As the European Union celebrates its 50th anniversary, it finds itself entering a period of uncertainty and faces a loss of direction and a number of key challenges that have credit risk implications, says Moody’s Investors Service in a new report on “International Policy Perspectives”. In particular, the combination of a frenetic period of enlargement and the rejection of the EU Constitution in the French and Dutch referendums has resulted in a shattering of the
The report, entitled “The EU at 50: Are Its Best Years Behind It?”, explains that the fate of the EU is of significance from a credit risk standpoint because of the virtuous role that European integration has played in providing political stability, anchoring macroeconomic policies and fostering a large-scale microeconomic transformation.
“However, following recent developments, the EU is deeply uncertain about whether it should continue to promote its values and its model through further expansion or whether it should now consolidate its enlarged membership and become a closed group of states,” says Pierre Cailleteau, Moody’s Chief International Policy Analyst and author of the report.
At least four major challenges confront the EU over the next decade, according to Moody’s. Firstly, ageing populations will start taking their toll, especially in terms of increased government liabilities.
Secondly, a degree of ineffectiveness is setting in, as voting rules agreed in 2000 have clearly become inadequate for the efficient functioning of the enlarged Union, combined with the lack of an appropriate ‘modus operandi’ following the rejection of the Constitution. In this context, ‘inter-governmentalism’, i.e. the clashing of key national interests, is coming increasingly to the fore as the number of member states has increased and with many countries facing a high degree of political fragmentation.
Thirdly, a considerable degree of enlargement and reform fatigue is taking hold, with the future of further enlargement now deeply compromised and the benefits of reforms being far from evident for many citizens. Finally, anxiety is a growing theme, with
“From the rating agency’s perspective, the implications of these challenges are significant. On the one hand, Moody’s expects that the so-called ‘EU halo effect’, which has had a powerful positive impact on new members’ government ratings, will most likely remain active, although enlargement fatigue will result in a dilution of this effect for aspiring members — primarily Turkey,” says Cailleteau.
Some observers have viewed the EU as spelling an “end of history” for sovereign ratings. However, the current context — the pressure of ageing on public debt and the erosion of the tax base — suggests that the picture is somewhat more complex and challenges this notion.
“A final source of risk is the possibility of a dislocation of the EU or European Monetary Union (EMU), with the two prospects very much linked to each other. However, Moody’s view is that it remains highly unlikely that EMU will fall apart as the economic and financial rationale for such a development is very weak. Nonetheless, whilst extremely improbable, such a decision is not implausible,” Cailleteau explains.
