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Politics - European trends, national consequences

Economic Report

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  • European countries face a number of destabilising political trends
  • The rise of new parties with no experience of government combined with the decimation of traditional parties is leading to weak coalition governments operating fragmented national parliaments
  • Rising Euroscepticism is limiting the scope for reform in Southern Europe and making Northern European countries less forthcoming. It will also make it more difficult to reach European solutions for supranational problems
  • Some South-Eastern European countries are facing increasingly authoritarian trends that threaten to weaken democratic institutions and the rule of law
  • EU-Russian tensions are likely to remain elevated but with little macroeconomic impact.
  • The transatlantic trade and investment partnership (TTIP) may be concluded in 2015/2016, which could result in an improvement of the geopolitical position of the EU
  • After the UK elections, a referendum on remaining part of the EU is a likely scenario, but a Brexit scenario remains unlikely
  • The new Commission headed by Juncker is profoundly more political than its predecessor
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Changing political landscapes bring with them the threat of increasing instability

After more than five years of very weak economic growth and a lingering euro crisis, the political landscape is changing significantly in several European countries (table 1). In the southern euro area periphery, corruption and rent-seeking practices, as well as years of fiscal austerity, have alienated voters from established political parties once firmly in charge of policymaking. New and in some cases populist parties are benefiting from this estrangement and some of them have gained considerable representation in national parliaments (Greece, Italy) or even formed new governments (Greece). In various northern euro area states, lingering concerns about continuous financial support for ailing euro area members have either boosted support for already-existing conservative or extreme right-wing parties (True Finns in Finland) or led to the emergence of new Eurosceptic parties (Alternative für Deutschland in Germany). Besides possibly adding a populist note to the ongoing euro area-wide debate in various countries regarding the suitability of currently implemented policies, the rising importance of these new parties may undermine the formation of stable (coalition) governments, particularly if the euro area debt crisis were to re-intensify. The potential available for policy formulation may decline, as public readiness to accept necessary structural reforms, both at national and European level, may suffer. The tensions within the euro area following the government takeover in Greece by the left-right Syriza-Anel coalition government are a case in point in this regard.

So far, however, also given the particular deepness of its crisis, the situation in Greece remains unique and does not seem to be spreading to other ailing euro area countries. While enjoying considerable support at times in some countries, populist parties’ direct impact on policy formation has so far been limited. In spite of its strong representation in parliament, Italy’s Five Star Movement has so far only delayed and not obstructed policy implementation. Meanwhile, ahead of Spain’s December 2015 parliamentary elections, the left-wing Podemos party is losing considerable ground to the pro-European liberal Ciudadanos party, which could enable the incumbent Partido Popular to form a coalition government. In Cyprus and Portugal, which are heading for parliamentary elections in October 2015, no new parties have emerged on the political landscape, while Slovenia has not seen any major policy changes since the newly-created SMC party took power in September 2014. In several northern euro area member states, including Germany, Eurosceptic parties have become an integral part of the local political landscape. Where unemployment and poverty are the driving forces behind rising populism, a prolonged euro crisis or another economic downturn will intensify support for such parties. The extent of the recovery and particularly lower unemployment will be a crucial indicator of the development of political risk.

Table 1: National elections in Europe 2015-2016 (++ denote a strong trend while -- denote a strong reversal of the particular trend)
Table 1: National elections in Europe 2015-2016 (++ denote a strong trend while -- denote a strong reversal of the particular trend)Source: www.parties-and-elections.eu, Eurasia, Rabobank

Implications of Euroscepticism in the establishment

According to our analysis of party manifestos, there is a Eurosceptic trend in most countries (figure 1). Given their media dominance, one might ascribe this to the growth of parties like UKIP, Front National in France, Alternative für Deutschland in Germany and the Partij voor de Vrijheid in the Netherlands. Our analysis shows that this is more to do with established parties gradually becoming more Eurosceptic rather than the growth of populist parties. The political trends described have profound implications for the way the EU can deal with supranational challenges. Firstly, there is still considerable need for structural reforms at Member State level, particularly in Southern Europe[1].

Figure 1: The rise of Euroscepticismin national politics
Figure 1: The rise of Euroscepticismin national politicsSource: Manifesto database, Rabobank

This process becomes harder as reforms are perceived as dictates from the EU (e.g. in Greece), while the EU is becoming more unpopular. The extent to which Northern Europe is prepared to accommodate the southern countries is also declining, as Euroscepticism[2] is taking root in the north as well. Meanwhile, at European level, there are several supranational problems that require a transfer of sovereignty from Member States to the EU. The EMU still lacks the necessary fiscal transfer mechanisms to deal with macroeconomic shocks. In a more Eurosceptic political arena, these mechanisms are less likely to come into being. Also, in an environment where national political interests feature strongly, the ability to speak with a unified voice is limited. This is exemplified by the lack of a unified EU foreign policy, which will remain a drag on the EU’s geopolitical influence globally.

Authoritarian tendencies on the rise in South-Eastern Europe

Since the end of Communism, most northern Central and Eastern European (CEE) countries have successfully transformed their political systems into stable pluriform democracies. However, South-Eastern Europe (SEE) and Turkey are still prone to authoritarian tendencies, irrespective of some states’ EU membership. Authoritarianism has been on the rise in recent years in Hungary, Turkey and several former Yugoslav republics, in particular. In Hungary, once renowned as one of the most liberal of the emerging European economies, Victor Orban’s Fidesz-KNDP party used a two-thirds majority to pass a new constitution that weakens checks and balances. It has also weakened central bank independence and the rule of law by public purges and forced retirement. Still, continuous EU scrutiny and rising public opposition to the erosion of democratic standards at home make a further deterioration of the situation unlikely. The same cannot be said for Turkey, however, where authoritarian tendencies have been rising markedly, threatening to reverse improvements in democratic standards in recent years. 2014 saw sizeable purges of the country’s police and judiciary, a crackdown on already low press freedom and significant pressure on the central bank to lower the policy rate ahead of the June 2015 parliamentary elections. Going forward, a further deterioration might be on the cards should the incumbent AKP win a constitutional majority in the June elections, allowing it to introduce a presidential system. In other SEE countries, particularly in the former Yugoslav republics, a similar weakening of democratic standards can be observed. For the region as a whole, increasing authoritarianism appears to go hand in hand with worsening corruption, deteriorating democratic checks and balances and reduced central bank independence. This increases the risk of detrimental populist economic and monetary policies that could threaten the region’s already weak economic performance. 

Rise of geopolitical tensions in EU-Russian relationship

Europe is heading for increasingly frosty relations between the EU and Russia after an escalation of the Ukraine-Russian conflict over the Crimea and Eastern Ukraine. The Russian annexation of Crimea and its (alleged) support for pro-Russian separatists in Eastern Ukraine have reignited fears within the EU, in particular among its eastern members, that Russian foreign policy is becoming more aggressive. Amid considerable mistrust on both sides, continued tensions between the EU and Russia in the coming years are likely. Recurrent diplomatic efforts to resolve the military conflict in Ukraine peacefully have thus far failed and economic sanctions by the EU and the US have not led to a softening of Russian policy in Ukraine. Given its sizeable energy dependency on Russia, the EU will likely be more cautious in its policy towards Russia than the US. Meanwhile, the sanctions implemented will likely remain in place until sustainable pacification of Eastern Ukraine is achieved. Even though the sanctions are deepening Russia’s economic recession, and Russia feels encircled by Western powers, Russia is unlikely to yield to EU and US pressure. The economic consequences of reciprocal sanctions by Russia have not had a major economic impact in the EU. However, Russia has made attempts to increase its influence in crisis-stricken euro area members Cyprus and Greece, whilst strengthening ties with its former communist allies like Montenegro and Serbia that border the EU. Moreover, reflecting considerable concerns in the Baltic states (all former Soviet republics) about Russian hybrid warfare on their territory, NATO has increased its military presence in the region. An outright military conflict between both sides remains highly unlikely, but the military build-up on Russia’s borders is unlikely to promote a swift reduction of tensions.

Transatlantic Trade and Investment Partnership (TTIP)

Since 2013, the EU and the US have been negotiating a Transatlantic Trade and Investment Partnership (TTIP). On top of a conventional free trade agreement (FTA), TTIP encompasses articles on mutual recognition of product standards in areas where these are high in both countries (e.g. cars and pharmaceuticals). Moreover, TTIP creates a dialogue for cooperation on developing legislation for new products. Both these developments could tremendously reduce non-tariff barriers that often amount to 20% of the value of products. The European Commission (EC) estimates the benefit to economic activity in the EU from TTIP to amount to around €119 billion per year, but this figure is uncertain as negotiations are not yet complete. A deal is expected somewhere in 2015 or 2016. With TTIP, the US and the EU could set global industry standards jointly in future. Major emerging economies such as China therefore see TTIP as a geopolitical move by the EU and the US. A chapter on energy, including liberalisation of licensing of oil and LNG, is not yet on the cards but could still be included. The EU is keen to diversify gas imports away from Russian supply to improve its geopolitical position. If TTIP succeeds in its current form it could structurally increase economic growth and improve the geopolitical outlook for the EU. 

Risk of a Brexit

The UK will hold a general election in May. Prime Minister David Cameron has promised to hold a referendum on British EU membership should his Conservative party win. With the current political outlook this is the most likely scenario, though the Conservatives are unlikely to win a majority. The UK will end up with a hung parliament now that the Scottish Nationalist Party (SNP) and UKIP have entered the national political scene. All of the likely candidates for a coalition, namely the Liberal Democrats, the SNP and the Greens, are outright pro-EU but both the SNP and the Lib Dems would probably accept a referendum in the post-election negotiations. A coalition with the anti-EU UKIP is deemed unlikely in any case. Should a referendum take place, it remains to be seen if Britons would vote in favour of a Brexit. After reaching a low in 2013, the proportion of citizens in favour of the EU has rebounded to 52%. Meanwhile, 41% of the public favoured a Brexit in the most recent Pew research centre poll. On the whole we do not expect a Brexit but it remains an important tail risk: low probability, but with very high geopolitical and economic impact on the EU.

New European Commission

Fall 2014 saw the installation of a new Commission headed by former Luxembourg PM Jean-Claude Juncker. Two major developments will influence policy at European level. Firstly, Juncker’s team is significantly more political than the last Commission. Juncker created seven Vice Presidents (VP), each of whom will lead teams of several Commissioners, encouraging Commissioners and their respective bureaucracies to overcome national or traditional leanings and coordinate and function more closely. A number of the VPs are former PMs or deputy PMs, revealing Juncker’s aim of re-establishing the role of the Commission vis-à-vis the Member States. It remains to be seen whether the new structure will increase the Commission’s effectiveness and influence; the team structure may also lead to political gridlock within the teams, reducing their effectiveness. The other development is the strong German influence within the Commission, demonstrated by the large number of senior German policymakers that have permeated the second-tier management. Besides stimulating non-debt-driven economic growth, the main policy targets of the new Commission are the establishment of an Energy Union to strengthen EU member states’ negotiating power in energy imports and the creation of a common European capital market.

Footnotes

[1] The regions are defined as follows: Nordics (Denmark, Finland, Iceland, Norway, Sweden), Western Europe (Austria, Belgium, France, Germany, Ireland, Luxembourg, Netherlands, UK, Switzerland), Southern Europe (Cyprus, Greece, Italy, Malta, Portugal, Slovenia, Spain), Baltics (Estonia, Latvia, Lithuania), CEE (Czech Republic, Hungary, Poland, Slovakia), SEE (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, FYR Macedonia, Moldova, Montenegro, Romania, Serbia), and Turkey.

[2] The degree of positiveness is measured by the number of positive references to the EU in party manifestos divided by the total number of references to the EU. The decline in positiveness across the EU is interpreted as a rise of Euroscepticism. 

Colophon

This study is a publication of Economic Research (KEO) of Rabobank.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

No rights may be derived from the information provided. Past results provide no guarantee for the future. Rabobank and all other providers of information contained in this study and on the websites to which it makes reference accept no liability whatsoever for the content or for information provided on or via the websites.

The use of this publication in whole or in part is permitted only if accompanied by an acknowledgement of the source. The user of the information is responsible for any use of the information. The user is obliged to adhere to changes made by the Rabobank regarding the information’s use. Dutch law applies.

Abbreviations for sources: AMECO: Annual Macro-Economic Database, BIS: Bank for International Settlements, DOTS: Directions of Trade Statistics, EC: European Commission, ECB: European Central Bank, OECD: Organisation for Economic Co-operation and Development, EIU: Economist Intelligence Unit, IMF: International Monetary Fund, WEO: World Economic Outlook, UN: United Nations

Abbreviations used for countries: AL: Albania, AT: Austria, BE: Belgium, BG: Bulgaria, BA: Bosnia and Herzegovina, CH: Switzerland, CY: Cyprus, CZ: Czech Republic, DE: Germany, DK: Denmark, EE: Estonia, ES: Spain, FI: Finland, GB: Great Britain (UK), GR/EL: Greece IE: HR: Croatia, Ireland, IS: Iceland, HU: Hungary, IT: Italy, LU: LV: Latvia, Luxembourg, LT: Lithuania, MD: Moldova, ME: Montenegro, MK: Macedonia, FYR, MT: Malta, NL: The Netherlands, NO: Norway, PL: Poland, PT: Portugal, RO: Romania, RS: Serbia, SI: Slovenia, SK: Slovakia, TR/TK: Turkey, XK: Kosovo, SE: Sweden, EA17: Euro Area-17, EU27: European Union.

Economic Research is also on the internet: www.rabobank.com/economics

For more information, please call the KEO secretariat on tel. +31 (0)30 – 216 2666 or send an email to economics@rn.rabobank.nl

Editors-in-chief: 
Allard Bruinshoofd, head of International Research, Economic Research

Graphics: Selma Heijnekamp and Reinier Meijer

Production coordinator: Maartje Wijffelaars and Christel Frentz

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Author(s)
Jurriaan Kalf
RaboResearch Netherlands Rabobank KEO
+31 (0)30 21 62666
Fabian Briegel
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 64053

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