Europe's gathering storm clouds

http://www.theguardian.com/business/2015/jun/26/europe-gathering-storm-clouds-greece-russia

From the Greek crisis to Russia’s incursion in Ukraine, leaders must act fast to ensure that they can dissipate each crisis before it merges with the others

Europe's gathering storm clouds
Mohamed El-Erian
Friday 26 June 2015 10.03 EDT

Dark clouds are lowering over Europe’s economic future, as three distinct tempests gather: the Greek crisis, Russia’s incursion in Ukraine, and the rise of populist political parties. Though each poses a considerable threat, Europe, aided by the recent cyclical pickup, is in a position to address them individually, without risking more than a temporary set of disruptions. Should they converge into a kind of “perfect storm”, however, a return to sunny days will become extremely difficult to foresee any time soon.

As it stands, the three storms are at different stages of formation. The Greek crisis, having been building for years, is blowing the hardest. Beyond the potential for the first eurozone exit, Greece could be at risk of becoming a failed state – an outcome that would pose a multi-dimensional threat to the rest of Europe. Mitigating the adverse humanitarian consequences (associated with cross-border migration), and geopolitical impact of this storm would be no easy feat.

The second storm, rolling in from the EU’s east, is the costly military conflict in Ukraine’s Donbas region. The crisis in eastern Ukraine has been contained only partly by the Minsk II ceasefire agreement, and reflects the deepest rupture in the West’s relationship with Russia since the Soviet Union’s collapse.

Further Russian interference in Ukraine – directly and/or through separatist proxies in Donbas – would present the west with a stark choice. It would either have to tighten sanctions on Russia, potentially tipping western Europe into recession as Russia responds with counter-sanctions, or accommodate the Kremlin’s expansionist ambitions and jeopardise other countries with Russian-speaking minorities (including the EU’s Baltic members).