As if the intractable recession and the confrontation with Russia over Ukraine were not enough to deal with, the nightmare of the jihadist attacks in Paris and the revelations of Islamist plots being foiled in other European countries have aggravated an already very downbeat and anxious mood all over Europe. This benefits a range of populist parties that are riding the wave of popular frustration and anxiety about the economic crisis and the ever more acute issue of immigration. The convergence of crises in the economic, security, domestic policy and geopolitical domains have created a situation of unprecedented gravity on the continent, testing the mettle of European leaders and their ability to provide answers and solace to the anguish of their people.
Just as France was reeling with the trauma of three consecutive jihadist attacks, came news that unemployment had climbed to new heights in the last year and that the figures now confirm the euro zone is entering into dangerous deflation territory. The downward pressure on the euro has been increasing, with its value barely reaching 1.15 to the US dollar and the Swiss National Bank precipitously abandoning the peg to the European currency as it had become unsustainable. The acceleration of the euro's depreciation was partly triggered by the expectation that the European Central Bank (ECB) would at long last start a Quantitative Easing (QE) program partly similar to what the US Fed had implemented successfully and had just ended.
However, the margin of manoeuvre of Mario Draghi, the president of the ECB, is very limited because of the fierce resistance of Germany, with a quarter of his Board of Governors being against any QE and a barrage of criticism from the German media. So the expectation at this writing is that the ECB will announce on 23 January a QE program limited to 500 billion euros with the crucial caveat that the responsibility for bond-buying will be divided among the central banks of the 19 euro zone members which will have to bear any loss in the value of the bonds they buy.
This is likely to limit the efficacy of the QE program in terms of easing the provision of credit to corporations and consumers in order to re-activate economic life in these countries. In addition to that, as long as Berlin keeps dictating austerity policies to the rest of the euro zone and refuses to stimulate its own domestic consumption, there cannot be any illusion that whatever QE is done will be enough to cure Europe's crisis.
In this context where more than five years of harsh austerity and spending cuts have brought tremendous social pains and have sacrificed an entire generation in Greece, Portugal, Spain, Italy, and France without significant results, it is not surprising to see the rise of populist parties all over Europe. These parties have also capitalised on the anti-immigration feelings and rising anxiety about the loss of national identity.
It is now expected that the leftist, populist party Syriza will either come first in the national elections in Greece on 25 January or will be in a position to dictate the terms of any coalition government. If Syriza sticks to its program of expanding social spending and demanding a renegotiation of Greece's debt it is difficult to predict the ripple effects this might have on the whole euro zone.
However, one thing is for sure: A result considered as a victory for Syriza will be a tremendous boost for Podemos in Spain, a party also demanding the end of austerity. Podemos did not even exist 18 months ago and could now come first at the national elections later this year. Here again there is no predicting the ripple effects. And this is without mentioning the continuous rise of the National Front in France with its rightist, anti-EU, anti-immigration program; or of the UK Independence Party (UKIP) advocating also an exit of the UK from the EU and a tougher stance on immigration.
One key issue with all these populist parties is that while they are making the right diagnosis on some issues, they are proposing solutions that may be appealing to segments of the public but are not applicable in a world ever more complex and interdependent. Nevertheless, this creates terrible constraints and pressures on governments, aggravates the polarisation of political life and generates sometimes irresistible temptations for politicians to veer to demagoguery "to keep the electorate".
The increase of the level of the jihadist threat in Europe is of course the kind of traumatic development that is adding to the sense of crisis in Europe and providing a tail wind to populist tendencies as we have seen also in Germany with the rise of the Pegida movement. European leaders have avoided connections between the presence of a significant Muslim population and the jihadist threat but it is true - as remarked recently by the former Head of the British Intelligence Services - that terrorism originating from the West Asia has become for Europe a threat as severe as the one posed by the Soviet Union during the Cold War. Too many of the thousands of people with European nationalities or residency who have gone fighting with extremist jihadists in Syria and/or Iraq are coming back to the continent with military training and a thirst for blood. It will be very difficult to keep the balance between the need for additional measures to preempt and fight the jihadist threat and the protection of the values of tolerance and respect for civil liberties.
In some respect, the confrontation with Presidient Putin over Ukraine is another brutal awakening from the delicious fantasy that Europe had entered the "post-conflict era", that every conflict or problem could now be solved by clever diplomats, that positions and interests could be advanced just by using "soft power". Obviously many people in the world - including Mr Putin or the leaders of the Islamic State or of Boko Haram in Africa - have not read the memo: they still live in the "conflict era" in which the resort to violence, to military means is part of the panoply of tools to advance national interests or ideological and religious extremist goals.
Europe - and the US in that respect - think that they can contain and "punish" Mr Putin by using economic sanctions. But as these sanctions are giving an impact on the Russian economy they are also having a boomerang effect on Europe: Germany's already slowing economy has been hit significantly by the loss of the business it used to get from Russia; other countries have been also hit although to a lesser way. In that respect a key question is the extent of the exposure of European banks to Russian public and private debt and how this factor could play if Mr Putin feels at some stage that he has his back to the wall.
This is the year of living dangerously for Europe - in every sense of the term.
The writer is the president of Smadja & Smadja, a strategic advisory firm
Twitter: @ClaudeSmadja
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
