Top Risks 2024: Implications for Europe

 

IMPLICATIONS FOR EUROPE
Europe is not the main focus of any of this year's Top Risks. In fact, as highlighted as one of the report's red herrings, the steady uptick in support for populist parties will test mainstream politics but is unlikely to fundamentally undermine the post-war centrist consensus in Brussels or key capitals next year. But all is not well on the old continent. With the June European Parliament elections approaching and domestic issues plaguing the most important member states, the EU will turn increasingly inward. Policymaking will diminish in pace and ambition, hampering the bloc's ability to respond effectively to the many economic, social, and foreign policy challenges it faces. Against this backdrop, Europe will be strongly affected by many of the top risks.

Two in particular stand out. Turmoil in the United States in the lead-up to the presidential election will compound doubts about the reliability of Europe's most important ally and traditional security guarantor—while the worst security crisis in post-war Europe continues to fester and could even turn in Russia's favor.

Several other risks will also combine to heighten the many stresses European governments are already grappling with. The sluggish recovery will continue to feed discontent and limit room for public investment. El Nino-related weather patterns have the potential to aggravate migration pressures, while the ongoing conflict in the Middle East could foster violent extremism in Europe. Here are some of the key takeaways from Eurasia Group's Top Risks 2024 report for Europe. For the full list of risks, please see the report here.     

• While Joe Biden's presidency has failed to produce the full harmonization of transatlantic relations many had hoped for since 2020, it has restored a sense of normalcy and confidence in the US as Europe's most important military ally and the ultimate guarantor of European security. This is most evident in Washington's leading role in orchestrating the response to Russia's full-scale invasion of Ukraine. The conflict has highlighted continued European reliance on US defence “muscle” and has given NATO a new lease on life. As the US elections unfold, all this will once again be called into question.
• Irrespective of the outcome, a more polarized, dysfunctional, and inward-looking US will be a less reliable partner—undermining EU hopes of jointly advancing a number of bilateral and multilateral issues, from the war in Ukraine to trade, climate, AI governance, and China de-risking.
• A second Donald Trump administration would come as less of a surprise than in 2016, but European governments are no better prepared for it. Little strategic thinking has been devoted to the possibility, with the notable exception of trade policy, where new barriers between the world's top two economies are much feared. The immediate response will see renewed calls for greater European unity and “sovereignty,” but the EU will struggle to translate these into progress given its own domestic challenges and divisions. Meanwhile, countries such as Hungary are set to actively welcome Trump's return as a useful counterweight to Brussels. Populist parties (and governments) across Europe will be legitimized and emboldened by a second Trump term.
• Moreover, a Trump victory would deal a potentially irreparable blow to the already damaged rules-based multilateral system that underpins the EU's economic prowess and global clout. More concretely, it would call into question the US commitment to NATO and likely spell the end of US support for Ukraine, which the Europeans will be unable to fully replace. Both would send shockwaves through Europe's fragile security landscape and trigger existential fears among Europeans, especially on NATO's eastern flank.  
• Heightened security risks, particularly for the Baltics, Poland, and in the Black Sea, will be the most significant implication of Partitioned Ukraine (risk #3). A weaker, more risk-acceptant Ukraine and an emboldened Russia raise the risk of the conflict spilling over, particularly if NATO assets are accidentally hit. The possibility of asymmetric retaliation by Russia toward Europe also remains, be it via cyberattacks, election interference, or other means.
• Moreover, while Eurasia Group expects Europe to maintain financial and military support at roughly current levels next year, this will not be enough to give Kyiv the upper hand, nor to offset any reduction in US aid. While US credibility would take a more significant hit from failing to support Ukraine militarily, Europe's soft power would also be weakened. This could facilitate attempts by China and Russia to build relations with countries in Europe's neighborhood—as outlined in Axis of rogues (risk #5).
• A weaker Ukraine losing ground in the war will likewise impact cohesion within the EU, and tensions between Kyiv's staunchest backers and countries weary of an open-ended commitment will become more visible. More countries are likely to align with Hungary in stalling Ukraine's EU accession process and could join an emboldened Budapest in its attempts to hold up military and financial aid for Kyiv.
• The effects of the energy price shock will continue to weigh on Europe's economy this year. The post-pandemic recovery has given way to a prolonged period of lackluster growth, with significant political implications. Inflation in Europe will likely remain above target for much of the year, not least given the underlying wage pressures in a tight labor market and persistent drivers of inflation. As a major importer of energy and food, Europe will be especially vulnerable as supply chains come under more strain owing to ongoing political instability, conflict, and climate-related events. The lackluster demand in China (Top Risk #6), will also weigh on growth. Increasing overcapacity in the East Asian economy will further undermine the cost-competitiveness of European manufacturing—still reeling from the energy shock.
• For governments, lower growth and high financing costs will make it harder to rebuild a fiscal cushion to respond to future crises and limit resources available to fund the growing investment needs to support strategic priorities such as the green transition, defense, and the diversification of critical supply chains.
• The EU is also heavily reliant on imports of critical raw materials. As highlighted in Top Risk #7, the growing politicization of raw materials trade will drive up costs. This could hamper the EU's ability to meet its decarbonization goals and build up the domestic industrial base in critical technologies. With efforts to boost local production hampered by regulatory obstacles and inadequate subsidies, Europe will remain heavily dependent on China. 
• A tough environment for households (especially low-income ones) and firms gives more momentum to antiestablishment parties and favors the opposition over incumbents. The combination of political challenges and limited fiscal space will heighten tensions within coalition governments, with negative repercussions for governability and growing uncertainty around policy.
• El Nino-related weather patterns will drive up food prices, disrupt trade routes in some cases, and—most relevant for Europe—add to the significant migration flows Europe is already struggling to manage.
• At the same time, the ongoing war in the Middle East has the potential to add to lingering inflation challenges, especially in the event of a significant escalation in the conflict that would risk triggering higher oil prices. In addition, a regional widening of the war could add to migratory pressures on Europe at a time when this issue is already the main driver of populist politics. Continued fighting in Gaza will increase the already considerable tensions the conflict has ignited in Europe, driving up violent extremism in European cities. While isolated terrorist actions by individuals in France and Belgium last year did not have meaningful implications, larger-scale attacks that pose substantial risks to public security are possible in 2024, and would benefit far-right parties in an important election year. Beyond terrorism, hate crimes targeting Jewish and Muslim communities will continue to be a concern in some European countries, exacerbating polarization.
• With European Parliament elections in June, the risks of amplified disinformation and election interference described in Ungoverned AI (risk #4) are particularly important for Europe. Furthermore, the emerging regulatory gap between the EU, which has gone further than any other jurisdiction in advancing a governance framework for AI, and the regulatory burden it implies could undermine European competitiveness in this critical and fast-evolving field.