States have stepped up their defence production in their support to Ukraine, the EU missed its target of supplying one million shells to Ukraine by March 2024. ^[10] Although there is a significant political will to enhance industrial defence capacity, the economic and governance pressures in many Member States creates a hindrance in the realisation of collective security goals.

As Europe remains divided on security issues, the incoming Trump administration is bound to have ramifications on European security as well. Any amount of withdrawal of US support to Ukraine will have to be compensated by the Europeans and if Trump were to sideline EU in the peace talks with Ukraine, European security is likely to be rendered fragile. Further, if Trump either completely withdraws or slashes defence spending in NATO, a rapid increase in European military spending would be expected. This creates the need for greater security partnership within Europe. As the European defence capabilities are under immense pressure, there is an urgency to assemble a comprehensive military support package through the joint financing of the region’s defence bloc, necessitating a need for European strategic autonomy. It is high time for the EU to step into the shoes of the region’s primary security actor, especially in a landscape in which relying on US or the NATO is not an option.

Leadership Crisis

The prognosis for the future indicates that Europe will continue to be confronted with an increasingly aggressive external environment. Russia-Ukraine conflict will remain the key threat, but there are also an ever-widening range of regional crises from other directions, from the Red Sea to the Sahel region, and from Israel-Hamas war to migration and transnational terrorism, which will put Europe’s stability and security to test. As observed through the nexus of multiple crises, Europe is hopelessly divided. The continent is in need for a strong leadership, not just at the level of the Union, but also at that of the Member States, in order to be in a position to put its voice on the table at the global level. The maxim remains that unless the EU puts its own house in order, its ability to speak globally for Europe will be undercut.

While every generation of European leaders have had their own share of challenges to grapple with, the current leaders are dealing with a world where the set of challenges are highly unusual and unprecedented in intensity. Europe has been facing a massive vacuum in leadership over the past three years, which began with the failure in intelligence and decision-making that preceded Russia’s full-scale invasion of Ukraine in 2022. Fragmentation of the party landscape continues to be a persistent problem in Europe. As seen in the case of Germany, multiple elections, complicated coalitions, and an unstable political climate is inducing a sense of volatility and disrupting effective governance. ^[11] The lack of a stable government in France and Germany, which are fully occupied with domestic political struggles, has created a void, not just at the economic and policy level, but in context of an effective leadership as well.

With a failing Franco-German motor, a third model of leadership is emerging in Poland, EU’s fifth largest economy. Given the size of the country and its economic dynamism, the potential for Poland to “punch above its weight” has been there for quite some time now.^[12] Warsaw is launching a major rearmament that will make Poland one of Europe’s leading military powers. As Poland spends more than 4 percent of its GDP on defence, its defence budget has increased by 75 percent over the previous year. Warsaw has also allocated 0.7 percent of its GDP to Ukraine, and has spent more than $24 billion on the one million Ukrainian refugees that the country has taken in. ^[13] As the Polish government signs deals with domestic companies to manufacture explosives in November 2024, Poland seems to have a clear and actionable vision for future deterrence against Russia, exemplifying Polish ambitions for a leadership role in the bloc.

Shreya Sinha (VIF)
17 December 2024

Energy Crisis

The non-defence related domain highly affected as a result of the war has been energy. The conflict created a “weaponisation” of gas supplies to Europe, which triggered an unprecedented energy crisis. ^[14] There was an abrupt cut-off of Russian gas following the war, a decision taken by the EU, and not Russia. This was followed by severe summer droughts in 2022 which hampered EU hydropower generation, inducing a hard blow to the European energy markets. Not only is the continent facing an energy consumption crisis, but all energy-intensive businesses have also been disrupted, creating subsequent negative economic consequences. The end of 2024 is set to witness another winter of high prices, not just for gas, but also for electricity, further hindering the future of energy-intensive sectors in the region. There have been regular plant closures in the manufacturing sector, business losses worth millions of euros, job losses, and pressure on households as well. As retail gas and electricity prices rise steeply, inflation is boosted, and economies across Europe are hit.

The crisis aligns with EU’s targets of clean energy transition amid the European Green Deal, with the overarching aim of making the EU climate neutral by 2050. Europe is now relying heavily on its gas storage. During the first two weeks of November, gas withdrawals from inventories have been recorded as the second largest for that period since 2010. ^[15] Although Europe has cut back on its reliance on Russian pipeline gas, at the same time it has increased its purchase of Russian LNG. Russia still remains the third-largest source of European gas imports, after US and Norway. ^[16] In light of Europe’s military and humanitarian support to Ukraine, it remains questionable as to why Europe continues to import Russian gas, showcasing the disproportional intersection between its strategic and economic priorities.

Europe needs to work on accelerating the creation of renewable energy projects and grids, with a focus on digitisation, modernisation, and cross-border harmonisation. EU’s leadership in nuclear energy, a priority for France, could also be a ray of hope amidst the energy crisis. A coordinated European approach also needs to be implemented towards an LNG import infrastructure. With the threat of Trump once again withdrawing from the Paris agreement and considering climate change a ‘hoax’, the EU must strengthen climate and energy cooperation with third countries similarly affected by the crisis. In addition, Member States must also target financial support towards vulnerable households and the worst affected businesses in the region.

Conclusion

It is a critical juncture in European history. The many crises in Europe have several things in common: they are felt across the continent with varying intensity, they adversely affect domestic as well as regional politics, they have become an existential threat to the every-day life of Europeans, and finally, they are not going away easily any time soon. The cumulative impact of the polycrisis is taking Europe down. Exhausted with multiple crises and divided by stagnating divergent domestic priorities, the EU project is failing to deliver at the scale and pace required to stay relevant. The different crises, neither share a single cause, nor a one-size-fits-all solution template, but have profound consequences for the fate of the continent.

With renewed calls for stricter border controls, the Schengen dream is also dying a slow death. Much contrary to ‘Fortress Europe’, the regional organisation is transitioning towards a Union that is looser than ever before. Rebuilding resilience and collective faith in European action is key to deal with the urgent challenges and counter the fast-spreading defeatism. There is a need to shift from European integration to European consolidation at the moment, to really protect Europe against the world and against itself.

Endnotes

^[1] Lucas Schramm and Ulrich Krotz (2024), ‘Leadership in European Crisis Politics: France, Germany, and the Difficult Quest for Regional Stabilisation and Integration’, Journal of European Public Policy, 31 (5): 1153-1178. https://www.tandfonline.com/doi/epdf/10.1080/13501763.2023.2169742?needAccess=true
^[2] Holly Ellyatt, ‘Europe Careens Toward a Downturn as its Biggest Economies Fight Crises at Home’, CNBC, September 23, 2024. https://www.cnbc.com/2024/09/23/europe-adrift-without-a-rudder-as-france-and-germany-fight-crises.html
^[3] The Economist, ‘Europe’s Economic Growth is Extremely Fragile’, August 15, 2024. https://www.economist.com/finance-and-economics/2024/08/15/europes-economic-growth-is-extremely-fragile
^[4] Ellen Francis and Kate Brady, ‘How Trump’s Tariffs Could Spark a Trade War and Europe’s Worst Economic Nightmare/, The Washington Post, November 20, 2024. https://www.washingtonpost.com/world/2024/11/20/trump-tariffs-europe-trade-war/
^[5] Regional Economic Outlook, ‘Scaling Up the Single Market to Boost Productivity: A Recovery Short of Europe’s Full Potential’, October 2024. https://www.imf.org/en/Publications/REO/EU/Issues/2024/10/24/regional-economic-outlook-Europe-october-2024
^[6] Jean-Michel Boussemart and Michel Godet, ‘Europe 2050: Demographic Suicide’, Fondation Robert Schuman: The Research and Studies Centre in Europe, February 12, 2018. https://www.robert-schuman.eu/en/european-issues/0462-europe-2050-demographic-suicide
^[7] Eurostat, ‘Key Figures on Europe-2024 Edition’, July 10, 2024. https://ec.europa.eu/eurostat/en/web/products-key-figures/w/ks-ei-24-001
^[8] Ryan Hogg, ‘Europe’s Population Crisis Could Shave 4% off its GDP by 2040, Morgan Stanley Warns, and the Options to Solve it aren’t Good’, Fortune, October 14, 2024. https://fortune.com/europe/2024/10/14/europes-population-crisis-gdp-2040-morgan-stanley/
^[9] Abbey Fenbert, ‘Polish FM Criticizes Hungary for Supporting Russian Aggression’, The Kyviv Independent, November 19, 2024. https://kyivindependent.com/polish-fm-criticizes-hungary-for-supporting-russian-aggression/
^[10] Laurence Boone and Nicu Popescu, ‘Better Firefighting: Readying Europe for an Age Between War and Peace’, European Council on Foreign Relations, November 4, 2024. https://ecfr.eu/publication/better-firefighting-readying-europe-for-an-age-between-war-and-peace/#strategic-but-inadequate-the-eu-response-to-24-february-2022
^[11] Stefan Lehne, ‘The EU’s Crisis of Confidence’, Carnegie Strategic Europe, October 1, 2024. https://carnegieendowment.org/europe/strategic-europe/2024/10/the-eus-crisis-of-confidence?lang=en
^[12] Claudia Ciobanu, ’20 Years in the EU: Poland Pulls Up Chair at the Top Table’, April 29, 2024. https://balkaninsight.com/2024/04/29/20-years-in-the-eu-poland-pulls-up-chair-at-the-top-table/
^[13] Bart M. J., ‘Who Wil Fill Europe’s Leadership Vacuum’, Foreign Policy, July 19, 2024. https://foreignpolicy.com/2024/07/19/europe-eu-strategy-leadership-france-germany-poland-security-russia/
^[14] Simon Dekeyrel, ‘The European Energy Crisis: Shock Therapy for the EU’s Clean Energy Transition’, European Policy Centre, Policy Brief, January 11, 2024. https://epc.eu/content/PDF/2024/Simon_Energy_policy_Brief.pdf
^[15] Javier Blas, ‘Europe is Gaslighting Itself About Its Energy Woes’, The Economic Times, November 21, 2024. https://economictimes.indiatimes.com/news/international/business/europe-is-gaslighting-itself-about-its-energy-woes/articleshow/115515851.cms?from=mdr
^[16] Ibid.

 

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