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ISIS is About to Make the Euro Crisis a lot more Challenging

2015 has seen an increasingly challenging environment across Europe. The Greek crisis nearly boiled over to a defection earlier in the year and now the tragic attacks in Paris are likely to make things even more challenging as we head into 2016.  There are two effects from the terrorist attacks that are likely to exacerbate the Euro crisis:

  1. Budget deficits are likely to expand and create more tension over the EMU’s debt:gdp constraints.
  2. The refugee crisis is increasing tensions and challenging the core ideals of the Euro project.

In response to the attacks in Paris we’ve seen France stating that they will likely be forced to blow further through their budget deficit constraints as they ramp up their military efforts.  This is likely to increase tensions in the region as the math remains unworkable in most countries.

As I highlighted several years ago the math behind the Euro crisis is ugly.  Too many countries are restricted by debt:GDP constraints which lead to austerity which hinder growth and actually cause the debt:gdp ratios to increase.  Compounding this is the unfortunate reality of war and the fact that there are few things less productive in the long-term than building goods that literally explode and kill people.  The military response to ISIS is going to boost the debt:gdp ratios in many countries while doing little for long-term growth.

The refugee crisis is also increasing tensions in the region as Europeans begin to challenge the very principles behind the Euro project.  The free movement of people and trade across Europe is essential to growth in Europe. What we’re seeing as a result of the refugee crisis is a rise in nationalism and protectionism.  This issue is unlikely to subside any time soon as ISIS claims “this is only the beginning”.

An already difficult situation in Europe is getting a lot more challenging.  I’ve been moderately optimistic about things over the last few years, but I have to admit that this might be too much to bear.  2016 is going to be a year marked by an increasingly difficult environment across Europe.

 

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