How will the political volatility in 2017 impact EU’s trade agenda?

Doru Frantescu is CEO and cofounder of VoteWatch Europe, the think tank most followed by the European Parliamentarians.

Many thought that 2016 was not the best year for the established liberal order and for the global trade. However, 2017 may not be much different, if some of the many political developments on the horizon go in the “wrong” direction. The political realignment in the European Parliament and the plethora of elections and possible referenda in key EU Member States will require continuous monitoring throughout the year.

Negotiators and legal experts tend to underestimate or be outright blind to the political risks posed by the rise of populism, nationalism and protectionism in the Western world. Despite the Brexit referendum, despite the victory of Trump on a protectionist platform (with devastating consequences for TPP and TTIP), despite the almost sudden death of CETA at the hand of a regional parliament in Belgium, some still think that if they convince the bureaucrats and the legal experts of the benefits of a trade agreement then the deal is done. However, in democracies, things are much more complicated than that, as the political factors are able (and sometimes motivated) to turn down a (technically) done deal. Because of that, the European Commission can only move as fast and as much as the European Parliament and the Member States’ Governments allow it to.

Commission’s negotiators, ie. the DG Trade’s bureaucrats, do not want to be accused of overstepping their mandate (which would hurt their careers), reason for which they watch closely the trends in the EP and the Member States to see where there is room for maneuver and where there isn’t any. This weighs substantially when the Commission’s negotiators shape their views and their negotiating plans.

Consequently, by following the political developments in the EP and the Member States we can understand the limitations of the Commission, get highly useful insights into which of its views are based on internal analysis and which are pushed (or blocked) by political pressures, and ultimately foresee its trade policy output.

In this piece we’re looking at the political risks in the European Parliament and the EU’s member states in 2017. For the sake of efficiency, we are excluding on purpose the UK from this assessment, as Brexit is being analysed extensively in other reports.

The coalition dynamics in the European Parliament have changed at the beginning of the year, given the “clash of the titans”, ie. the deep disagreements between the big political groups, European People’s Party (center-right, generally pro trade) and the Socialists and Democrats (center-left, ambivalent towards trade). Gianni Pittella, the leader of the Socialist EU Parliamentarians has proclaimed the death of the “grand coalition”, and his defeat in the race for the EP Presidency can only fuel that point of view. The winner, Antonio Tajani, has come at the helm of the EP as a result of a new coalition, one between his own group, the EPP and the liberals of ALDE, a pro free trade group.

While this new coalition is more free trade oriented, it lacks the numbers to implement this agenda on its own. EPP and ALDE combined hold only 284 seats in the EP. Even if you add the other trade-friendly-group, the ECR, you still don’t reach an absolute majority of seats. In order to build a majority to push a trade agreement through the European Parliament, one needs to secure more support, usually from among some of the Social-Democratic delegations. Until recently, the ones at hand were the British and the German social-democrats. However, the British have become much less trade-friendly since Jeremy Corbyn took over, while the German SPD may have a very different kind of behavior if it exits the governing coalition in Berlin after the elections that will take place in September. All this means that it will be harder to build pro trade majorities in the European Parliament and that any MEP’s vote will count.

Elections in key Member States

The Netherlands will be the first of the Member States to hold elections this year, on 15 March, with the far-right anti-EU and anti-establishment party (PVV) leading in the polls. One may get some relief at the thought that PVV will not gain a majority and that other parties will create a broad alliance to contain them. Indeed, the trends in the public opinion in the Netherlands seem to indicate the most likely outcome to be a center-right coalition under the leadership of the same Prime-Minister, Rutte, made up of two liberal parties (VVD and D66) and the Christian-democrats (CDA). However, the government will still need to get the support of some of testimonial parties in the Parliament (e.g. Conservative Christians, the Pensioners or the Greens) in order to reach a majority. If that were the case, then the next government would be more trade friendly then the current one.

However, the governing coalition is not the only thing one should pay attention to, especially in a country which has just recently rejected, via a referendum fueled by the nationalists, the EU-Ukraine Association Agreement. That referendum, even if not binding, put the Dutch government in a much occurred position when meeting the other 27 in the European Council. At the end, the European Council was forced to give some concessions to the government led by Rutte, so that he can appease the Dutch electorate. The lesson is that regardless of the result of the elections, the Netherlands is confronting with a fair level of political volatility when it comes to international agreements (one should always remember that it was the public in the Netherlands, together with that in France, that buried the EU’s Constitutional Treaty a decade ago and the trends in the public opinion have all but become more favorable since then).

The French, for their part, will start their series of Presidential and legislative elections in April, against the background of a fragmented electorate. While Marine le Pen is likely to make it into the second round, Fillon seems to hold the upper hand (unless Macron takes away too much of Fillon’s economically-liberal electorate). However, the above-mentioned logic applies: Marine le Pen and her followers do not have to win the elections to influence the future policy making. In fact, they are already doing so: the (intergovernmentalist) agenda with which Fillon has won the nomination of the Republicans for the French Presidency has been substantially influenced by the rising popularity of Front National. Fillon, if he wins, will have to govern very carefully, especially in the first year of his presidency, in which he has to consolidate his power. He will not want to rock the boat with a pro trade agenda, but rather play a game of wait and see. Hence, the trends in the French public opinion will matter a lot, and these trends are not going in the pro trade direction at the moment.

Italy is the mother of political volatility in Europe this year. Italians are likely to go to the polls over the year, amid prolonged squirming of their political elites. The possibility of holding a referendum for exiting the Eurozone is no longer a science-fiction scenario (after seeing Brexit and Trump victories nothing should be). The leading opposition force, 5-Star, is asking for the referendum and is leveraging the current banking crisis to make it happen. Other relevant parties, such as Forza Italia and the Northern League are not big Euro fans either and already put forward ideas for either replacing the euro or introducing a second currency alongside it. In fact, only the governing Democratic Party and other small centrist forces fully support the Euro, but their voters are far from being enough to secure a victory in the case of a referendum (as just seen in their defeat in the previous referendum held in December on the change of Italy’s Constitution).

Although the final outcome will very much depend on what kind of electoral law will be designed by Italian MPs, the most likely scenario in the case of elections is a PD-FI (aka Renzi-Berlusconi) government, the only one capable of securing some stability for moving ahead reforms. Both parties are rather favorable to trade, but the question is how much could this government hold and how much could it risk, while keeping an eye on how the anti-trade 5-Star Movement and Northern League will consolidate their power as the only relevant opposition parties.

Germans will vote in September, amid the societal crisis that have led the centrist CDU and SPD forces to “bleed” electorate to radical anti-EU reformists, such as the AfD. The terrorist attack in the Berlin Christmas Market complicated things further and many events can happen in the remaining time interval. Merkel’s CDU seems to prefer a new governing coalition, alongside the Greens and the Liberals, which would thus exclude the SPD. By putting SPD in opposition, CDU would solve two issues: gain more room for maneuvering in the government and avoid further fragmentation and instability of the German political spectrum.

However, the reality of the elections’ outcome may terminate their plans. Either way, a new government configuration will take shape, which might change fundamentally Berlin’s policy agenda (and with it, that of the EU).  If SPD goes in opposition, freed from the governing responsibility, this would allow them to be much more critical to the trade agenda. The Greens will not fancy the possibility that they can lose electorate to the SPD as a result of this, and might be tempted to undermine the trade liberalization efforts from within the governing coalition.

These are the states of affairs as of now in the big EU countries. However, the political developments in other EU Member States can also have an impact on the EU’s trade policy. Austria, Spain, Portugal, Greece (and more recently the Baltics) also have fragile governments and rising anti-establishment anti-trade parties who hold increasing leverage in policy making, reason for which the governments of these countries will find it harder to sell EU-made trade agreements to their citizens.

2017 is clearly not business as usual for EU’s trade policy and there is a lot to be watched and done.