n°01/2020
5 January 2020
2020 Forecast: Europe
GANJA - A lot is going on in Europe. Some are looking to
shake things up within the European Union and strife for
greater self-sufficiency. Others will be leaving the union;
still others will have to reconsider climate risk into their
capital markets. While Europe becomes more
geopolitically aware and independent, to the east of the
continent, the situation is less amicable. Peace talks are
frustratingly slow, new pipelines are coming online, and
a strategic arms build-up is destroying the remaining
arms control pacts. So, let’s filter out the noise and look
to Europe in 2020.
Epilogue of Brexit
The main story in Europe is Brexit. With the Conservative
Party holding the majority of seats in the House of
Commons, the British Parliament will formally approve
the Brexit deal. Under the terms of the exit agreement,
the United Kingdom will leave the European Union but
remain in its single market for the rest of the year. This
will ease economic disruptions for international
businesses. To preserve their newly acquainted trade
relationship, lawmakers in London and Brussels will start
negotiating for a replacement free trade agreement.
The talks will be complicated, the European Union has a
trade surplus with the United Kingdom in goods, but a
trade deficit in services. So, while Brussels will push for
British industries to follow the norms and regulations of
the single market, London will seek to develop its own
regulations. In the post-Brexit world, the point of
contention will be which goods and services will be
included in the free trade agreement between the
European Union and the United Kingdom.
Free trade deals are notoriously difficult to negotiate,
and it will probably not be signed by the end of Brexit’s
implementation period in December. Without a free
trade agreement, Brussels and London would have to
Shirvan Neftchi
trade under the tariffs of the World Trade Organization
by 2021. Neither side wants this because it would make
trade more expensive. To avoid trading under the WTO,
the UK and the EU can either extend the Brexit
implementation period into 2021 or agree on a limited
free trade agreement that covers the most critical
sectors.
London will also be negotiating with Washington for a
similar free trade agreement. But, again, due to the
complexity, it will also last beyond 2020. Regardless of
how future free trade agreements are resolved, Brexit
has shaken the United Kingdom to its core. The
relationship between England, Scotland, Northern
Ireland and even Wales will be on the table this year.
This doesn’t imply that the UK will collapse, but it’s
possible that a crisis of confidence takes hold in the
country.
Continental Europe
In continental Europe, low GDP growth in Germany is
likely to divide the government coalition. The Social
Democratic Party will argue for higher public spending,
while the Christian Democratic Union will seek a
balanced budget policy. Division over fiscal policy will
prevent Berlin from carrying out a large stimulus
package to boost domestic consumption.
Germany will also be taking over the rotating EU
presidency in the coming year. With most of the
European Union preoccupied with finalising Brexit,
Germany and France will have the opportunity to lead
the European Union towards greater self-sufficiency in
areas like foreign policy, defence and finance. In 2020,
the union will take steps towards breaking down cross-
border barriers to military trade and technological
development. Lawmakers in Berlin and Paris will still face
opposition from the other European member states, but
2020 present an exceptional year for the EU to chart its
own course on foreign and trade policy.
In Italy, the coalition government will continuously be on
the risk of collapse due to conflicting ideologies and
policy goals. As such, lawmakers in Rome will have
difficulty to implement reforms to resolve the country’s
economic complications, such as a high budget deficit,
massive debt levels, low GDP growth, etc. In other
words, most of Italy’s structural economic issues will
remain unresolved, and this way of affairs goes for many
other European nations as well.
Also in 2020, delegations from all over the world will
gather to check on their progress under the Paris
Agreement on climate change. Little progress has been
made thus far, which will renew international attention
to the cause and increase civilian activism. The number
of climate risk lawsuits against governments and
corporations is also likely to increase, forcing companies
to price climate risk into credit decisions and capital
markets. As climate change takes a bigger role in the
conversation, lawmakers will rethink their policies with
elections in mind. And, elections are plentiful this year.
The United Kingdom and France will hold local elections,
while Poland, Belarus, and Moldova will elect new heads
of state. In Azerbaijan and Georgia, parliamentary
elections will be held, while the Greek Parliament will
choose the country’s next president. So, there a lot of
political manoeuvring ahead.
Gates of Europe
To the east of the continent, things get more exciting. No
less than four pipelines are expected to come online, all
adding to Russia’s capacity for natural gas exports to
Europe. The first is the Nord Stream 2 across the Baltic
Sea, which will expand the Nord Stream pipeline's
capacity from 55 billion cubic meters (BCM) to 110 BCM.
The second and third are the parallel Brotherhood and
Soyuz pipelines, which have a combined capacity of 140
BCM and go though Ukraine to European consumers.
The final pipeline is the TurkStream in the Black Sea,
which is comprised of two separate pipelines designed
to carry up to 16 BCM each. One of the pipelines will
supply the Turkish domestic market, while the other will
send natural gas through Turkey to Europe.
Beyond pipeline politics, the crisis in Ukraine will remain
the most volatile strife in Europe. Officials in Kyiv and
Moscow will fail to achieve progress in the peace talks
over the state of Donbas. The Minsk agreement, which
outlines a roadmap to end the Ukraine conflict, calls for
the reintegration of the separatist-occupied territories
into Ukraine in exchange for autonomy or quasi self-rule.
Ukrainian President Zelenskyy has been negotiating with
Putin, Macron and Merkel, but the core issue is that
Russia denies being a party to the conflict. The Kremlin
insists that the Ukrainians should negotiate with the
separatist leaders of Donbas. Frustration is building in
Kyiv and Moscow at the lack of a diplomatic
breakthrough. If the tensions persist, they could roll back
the progress made thus far, and destabilise the frontline
in eastern Ukraine.
Russian foreign policy
Whatever happens, the United States will sustain the
sanctions against the Russian Federation. The sanctions
targeting Russian arms sales and the Nord Stream 2
pipeline to Germany could delay some of Moscow’s
economic reforms. GDP growth will, therefore, remain
low in 2020. Social unrest is also expected to increase as
the standard of living has been dropping. Currently,
some 21 million Russians living below the poverty line,
and the number of bankruptcies among Russian
businesses increased by 57 per cent in 2019 compared to
the year before. Much of it is due to the Western
sanctions and falling oil prices over the past five year.
President Putin’s government took these macro
indications as a cue to shake things up. Last week, just
after delivering his annual state of the nation address,
Putin proposed new measures to boost social assistance
as well as crucial constitutional amendments, while
Prime Minister Medvedev and his Cabinet resigned.
2021 is an election year for the State Duma, and the
government’s resignation is designed to help Putin
secure the best possible result for his party. So, in
preparation for the next parliamentary elections, Putin is
likely to boost social spending in 2020.
Also consequential, are Putin’s proposed constitutional
amendments. Based on the current constitution, he
won’t be allowed to run for re-election after his current
term ends. Some believe that the President could seek
to extend term limits, but a more subtle way to go about
is for Putin to amend the constitution where the
nomination of Prime Minister and Cabinet is transferred
from President to the Parliament. This would grant Putin
a long-term strategy to stay in power beyond 2024.
Either way, discussion on the constitutional
amendments will be a big part of 2020.
Russia is also likely to cultivate economic relations with
unusual markets. Think of arms sales to Saudi Arabia,
mining operations in Argentina, and so on. One
relationship, however, will eclipse others: Russia’s
exchange with China. The two have a common enemy in
the United States, so it makes sense that they deepen
their cooperation. Through trade, Moscow and Beijing
will want to reduce their dependence on Western
markets. That said, it’s a relationship that is in China’s
favour. The Russians will move ahead with caution, not
committing themselves to any long-term project.
As for Russia’s relationship with the United States, the
most pressing issue will be the dismantling of the
nuclear arms control. No new agreement is in close to
replace or extend the New START treaty. With Russia’s
strategic arms build-up and the exclusion of China in
existing protocols, sustaining arms control treaties is of
little value to Washington. Plus, the development of new
strategic arms technologies, such as hypersonic missiles,
fall outside of the definitions in the current treaties.
With so many variables to consider, the value of existing
agreement will decay over the year. And, as we enter a
new nuclear age, 2019 and 2020 will be remembered as
the point of no return.
Altogether, the epilogue of Brexit, EU self-sufficiency,
climate risk, the Ukrainian peace talks, and Russia’s
foreign policy are just some of the trends to watch for in
Europe’s geopolitical environment in 2020.
References
 Trade after Brexit (Institute for Government,
December 2017)
https://www.instituteforgovernment.org.uk/site
s/default/files/publications/IFGJ5896-Brexit-
Report-171214-final_0.pdf
 Principles of the trading system (World Trade
Organization)
https://www.wto.org/english/thewto_e/whatis
_e/tif_e/fact2_e.htm
 U.S.-UK Trade Agreement Negotiations (Office
of the U.S. Trade Representative)
https://ustr.gov/countries-regions/europe-
middle-east/europe/united-kingdom/us-uk-
trade-agreement-negotiations
 Germany Lowers 2020 Growth Forecast as
Slowdown Persists (Bloomberg, October 2019)
https://www.bloomberg.com/news/articles/201
9-10-17/german-government-cuts-2020-growth-
forecast-as-slowdown-persists
 German coalition collapse looms as CDU rejects
SPD's demands (The Guardian, December 2019)
https://www.theguardian.com/world/2019/dec
/02/germany-coalition-collapse-looms-cdu-
rejects-spd-demands
 SPD shakeup: What does the future hold for
Merkel's coalition government? (The Local, 5
December 2019)
https://www.thelocal.de/20191205/stay-or-go-
four-scenarios-as-merkel-partners-debate-
future
 Brexit, Macron and Russia: Will 2020 be as
Difficult for EU as 2019 Was? (InfoBrics,
December 2019)
http://infobrics.org/post/30047/
 Italy’s Government Could Fall Six Different Ways
This Month (Bloomberg, January 2020)
https://www.bloomberg.com/news/articles/202
0-01-02/italy-s-government-could-collapse-six-
different-ways-this-month
 Nord Stream 2 to be commissioned by the end
of 2020 (Tass, December 2019)
https://tass.com/economy/1104459
 Nord Stream 2 construction activities (Nord
Stream 2)
https://www.nord-
stream2.com/construction/overview/
 Russian gas transit through Ukraine after 2019:
the options (The Oxford Institute for Energy
Studies, November 2018)
https://www.oxfordenergy.org/wpcms/wp-
content/uploads/2018/11/Russian-gas-transit-
through-Ukraine-after-2019-Insight-41.pdf
 TurkStream pipeline project to be officially
launched Wednesday (Daily Sabah, January
2020)
https://www.dailysabah.com/energy/2020/01/0
6/turkstream-pipeline-project-to-be-officially-
launched-wednesday
 Global Economic Prospects: Europe and Central
Asia (The World Bank, January 2020)
http://pubdocs.worldbank.org/en/44662157488
7968929/Global-Economic-Prospects-January-
2020-Regional-Overview-ECA.pdf
 Russia in 2020: Will the Economy Grow Faster?
(The Moscow Times, December 2019)
https://www.themoscowtimes.com/2019/12/25
/russia-in-2020-economy-grow-faster-a68624
 What Changes Is Putin Planning for Russia’s
Constitution? (The Moscow Times, January
2020)
https://www.themoscowtimes.com/2020/01/16
/what-changes-is-putin-planning-for-russias-
constitution-a68928
 Putin Calls For Constitutional Changes, More
Social Spending In Annual Address (Radio
Liberty, January 2020)
https://www.rferl.org/a/putin-to-give-state-of-
nation-address-to-federal-
assembly/30377694.html
 21M Russians Live in Poverty, Official Data Says
(The Moscow Times, July 2019)
https://www.themoscowtimes.com/2019/07/30
/21m-russians-live-in-poverty-official-data-says-
a66618
 The number of bankruptcies among individuals
is growing in Russia (EastRussia, January 2020)
https://www.eastrussia.ru/en/news/v-rossii-
rastet-chislo-bankrotstv-sredi-chastnykh-lits/
 Rating of political parties in Russia (WCIOM)
https://wciom.ru/news/ratings/elektoralnyj_rejt
ing_politicheskix_partij/
 Russia all but destined to edge closer to China in
2020 (Nikkei Asian Review, January 2020)
https://asia.nikkei.com/Spotlight/Comment/Rus
sia-all-but-destined-to-edge-closer-to-China-in-
2020
U.S.-Russian Nuclear Arms Control Agreements
at a Glance (Arms Control Association, August
2019)
https://www.armscontrol.org/factsheets/USRus
siaNuclearAgreements
 Survival: Global Politics and Strategy (IISS, June-
July 2019)