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Trouble keeping up with the political risks swirling in Europe?

Michael Collins  |  15 Jul 2016Text size  Decrease  Increase  |  

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In 1987 while in Berlin, US President Ronald Reagan called on his Soviet Union counterpart Mikhail Gorbachev to "tear down" the physical and symbolic obstacle between communist and non-communist Europe.

Few would have expected that within two years the Berlin Wall would collapse as a barrier and that communist regimes across eastern Europe would crumble.

Fewer still would have forecast that within four years the Soviet Union would shed communism and dissolve into 15 countries.

But the signs were always there that the Soviet Union's federation and its grip across eight eastern European countries were tenuous.

As early as 17 June 1953, for instance, Soviet tanks massacred 50 demonstrators in East Berlin to quell unrest that simultaneously flared that day in 373 cities and towns across the former East Germany, as up to 1.5 million workers in about 600 enterprises went on strike.

Similar revolts broke out in Hungary in 1956, Czechoslovakia in 1968 and Poland in 1970, 1973, 1980 and 1981, to name but a few outbreaks of unrest that were usually deadly.

When it came to the Soviet Union, many analysts had warned for decades that the collection of nationalities, ethnicities and cultures was too diverse to be contained within one country, especially one that was so economically dysfunctional and governed by an ideology that had long shed its appeal.

No one, then, should be surprised if meaningful political shifts were to take place across the EU in coming years.

Eight years of economic stagnation, high unemployment, especially among the young, a refugee crisis on top of unrest about unchecked immigration, the unelected nature of the EC and disillusionment with the political elite that invented the euro and imposed austerity have sparked voter revolt across the continent.

Backing for fringe and nationalistic parties is rising as euroscepticism (or euro hostility as some call it) drains support for the mainstream centrist parties that have alternatively held power since World War II.

The UK decision to the leave the EU just foreshadows the disruption the continent faces in coming years; commotion that would have occurred irrespective of the British decision.

It's looking less likely that even a 27-member EU (counting the UK as gone) and the 19-member Eurozone will last in their current forms.

Investors should be more wary of what happens to euro users, rather than semi-attached countries such as the UK, because a euro departure would threaten the European monetary system.

The EU was born out of two European-based world wars and no one expects any metamorphism to undermine its paramount goal of ensuring peace on the continent.

Russian aggression could prove a glue, especially in neighbouring states that were part of the Soviet Union or the former communist bloc.

After all, Russian revanchism prompted Estonia, Latvia and Lithuania to join the euro in 2011, 2014 and 2015 respectively, even though the currency was already regarded as an economic poison.

Europe's elite, for all their flaws, appear adept at the political fix. They, for instance, just helped Greece avoid its dénouement again.

Europeans (especially the Greeks) appear politically passive, rather than revolutionary in the face of hopelessness, so perhaps the political shifts will fizzle out rather than lead to change.

Maybe populists in power would succumb to pro-EU pressures as Syriza did once in charge of Greece. Perhaps the populists will never attract enough appeal anyway to be in positions to drive fundamental change. A sustained economic recovery would sap their support.

For all the angst so far, the centre is still largely holding, helped by electoral systems that are designed to block fringe parties.

But the reality is that the ingredients for disgruntlement are untouched. Polls showing that twice as many Europeans want "less" Europe rather than "more" Europe will ensure political fires will flare across the continent.

It will likely prove beyond the ability of Europe's elite to control all of these anti-establishment flare-ups. Who knows where these changes might lead. It's easier to say where they won't head.

Labour split

Terms such as populism, nativism and nationalism abound these days as ways to describe the political shifts underway in Europe (and elsewhere). Defining such terms is contentious, however.

Populism is derived from the Latin word for people and in Roman times "populist" described leaders such as Julius Caesar whose rise to power was based on their popularity with the people's assemblies.

These days, the term is often used to describe the masses rebelling against the elite.

The expression is more an insult, however. It usually implies that a vocal group has given way to emotion over reason.

The mob is accused of succumbing to policies that are simplistic, reactionary, untenable and generally counterproductive.

Nativism describes a movement designed to protect the status quo against newcomers. In crass terms, it pits inhabitants against immigrants and is usually used pejoratively to imply xenophobia or racism.

Nationalism traditionally described an excessive belief in the importance of one's country. Nowadays it's more defensive; it's a country protecting its culture, way of life and economy from globalisation.

A worrying trend underway in Europe is the revolt against democracy, or the rise of illiberal populism, that is occurring in eastern EU countries, namely Hungary and Poland.

Part of the allure of nationalism and the longing for a strongman in these countries is as a counterforce to the possible collapse of the EU--after all, these people saw the Soviet empire unexpectedly disintegrate so they think any cross-border project is vulnerable.

Another interesting question is where economic thinking fits into today's political shifts.

In the US, before the rise of Trump, right-wing populism appeared grounded in free-market economics, low taxes, light regulation of business, reduced social security and brakes on organised labour.

Trump has exposed that the right-wing masses are against free trade and immigration, like welfare spending but still favour tax cuts and few rules on business.

In Europe, the rise of right-wing populism is based on social issues. It is still left wing on economics. People accept the need for high taxes to enable the government provision of welfare.

They support state intervention in markets, strong labour safeguards and trade protectionism.

Historian Anne Applebaum proposes that the best way to describe the political swings underway in Europe is "national socialism" in the purest sense--the combination of nationalism and socialism.

This marks a departure from decades of thinking when the right and left were internationalist in nature, even if in different ways.

It shows that the working class support is splitting to the far right and, in lesser numbers, to the radical left.

Recent votes and polling shows this trend. In 2015, the splintering of the traditional left to the far left in 2015 helped the radical Syriza ascend to power in Greece.

In Portugal, it led in 2015 to Portugal's tenuous left-wing coalition that is propped up by anti-euro communists.

In Spain, it enabled the anti-establishment Podemos (and right-leaning Ciudadanos) to win enough support to prevent the mainstream parties forming government and a fresh election in June resulted.

At the same time, support for centre-left parties is collapsing.

In Italy, novices from the populist Five Star Movement won mayoral second-round ballots to take control of Rome and Turin, two of Italy's four biggest cities, by beating candidates from Italy's ruling centre-left Democratic Party led by Prime Minister Matteo Renzi.

Germany's Social Democrats and French President François Hollande's Socialist party are bleeding support.

Greece's traditional mainstream leftist Pasok party is largely irrelevant while the UK Labour Party is heading that way under Jeremy Corbyn.

Spain's mainstream Socialist Workers' Party is losing support to the far-left Unidos Podemos coalition.

Centre-left parties often lost support because they imposed austerity at the bequest of the EU, and followed other free-market policies especially when regulating labour.

The rightward shift in working-class support is placing populist candidates in parliaments across the Eurozone.

In Finland, such support propelled the nationalist right-wing True Finns into second place in the 2015 elections and into a ruling coalition.

In Denmark last year, it helped the anti-immigration Danish People's Party gain 21 per cent of the vote and form a minority government.

It enabled the Swedish Democrats, Italy's Northern League and the Alternative for Germany parties to enter regional or national parliaments.  

Three categories

Europe's upcoming electoral risks can be split into three categories, even if one country can be in more than one clique.

The first group of ballots would include the countries at risk of conducting a UK-style referendum on EU or Eurozone membership.

The most likely candidates here are Austria, Denmark, Italy, Finland, France and the Netherlands.

Denmark and the Netherlands recently held referendums on minor issues that were seen as de facto referendums on staying with the EU and, worryingly, euroscepticism won both.

In April, Finland's parliament debated the country's Eurozone membership after enough people signed petitions to force discussion on the topic in the hope of securing a referendum.

On 2 October, Hungary is scheduled to hold an anti-immigration vote to disrupt an EC plan to share the settlement of refugees that is effectively a vote on more centralisation within the EU.

France's poll-topping anti-elite National Front is calling for a referendum on EU membership and could gain the power in 2017 elections to fulfil this pledge.

Italy's Five Star Movement, if elected, intends to hold a referendum on its Eurozone membership, if elected.

That's the challenge of course for these anti-EU movements; attaining the power to call a vote. It's unlikely any referendum would command a majority anyway.

The next category of imminent electoral risks involves numerous referendums or plebiscites on non-EU issues that could upend politics across Europe.

Italy is the main danger here because Renzi has threatened to quit if voters in October block constitutional reforms designed to reduce the senate's power over the lower house.

If Renzi were to resign, political chaos would ensue in the Eurozone's third-largest economy and one where the Five Star Movement is topping the polls.

Other possible Europe-changing votes would be ones on independence for Spain's Catalonia region, Flanders in Belgium, northern Italy (to be called Panadia by the secessionists), Scotland and even Northern Ireland. But they are long shots.

It's worth noting that national referendums are an attack on EU foundations in themselves for they undermine central decision-making.  

The last and biggest category covers the risks surrounding routine elections for heads of states and parliaments.

In polls for heads of state, the most pressing will be the re-run on 2 October of the second round of Austria's presidential election between former Green Party leader Alexander van der Bellen and the extreme right's Norbert Hofer, in what is a Bernie Sanders/Donald Trump-like match-up after mainstream-party candidates were eliminated in the first round.

Van der Bellen won the 22 May vote by 0.6 percentage points but Austria's high court voided the result due to voting irregularities.

Hofer, who supports a referendum on EU membership, has threatened to take the unprecedented steps of calling for fresh parliamentary elections, to take advantage of the fact that the fringe Freedom Party would probably gain enough support to lead a coalition.

Another head-of-state poll to watch is the presidential election next April and May in France, the country with the worst view of the EU after Greece, according to a poll by Pew Research of the EU's 10 biggest members.

Moves by the unpopular Hollande (13 per cent approval) to make it easier for companies to fire workers are a gift for Marine Le Pen's poll-topping Fronte National.

Le Pen is expected to reach the second round of voting in presidential elections but, as of now, would fail to snare the top job. Her core policies are to abandon the euro and to conduct a referendum on EU membership.

While they are still a fair way off, parliamentary elections in France in June next year and Germany about three months later are already prompting the governments in charge of the Eurozone's two biggest economies to pander to euroscepticism to counteract dropping support.

Angela Merkel's government is combating the rising anti-euro, anti-immigrant Alternative for Germany party and she may step down before the polls.

Another concern is that Paris and Berlin, to woo voters, are taking opposite directions on key policies.

Paris seeks more relaxed constraints on fiscal and monetary policies while Berlin is pushing for the opposite outcomes, a centralised approach backed by Brussels that is read as bullying by Europe's throngs.

In the Netherlands, Geert Wilders' anti-euro, anti-immigrant Party for Freedom is topping the polls and could dominate a ruling coalition after parliamentary elections in March next year.

Austria's far-right Freedom Party is preparing for parliamentary elections in 2018 unless they occur sooner.

These political shifts across Europe could lead to a hollowing out, though not a collapse, of the EU.

They, combined with precarious finances, could see one or two countries leave the Eurozone, Greece and Italy being these debt-heavy candidates.

It's more certain that these political swings make it harder to achieve the banking, fiscal and political integration Europe that needs to preserve the euro because forfeiting sovereignty requires voter sanction. The absence of such centralisation poses a threat to prosperity.

The more realistic of Europe's elite concede their hopes for "more Europe" have evaporated.

In May, European Council President Donald Tusk warned that pushing for a more federated Europe against the will of the people is a "utopian illusion" that is only fanning euroscepticism.

That is to say, a truly knitted Europe is as unattainable as the utopias that communist ideologues were still striving towards when Reagan spoke in Berlin 27 years ago.

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Michael Collins is an investment commentator at Fidelity International. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

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