Populist advances set to hobble EU integration

BRUSSELS Tue May 27, 2014 12:46pm EDT

Marine Le Pen, France's National Front political party head, arrives at a news conference at the party's headquarters in Nanterre, near Paris, May 27, 2014.  REUTERS/Philippe Wojazer

Marine Le Pen, France's National Front political party head, arrives at a news conference at the party's headquarters in Nanterre, near Paris, May 27, 2014.

Credit: Reuters/Philippe Wojazer

BRUSSELS (Reuters) - Stunning gains by anti-EU and populist parties in the European Parliament elections will prevent any new treaty on deeper euro zone integration for the foreseeable future and may tilt Europe's economic policy mix more towards expansion.

With the 28 European Union leaders meeting in Brussels later on Tuesday to digest the results of a widespread vote against the pro-European establishment, the first policy consequences are becoming clear:

NO MORE TREATIES

The EU will not risk a revision of its governing treaties any time soon that would require ratification by parliaments and referendums in some member states, given the risk of "no" votes.

While that means British Prime Minister David Cameron is unlikely to achieve his goal of removing the aim of "ever closer union" from the EU treaty, in practice integration is likely to be on hold, if not in reverse, for years to come.

"We're going to see a spread of the British disease," said Fabian Zuleeg, chief executive of the European Policy Centre think-tank in Brussels. "A number of governments are going to say we cannot move forward at the EU level because whatever we do will not be backed by the public back home.

"This means stagnation that does not deal with the problems we are facing," Zuleeg said.

The risk is that changes which many economists say are needed to strengthen the 18-nation single currency area become politically impossible.

It may take another acute crisis before ideas such as a central euro zone budget, a parliament for the currency area, more intrusive supervision of national budgets and economic policies and a common fiscal backstop for the EU's fledgling banking union can be put in place, if they ever can.

International Monetary Fund chief Christine Lagarde warned on Tuesday that progress on completing banking reforms to prevent a repeat of the 2007-09 financial crisis was too slow and being hampered by fierce industry lobbying.

DASH FOR GROWTH?

There will be strong pressure to ease budgetary austerity and unleash more public investment in southern countries to boost growth and combat mass unemployment, in a trade-off for accelerating economic reforms.

With anger over recession and youth joblessness fuelling protest votes in Italy, Greece, Spain and France, Italian Prime Minister Matteo Renzi will press German Chancellor Angela Merkel, the champion of fiscal orthodoxy, to relent.

Merkel acknowledged on Monday that the EU needed to boost competitiveness and create jobs to reverse the populist tide. Whether she will agree to use Germany's budget surplus to boost infrastructure investment and spur demand remains to be seen.

Daniela Schwarzer, director of the Europe program at the German Marshall Fund in Berlin, said governments in countries where the populists made strong gains will press for changes that they can sell at home.

"They will need to show that Europe can deliver growth and employment," she said. "The traditional German approach of introducing more rules won't be politically acceptable."

BACKWARD MARCH

There will be an effort, at least symbolically, to return some EU powers over areas that affect citizens' daily lives to the national level, with Britain, the Netherlands and Sweden all demanding such a shift.

Dutch Prime Minister Mark Rutte has joined Cameron in arguing that voters want "less Europe" in many areas, rather than the "more Europe" which has been the default setting of EU integration for decades.

Outgoing European Commission President Jose Manuel Barroso, sensing the mood change, launched what he called a "REFIT" exercise last year to identify unnecessary regulation.

French President Francois Hollande was reluctant at the time but in a television address after the far right National Front topped the poll in France, he said the EU should "withdraw from areas where it is not needed".

The difficulty will be in agreeing which rules to cut. Paris is likely to resist attempts to scrap food, environment or labor safety standards such as the maximum 48-hour work week which particularly irk the British.

Some in Brussels, such as Daniel Gros, director of the Centre for European Policy Studies, say the protest vote was really addressed to national policymakers, more than the EU.

"The EU framework has been built laboriously. It is difficult to see it going away, even the euro zone crisis couldn't do that," Gros said. "You would need a very large majority to march backwards, so to speak."

Other Brussels insiders say the populists disagree with each other on many policy areas - from free trade to the euro - and may be incoherent and ineffective in parliament, so it might be wise to sit tight.

On the other hand, Mats Persson, director of Britain's Open Europe think-tank, which advocates far-reaching reform of the EU, said: "It's clear that the best way to cut off their oxygen is to show that the EU can reform itself and respond to voters."

SLIMMER EU AGENDA

EU leaders will set a slimmed-down agenda for the next European Commission, focused on promoting growth and jobs, building a common energy and climate change policy, extending the bloc's single market in energy and digital services and completing a free trade deal with the United States.

They may also mandate a streamlining of the EU executive, empowering an inner circle of five vice presidents to filter legislative proposals from the 28 commissioners - one per member state - to stem the torrent of regulation.

The Transatlantic Trade and Investment Partnership may be the most difficult goal to achieve, since many far right, far left and Greens lawmakers have vowed to block it, and the center-left Socialists may well split over the issue.

French National Front leader Marine Le Pen, who favors trade protectionism, has identified stopping the U.S.-EU pact as one of her top priorities.

But Brussels experts believe the deal, intended to boost growth and job creation by tearing down barriers between the world's two biggest economic blocs, may well survive if the main blocs in parliament make it part of a coalition agreement.

"There is still a chance to get the TTIP through, though it will be more complicated than before," said Zuleeg, arguing the key driver would be EU member governments, led by Germany.

(Additional reporting by Noah Barkin in Berlin, Robin Emmott in Brussels. Editing by Mike Peacock)