European Integration Faces Unprecedented Challenges

By HE YAFEI

THE second half of the 20th century and the first 15 years of the 21st century have witnessed prodigious development of globalization. The rapid expansion of the world economy and the success of European integration， including use of the euro， have raised hopes of the possible building of a “global village.” But globalization has not been smooth sailing. The anti-globalization movement and other associated problems have relentlessly challenged the fundamental philosophy of globalization and its strategic framework. The multiple crises that currently plague Europe seriously threaten both the process of European integration and the survival of the euro； they also challenge the integration of other regions of the world， so affecting the interests of the international community. The coming decade will likely determine the success or failure of globalization in the 21st century. A serious analysis of the European integration process and the difficulties it encounters， therefore， is in order.

European integration has travelled a bumpy road over the 60 or so years since the establishment of the European Coal and Steel Community， which marked its beginning. All achievements since then have been hard-won. The core issue of advancing from regional integration to globalization lies in the contradiction between the upholding and at the same time partial transfer of national sovereignty. The creation of the euro exemplifies this conundrum. Currencies in the euro zone have been unified， so partially transferring sovereignty， but the fiscal policies of countries in the zone have not， so upholding national sovereignty. The problems and crises associated with the euro largely stem from this contradiction.

European integration now faces four challenges that imperil the survival of the European Union and the euro.

First， the continuous influx of refugees， which has raised doubts on whether or not the Schengen Agreement， which allows the free movement of people living within the Schengen Area， can last. Unrest in the Middle East， especially the civil war in Syria， has induced millions of refugees to enter Germany， the U.K.， France， and the Nordic countries through Greece， Poland， Hungary， and Turkey. Vast numbers of illegal immigrants have sparked squabbles between the EU countries whose policies in this regard are seriously at odds. Germany， under the leadership of Angela Merkel， adopted an open-door refugee policy， and received over one million refugees in hopes that other countries would follow suit. But instead it met with vehement opposition from other EU countries. Hungary， Poland， Austria， and Greece – mired in the tidal inflow of refugees – decided to close their borders. The U.K.， Switzerland， France， and the Nordic countries， meanwhile， strengthened border controls to prevent refugees from entering. Consequently millions have been stranded in countries such as Greece， and there have been news reports of hundreds of migrants who， in their vain attempts to smuggle themselves into Europe， have drowned in shipwrecks on the Mediterranean.

The political impasse in which the EU is locked by virtue of the refugee problem reveals the strong contrast between the EUs comprehensive open-door policy on refugees and the policies actually practiced by most of its member states. It also highlights an even deeper question with regard to the EU – that of whether the principles of democracy， freedom and humanism on which the EU so prides itself are purely lip service， or concepts that will indeed be backed up by actions. This is clearly not a simple test.

Second is the widening north-south divide in the euro zone. The debt crisis in the euro area triggered by the 2008 financial crisis continues to weigh on European countries， and has yet to show any significant improvement. The situation in Greece， for instance， is no better now than when the crisis first broke out. The European Central Bank （ECB） has continued to implement ultralow interest rates and a quantitative easing monetary policy， but has so far failed to quicken the snails pace of the continents recovery.

According to International Monetary Fund （IMF） criteria for assessing a countrys burden of debt， the debtto-GDP ratio of developed countries should not exceed 85 percent， and that of developing countries should be below 70 percent. Economic theory shows that a state cannot be bankrupt unless it becomes a failed state， or ceases to exist. However， examples of bankrupt states are quite common. Greece， which the European debt crisis hit so badly that it had to implement debt restructuring， and later announce a default of its sovereign debt， is the most recent. Economists， having studied examples of bankrupt states， drew the conclusion that between 1970 and 2008， the average debt-to-GDP ratio of countries that have declared bankruptcy and defaulted on their debt repayments stood at 69.3 percent. It is now much higher for many countries around the world， particularly those in the euro zone.

The Federal Reserves raising of the interest rates in 2015 signaled the international monetary markets entry into the strong dollar cycle. Although we have no idea how long this cycle will last， the euro zone nonetheless bears the brunt of the strong dollar policy. The U.S. and the euro zone comprise developed countries with similar economic structures， among which those with capital account surpluses （Germany possibly the sole exception） must generally rely on foreign capital or on borrowing to sustain their economic growth. Low cost loans， therefore， are crucial to them. A typical example is Greece and other countries whose sovereign debts skyrocketed during the most critical period of the European debt crisis， and the difficulty they encountered in finding buyers. The Feds raising of interest rates and the consequently strong dollar will induce China， Japan， and other countries with large foreign exchange reserves to adjust the composition of their basket of reserve currencies to increase their share of U.S. treasury bonds and financial bonds. Currently， the euro-to-dollar exchange rate continues to fall – an irreversible trend in the short term. Meanwhile， the United States monopolization of international rating agencies continues to downgrade the rating credibility of euro zone countries. This is one of the reasons why they remain under the shadow of the debt crisis. Robert A. Mundell， so-called father of the euro， commented that the three major rating agencieslowering of Greece and other countries ratings when the crisis swept the euro zone amounted to “rubbing salt into the wounds.”

Third is the division of Europe into east and west. Although the eastward enlargement of the EU and NATO over the past 20 years has now encompassed almost the entire European continent， new members from Central and Eastern Europe， such as Poland， Hungary， and the Czech Republic， have retained a strong national sentiment， and expressed doubts over EU integration. Their reaction to the unprecedented refugee influx has been to express dissatisfaction with Germany for pushing other European countries to open their borders to them. They are also adamantly opposed to mandatory refugee quotas.

As to security in Europe， there are different understandings and concerns in this regard between Central and Eastern European countries and those in Western Europe. After the Cold War ended and the Soviet Union collapsed， the EU and NATO sought all means possible to spread eastward. After 20 years of efforts， they have compressed Russias strategic space and pushed the battle front to Ukraine. The great power strategy game was indeed evident in Russias counterattack. For the time being the Ukrainian crisis has subsided， but it is far from resolved. The current situation in fact amounts to a strategic stalemate among the U.S.， Russia， and Europe， but sooner or later it will become a “crevice” in European security. For historical reasons， the countries of Central and Eastern Europe have serious misgivings about Russia. It is their hope that the U.S. and NATO will station troops in Poland and the Baltic countries as a Russian deterrent. At the same time， relations between major EU countries， such as Germany and France， and Russia， are more complicated due to their economic interdependence， particularly in the field of energy. The fundaments of the situation are unlikely to change in the short term， although the U.S. will in the long run increase its energy supply to Europe to reduce the continents dependence on Russian oil and gas. Owing to this east-west division， the problem of European security and controversy over how to handle relations with Russia remain major obstacles to European integration.

Fourth， the U.K.s EU referendum has drawn ever greater public attention. Although it is too early to forecast the outcome， the difficulties Europe faces in its integration process， especially the growing division among EU member countries due to the refugee crisis， will undoubtedly affect the results of the referendum.

The U.K. has always enjoyed special status in the EU. But as half of its foreign trade is with EU member states， its economic interests are sure to be affected if it leaves the EU. Meanwhile， the U.K. has retained its currency， the pound， which represents about 10 percent of the international monetary systems special drawing rights（SDRs）. Londons status as an international financial center will thus remain unchanged whether or not the U.K. leaves the EU. From the foreign policy perspective， the U.K. is closer to the U.S. than to its European partners.

The U.K. referendum has polarized world attention because its results will have impact not only on the U.K. economy and the direction of its policy， but also on the success or failure of European integration. The U.K.， France， and Germany are the three pillars of the EU， which is what makes the EU a main international force. If the U.K. decides to leave the EU， it is possible that Sweden， Denmark and other Nordic countries will follow suit and carry out their own referendums on EU membership. In that case， the future of the EU is uncertain.

For the EU， the current refugee crisis is certainly the biggest challenge to its future. If its member states continue to act independently by adopting inconsistent policies， the impact on EU integration will be much more serious than that of the division of countries in the euro zone. Since its creation in 1999， the euro has become a major reserve currency， second only to the U.S. dollar， with a share of about 20 percent. Judging from the international monetary system and the needs of countries in the euro zone， the euro will not disappear. The worst scenario would be a reduction of euro area countries due to the withdrawal of Greece and possibly other countries.

In comprehensive analysis， European integration is an important trial in the field of global governance. Much headway has been made in this regard. The contribution of European civilization to human progress， especially in the area of global governance， is undeniable. In that sense， European integration is both an attempt at and an experiment in global governance on the part of the international community. That also explains why the world pays such close attention to European integration. The rapid development of globalization in recent decades has brought unprecedented economic prosperity to the world， but it has also highlighted global challenges， such as the growing gap between rich and poor， environmental degradation， and the acceleration of global warming. In this difficult period when the world is still under the pressure of an economic downturn， peoples doubts about globalization and regional integration are bound to grow.