Three scenes from Europe's winter of discontent: In a central market in Florence in December, a far-right extremist armed with a .357 Magnum kills two Senegalese migrants and injures three others before turning the gun on himself. In Brussels, the Dutch block fellow E.U. members Bulgaria and Romania from entry into the Schengen area the 26-country zone where Europeans can travel freely without passports citing fears of corruption and crime. In the French coastal city of Toulon, President Nicolas Sarkozy kicks off his campaign for this spring's elections with warnings that Europe is too exposed, "open to the winds" of cheap imports from China and migration from Eastern Europe and beyond.
Three very different events in three European countries, all pointing to a shared regional mood: a fear of a borderless Europe and the foreign influences it brings. The euro crisis has exposed the cracks in the European Union's fiscal unity, triggering talk of a two-speed Europe and tensions between northern lenders and southern debtors. But it has also fueled anxieties about the much broader and deeper issue of identity, spawning debates on who is allowed to be European and who is not. At precisely the moment E.U. leaders are calling for closer integration to save the euro, Europe's mood has swung toward nationalism and xenophobia. "At the time that Europe needs more market-driven reforms, the political climate for those kinds of reform has become very unfavorable," says Simon Tilford, chief economist of the Centre for European Reform in London. "People feel threatened."
All the better for Europe's populist-extremist parties, which have seen unprecedented growth over the past two years. Mainstream politicians particularly those facing upcoming elections, like Sarkozy have ratcheted up the rhetoric on national identity and attempted to bolster their countries' borders. A 2011 report on right-wing extremism from the London think tank Chatham House found that 30% to 60% of European voters believe there are too many immigrants in their country. "It was always assumed that the rise of nationalism would be an awkward passing point that Europe would travel to en route to integration and greater stability," says Matthew Goodwin, a political scientist and author of the report. "That passing point is going to be much longer than we'd anticipated."
The ramifications for European economies are grim. The rise of extreme parties in Greece which now account for roughly half the Greek vote, up from one-third a few months ago could set back an E.U. deal to right the country's economy. Bulgaria and Romania, which were set to enter the Schengen passport-free zone in September, have been put off until 2015. And last spring, the Danish and French governments challenged the Schengen policy by reintroducing limited border controls. If moves like those continue, a more tightly guarded Europe one constrained by border disputes, trade barriers and a static labor force could lead to as much as a 25% to 40% haircut in cross-border trade within five years, according to Pankaj Ghemawat, professor of global strategy at IESE Business School and author of World 3.0: Global Prosperity and How to Achieve It. A drop-off in migrant labor would be especially damaging, given the continent's aging workforce. Europe's biggest economic gains "come from reducing barriers to people-flow," says Ghemawat.
The Euro crisis makes it all too easy for E.U. countries to forget the boons of belonging to the world's largest trading bloc and for Schengen's 400 million citizens to ignore the benefits of passport-free travel. After Europe's physical and tax barriers were abolished in 1993, trade between member states rose by between one-third and two-thirds. The E.U.'s so-called four freedoms the movement of goods, capital, services and people have helped it weather a globalizing economy. As a region, Europe leads the world in terms of integration with other nations, according to the 2011 DHL Global Connectedness Index, with European countries filling seven of the top 10 slots. Today, about two-thirds of E.U. member states' trade remains in the E.U. The region's capital flows in much the same way: over two-thirds of it remains in Europe. "The extent of mutual dependence is just grossly under-estimated," notes Ghemawat. "You talk to Germans and mention that 60% of their exports are to other Europeans. They're so used to thinking that they're global, they're a bit shocked to discover that the E.U. still matters to them."
But for Brussels, dictating a shared sense of purpose isn't easy in a region where unemployment rates range from Germany's 7.1% to Spain's 20.1% and per capita GDP spans from Bulgaria's $6,300 to Luxembourg's $104,400. For earlier generations of young Europeans, a borderless Europe meant cheap flights, educational exchanges and the freedom to live and work across Europe. For today's youth, it's likely to mean Brussels-imposed austerity and declining living standards: in eight European countries, 30% of young people are unemployed. "For the last generation, the idea that European integration is the future was something you just didn't question," says Hugo Brady, a senior research fellow in Brussels at the Centre for European Reform. "That's no longer true. This generation lacks the will to reverse European integration. They're not going to rip the system down, but they're not sure how to make it work. So they're sort of stuck."
Before the recent crises, a unified Europe was an easier sell. In the 1970s and '80s, with memories of World War II still fresh, a common market that turned former enemies into trade partners didn't just seem like good economic sense; it seemed like magic. In the 1990s, the fall of communism helped boost the notion of a common European identity along with national economies. After the E.U. enlargement in 2004, the new East European members saw their living standards rise, their unemployment rates drop and their GDPs rise by an average of nearly 2% a year. Those who migrated to work in Western Europe could see income gains on average of over 100%, according to a 2007 report for the German Marshall Fund. Enlargement helped rich West European nations too. Their GDP-growth rates held steady at just over 2%, their output grew from increased trade and investment, and most of the E.U. 15's unemployment rates dropped. As a whole, labor mobility within the E.U. adds about 0.3% to the E.U.'s aggregate GDP, according to the European Commission.
But the economic gains of a unified Europe have been unevenly distributed, and that's where the potential for populist discontent lies. The German Marshall Fund study found that white collar jobs were affected less by intra-European migration than blue collar ones, which saw the new competition from migrants resulting in falling wages and job losses. "A country can get collective gain, but there can be individual losses," notes Ulrike Guérot, a senior research fellow at the European Council on Foreign Relations. "After enlargement, Germany had a double-digit rise in trade with Eastern Europe. But a low-skilled worker facing competition from across the border won't feel those gains. That's the legitimacy gap facing the European Union and that's the policy gap that creates populism."