2024 Grey Swan: Climate Breaks the EU

By Bilal Hafeez

Summary

• No one expects the European Union (EU) to break up, yet there is increasing public opposition to EU climate laws.
• Only anti-EU far-right parties clearly oppose EU climate policies, which could force disillusioned voters to pick them in the 2024 European elections.
• This could set in train an EU breakup as far-right parties dismantle the project from within.

Market Implications

• The euro would tumble, peripheral spreads would widen, and European stocks would fall. But German autos could end up unexpected winners.

It All Comes Down to Cars

A sovereign crisis in 2012 could not do it. Neither could an immigration crisis in 2015. But a climate policy crisis in 2024 could be what breaks the EU.

At the heart of the crisis will be cars. 2021 saw a new EU law that forces all EU countries to meet a 55% reduction in carbon emissions by 2030 and be net-zero by 2050. Then in 2023, the law was revised under the ‘Fit for 55’ package to make the transition more concrete. Within the package, the EU adopted a new climate law that forces countries to start reducing the number of new cars that emit carbon. By 2030, all new cars and vans will have to emit zero carbon. That is in just seven years.

Consequently, European governments are on the path to forcing citizens to buy electric cars. While in theory, this may sound reasonable, in practice, electric vehicles are expensive and hard to ‘re-fuel’.

European Public Do Not Support Bans on Petrol Cars

It is no wonder, then, that the European public oppose governments banning the sale of petrol and diesel cars. A recent survey found that 61% of Germans and French oppose such a move, and even 51% of progressive Denmark do too (Chart 1). Compare this with attitudes towards banning single-use plastics: 67% of Germans support this, 78% of French, and 76% of Italians (Chart 2).

Anti-EU Far-Right Parties Oppose EU Climate Policies

The EU’s problem is that the only political parties that oppose these climate policies are far-right anti-EU parties. Take the recent shock victory of Geet Wilders’ PVV party in the Netherlands. His climate policy includes extracting more oil from the North Sea, abolishing climate laws, and scrapping any bans on petrol cars. We can see similar policies around Europe:

• In France, opposition leader Marine Le Pen wants to reduce taxes on fossil fuels and slow the adoption of electric cars.
• In Germany, the far-right party AfD goes even further and wants to abolish the EU climate policy.
• Meanwhile, Italy’s current Prime Minister Meloni has called EU climate policy ‘climate fundamentalism’ and consistently voted against phasing out fossil fuel cars.

European Elections Could Throw Grenade at EU Project

All this could come to a head at the European parliamentary elections in June 2024. Far-right parties will likely focus on rejecting EU climate policy and supporting anti-immigration and anti-EU policies.

This stance could earn these parties supporters even if voters disapprove of their other policies. But a big victory by the far right could set in train the break-up of the EU as these parties work within the system to break it up.

Additionally, Portugal (March), Belgium (June), and Austria (September) have parliamentary elections in 2024 too. In all these, climate and transport policy could feature heavily.

Pain For European Markets

Should this scenario materialise, the EU break-up trade could return – the euro would weaken, peripheral bond spreads would widen, and European equities would tumble.

But there could be a silver lining. Lagging German autos could be given a reprieve in their conversion to electrification and could get a boost by the fragmentation of the EU.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)