Beware the Guns of August—in Asia
How to Keep U.S-Chinese Tensions From Sparking a War
Following France’s 1954 humiliation at the hands of the Viet Minh at Dien Bien Phu, U.S. President Dwight D. Eisenhower divined the phrase “domino effect” to suggest that the victory of communist guerrillas would lead to a cascade of parallel events elsewhere: “You have a row of dominos set up,” Eisenhower said. “You knock over the first one. … What will happen to the last one is the certainty that it will go over very quickly.” Ike’s idea caught on; the “domino” concept was applied to everything from the Cuban Revolution to the Prague Spring.
Most recently, the prospect of a domino effect was a staple of discussions of the British referendum on EU membership. In this case, a first-mover (the United Kingdom) would trigger the implosion of the EU by daring to exit first. It would be swiftly followed by others eager to free themselves from the shackles of transnational regulators and their world-leading single market.
Domino distress served both sides. As the Leave campaign heated up in October 2015, British entrepreneur Jim Mellon warned that “the EU is heading for a cataclysmic implosion and Britain must get out to avoid (the) grim repercussions.” It implied a chaotic unravelling. The following February, Daily Mail columnist Dominic Sanbrook gave it a historical spin: “If [EU leaders] fail to learn the lessons of the past, then one day, I fear, the EU will go the way of the Soviet Union—a discredited vision of utopian internationalism, unceremoniously dumped in the dustbin of history.”
In the other camp, in April, European Parliament President (and now German chancellor candidate) Martin Schulz warned that Brexit could trigger “an EU implosion.” This view of impending doom also crossed the Atlantic, where the conservative National Interest (and the CATO institute) published an article titled, “The EU will likely implode,” featuring a straightforward prediction: “Once Britain’s exit becomes near-certain, others will rush for the way out.”
In fact, domino worries go back further than then-Prime Minister David Cameron’s fateful 2013 acquiescence of backbenchers with a “in / out” referendum. Indeed, they may have contributed to it. The constant search for an implosion trigger dates to the darkest days of the continental debt crisis, when the monetary union was thought to be on the verge of collapse. Greece’s exit from the Eurozone was discussed in excruciating detail, not merely in Athens but also within the German Finance Ministry. There were conspiratorial stories about the secret printing of an old-new currency, the drachma, which only worsened the crisis. Hence the “Grexit” moniker that spawned “Brexit” and now “Frexit.”
Soon after that, in 2012, reports of Italians crossing the Swiss border with cash savings abounded. Deutsche Bank went as far as to advertise on Iberian soil the wonders of saving “in safe Germany,” outraging the Spanish officials who worked to restore confidence in the local banking system.
After successive bailouts of Greece, Ireland, and Portugal, respected fund managers, such as Bridgewater founder Ray Dalio, and columnists, such as Financial Times’ Wolfgang Münchau, argued the Eurozone could not handle the larger checks needed to support Spain or Italy. In November 2011, following a failed Italian bond auction, Münchau wrote, “the Eurozone has ten days at most.” The following July his, column decreed the crisis “would not be resolved for 20 years, if at all.” Yet a Spanish bailout came and went; a new Italian government restored confidence, as did European Central Bank President Mario Draghi, who famously pledged to do “whatever it takes” to save the eurozone. “Believe me,” he added, “it will be enough.”
And it was. As expectations of doom eased in the continent, they escalated over the Channel. After the referendum, they permeated the upper echelons of government. That is how British International Trade Secretary Liam Fox was quoted last September predicting that the EU would “implode when Britain leaves and Germany will pick up the tab.” A few weeks later, the never-circumspect Daily Express concluded that “Britain will have the strongest hand in Brexit negotiations as EU is ‘starting to crumble’.” Meanwhile, the Daily Mail and the Daily Telegraph published vindicated editorials, the latter having proclaimed the “birth of a new Britain” the morning of Brexit.
None of Europe’s electoral tests since Brexit have set off a domino effect.
Given this background, it is unsurprising that the first call by the Donald Trump administration with EU officials allegedly began with one of his staffers asking which country “would leave next.” It was no faux pas. After all, Trump forcefully backed Brexit and hired the same big data company, Cambridge Analytica, which helped the Vote Leave campaign zero in on its voters. Trump’s Ambassador to the EU, Ted Malloch, has even likened the union to the Soviet Union, suggesting “there is another Union that needs a little taming.” The problem with this perception of an impending European chain collapse is that it is not borne by facts. None of Europe’s electoral tests since Brexit have set off a domino effect.
For instance, Spain held a general election three days after the British referendum. It led to a new term for Mariano Rajoy, leader of the center-right Partido Popular. It was Rajoy—alongside Finance Minister Luis de Guindos—who implemented the 2012 bank bailout funded by the European Stability Mechanism. Despite the depths of Spain’s real estate boom and bust, the country has developed no anti-European movements. At least on Iberian soil, Europe remains synonym of the country’s transition from three decades of dictatorship to globalized modernity. There is no viable party to argue for “Spexit.”
The Spanish party most critical of the European-sponsored structural reforms—populist, left-wing Podemos—severely underperformed its polling right after Brexit. That helped the pro-European socialists, the PSOE, defy every single poll published during the campaign to become the lead opposition party. Podemos, which once criticized the euro without arguing for an exit or the end of the EU, has yet to recover from the blow. Those who awaited an Iberian departure from the eurozone are now faced with another Rajoy term as well as Spain’s record as the fastest-growing large Eurozone economy for the third year running. Unemployment is still high, but it is hard to argue Spain is failing.
The other key post-Brexit electoral test in 2016 was last October’s Austrian presidential election. There was no post-Brexit cascade there either: against expectations, pro-European candidate Alexander Van der Bellen beat xenophobic Norbert Hofer. And this was after Hofer’s campaign decided to disavow the idea of leaving the EU.
This trend transcends electoral tests. According to the IFOP, public support for the EU has increased by double digits in Germany (18 percent), France (19 percent), and Belgium (11 percent), with Spain and Italy also recording statistically significant increases following Brexit. In Denmark, Finland, and the Netherlands, recent polls likewise registered improvements in the EU’s standing from the nadir of 2011.
At first sight, December 2016’s Eurobarometer—a periodic study with granular, country-specific data for every EU member nation—appeared to deliver an inconsistent message. In that survey, only 36 percent of Europeans approved of the EU. And yet, EU support is higher than that for national parliaments (32 percent) and governments (31 percent). And this first post-Brexit reading returned the highest marks for the Union since the autumn of 2011. It makes sense: growth is accelerating, inflation has revived, and the eurozone recorded its first sub-ten percent unemployment reading since 2011.
Thus far, in other words, there has been no domino effect. Sceptics might argue that the reason is that Brexit has not yet happened. Within days, British Prime Minister Theresa May will trigger Article 50, the thus-far untested EU exit clause.
Viewed from the continent, however, the domestic politics of Brexit look unenviable, which could help explain the pro-Europe surge. The referendum abruptly ended a government that had recently won a clear parliamentary majority and subjected the Conservatives to a power vacuum eventually filled, not without difficulty, by Prime Minister Theresa May. Internal divisions, to put it mildly, have not healed. It also deepened rifts within the opposition, pitting radical Labour leader Jeremy Corbyn against his own parliamentarians. Scottish nationalist pressures revived, with First Minister Nicola Sturgeon now demanding a new independence referendum; and Irish nationalists took note. Meanwhile the value of the pound has crashed, eviscerating the international worth of British assets at a time while the trade deficit is at a record high. Notwithstanding resilient consumption levels, the Bank of England and the Treasury have either explicitly or implicitly warned about “tough times” ahead. That may be why the spring Budget broke key Conservative promises on taxation.
In a celebrated December 2016 speech, May argued for transition deal with the EU, but she has concurrently promised at least two things that appear incompatible with it (the end of EU permanent residency rights and the end of jurisdiction for the European Court of Justice). The former has caused a rift with the House of Lords and her government was recently defeated in the Supreme Court when trying to bypass Parliament. Nine months since the referendum, the United Kingdom’s negotiating stance remains confused, with no fewer than three ministers (including Liam Fox) vying for the limelight. Amidst the uncertainty, many companies have announced divestment plans. The “birth of a new Britain” is not without its pains.
For its part, the EU faces a minefield of elections this year, from the Netherlands on March 15 to France in April and Germany this fall, as well as snap polls in Greece and Italy within 12 months. Among leading economies, only Spain will avoid an election. Might that trigger the domino at last?
A 2017 anti-European populist sweep on the continent is possible, but not probable. What is likely is that these elections will lead to a deeper pro-European reverse domino.
Usually dull Dutch elections preoccupied observers this year, with (particularly British) commentators predicting “Nexit” even when Dutch law requires a European treaty change to trigger a referendum. Ahead of this week’s election, the Daily Mail called Geert Wilders, Freedom Party (PVV) leader, “a rabble rouser who could be the next nail in the EU’s coffin.” Wilders enjoyed a surge of support during the migration crisis; but like in the last general election, his support cratered as the date approached. Prime Minister Mark Rutte’s toughening up on immigration and foreign policy endangered Wilders’ only real electoral message while promising—alongside other parties—to sideline him in coalition talks. After excruciating discussions, Rutte will lead another government, which the real overperformers in the election—intensely pro-European D66 and Greens, both with almost the same votes each than Wilders—will most likely join.
If one goes by the Anglo-American press (and the Kremlin-sponsored echo chamber), it would seem that Marine Le Pen and her National Front are on the verge of power in France and that the EU will soon be dismantled. Analysis has found that, on average, the Daily Express has published no fewer than two stories on Le Pen every day. Yet she is nowhere closer to the presidency than her father was 15 years ago when he reached the presidential second round, only to be humiliated by Jacques Chirac.
Le Pen’s polling has hovered around a quarter of the electorate since 2013, most likely giving her a spot in the runoff. This is because she will run with a devoted base in an atomized field. But in a second round against only one other candidate, no poll or study puts her remotely close to victory. Every other plausible candidate—the embattled François Fillon or the Obama-like Emmanuel Macron—would beat her comfortably. Meanwhile, her disapproval ratings are consistently over 50 percent. Unlike in the United States, where Trump’s disapproval was similarly high, Le Pen would need half plus one of the voters to win the second round. Historically, second round polls in France tend to tighten, as they did in 2012 between Nicolas Sarkozy and François Hollande, but in the last 30 years there has been no runoff upset.
Unlike in the United States, where Trump’s disapproval was similarly high, Le Pen would need half plus one of the voters to win the second round.
To be sure, there is always a first time. But even if Le Pen were to access the Elysée, an EU Frexit referendum would require a National Assembly majority or the invocation of a constitutional prerogative untested and severely constrained since Charles de Gaulle. The Front National currently has two representatives in a chamber of 557; in the last regional elections, it qualified for three run-offs, but it lost all three. A parliamentary majority is a bridge too far, even for President Le Pen.
Ironically Le Pen would be more popular if she did not propose to do away with the euro. The issue is divisive within the National Front, including with younger family star Marion Maréchal Le Pen. That may be why her “144 points” platform discusses “sovereignty” without specifics. Younger Le Pen—who has argued that the euro should not be on the referendum ballot—is closer to the electorate: a recent Les Echos poll puts support for the euro at 72 percent. And according to a recent YouGov study, French voters would want a referendum on the EU (44 percent) and the eurozone (41 percent); but only to support them, in the case of the eurozone by over 20 percent.
Look beyond Le Pen, and the most likely next French president wants the very opposite of Frexit. Macron is eager to revolutionize European institutions, not to dismantle the EU, but rather to deepen integration. He is in favor of a eurozone finance ministry capable of delivering counter-cyclical spending as well as a path toward common debt issuance, historically one of the crucial building blocks of the American federal government after Alexander Hamilton’s fabled Funding Act in 1790, which created a federal debt market.
Macron has that in common with Martin Schulz, who will attempt to deprive German Chancellor Angela Merkel of a fourth term this fall. Merkel or Schulz, no populist alternative will take power in Berlin. The nationalistic, xenophobic Pegida, which made headlines in 2015, has fizzled, and anti-euro Alternativ für Deutschland hovers around ten percent. Neither stands a chance of being part of the next government. The very fact that Schulz is running, and is currently leading, challenges the perception Germans are uneager for further integration. For his part, Macron’s most pro-European speech was delivered in Berlin, no less.
Off the record, British diplomats admit that the main loser from Macron and Schulz victories would be the United Kingdom, since those candidates and parties will be unwilling to give London selective access to the single market. Schulz’s SPD, which like its candidate has backed a path to common eurozone debt issuance, has been far more critical of the UK than Merkel. The looming political transitions in Paris and Berlin have only emboldened the pro-Europeans elsewhere.
After years of failed bailouts and a slump deeper than the U.S. Great Depression, Greece is the only nation where views of the EU are predominantly negative. But since the bailout referendum in 2015, “Grexit” exited the political vocabulary. Prime Minister Alexis Tsipras defied the EU, only to get a worse deal and capital controls. The electorate remains stubbornly supportive of the euro. That—alongside continued stagnation and charges of corruption—explains why Tsipras’ popularity is in free-fall. His would-be replacement is an intensely pro-European reformer, Kyriakos Mitostakis, who wants to keep the country at the forefront of integration. His polling lead, currently 19 percent ahead of Tsipras, keeps growing.
The last best hope for a post-Brexit domino is Italy. There, one can find popular populists on the left (Movimento 5 Stelle, or M5S) and the right (Lega Nord). Further, pro-European Premier, Matteo Renzi, quit office last December after losing a referendum on political reforms. But Renzi is not finished: he is most likely to lead his ruling party in elections within 12 months. Polls suggestthat the old premier has a good chance of being the next premier.
The Lega Nord worries those who do not remember that the party was once part of Silvio Berlusconi’s center-right coalitions; it did not threaten the EU then and it is unlikely to do so now. It could seek a coalition with Beppe Grillo’s M5S but its platform, which likens southerners to unwanted immigrants in their own land, is anathema in the regions where Grillo’s anti-corruption crusaders thrive. It would be a pyrrhic victory. Grillo is similarly misunderstood outside Italy on at least two fronts. First, he has repeatedly argued that his tech-savvy movement will only take power alone, if and when it has a majority. But the party currently polls around 30 percent at best. Second, M5S’s attitude toward the euro is critical but not destructive; some in the party want a consultative referendum, but they endorse neither EU nor Eurozone exit. In fact, a few months ago, the movement tried to join the most pro-federalist coalition in the European parliament, ALDE, a plausible home for Macron’s representatives.
Notwithstanding the success of his concept, Ike’s worries were unwarranted; most of South Asia avoided communism. A domino effect may be a convenient rhetorical device during the United Kingdom’s Article 50 negotiations, but Nexit and Frexit are only likely on the pages of some newspapers. From Madrid to Vienna, moreover, there is evidence of a pro-European surge, which is only likely to be furthered by elections in the next year. With leaders such as Rajoy, Rutte, and Renzi and new entrants such as Macron, Mitsotakis, and Schultz, the post-Brexit EU is more likely go for the tried and tested pillars of the early American republic—common defense and common debt—than abrupt disintegration. Paradoxically, worries about an impending EU collapse that never materialized may in turn further the very opposite outcome.