Europe politics: Political risk in Europe will remain high in 2018
- Content Type
- Country Data and Maps
- Economist Intelligence Unit
- No abstract is available.
- Politics, News Analysis, Forecast, Political outlook
- Political Geography
- Russia, United Kingdom, Turkey, Finland, Norway, Greece, France, Poland, Lithuania, Germany, Estonia, Belgium, Denmark, Bulgaria, Romania, Hungary, Spain, Italy, Croatia, Sweden, Latvia, Netherlands, Portugal, Ireland, Iceland, Austria, Czech Republic, Cyprus, Slovenia, Luxembourg, Slovakia, Malta
- We expect Europe's current cyclical economic upswing to be sustained, but political risk will remain high. Catalonia is probably the most underestimated crisis.
- Germany will face difficulties in forming a government; Brexit will breed discord in the EU27 countries; and a key election in Italy will produce a victory for a Eurosceptic populist party.
- The populist challenge to the established parties is unlikely to dissipate, and will continue to lead to political fragmentation that makes policymaking difficult.
- Tension between the IMF and some euro zone members on the sustainability of Greece's public debt could flare up again in 2018, while EU relations with Turkey and Russia will remain tense.
- Developments in Greece and Italy are obvious areas of concern, highlighting the persistent vulnerability of the euro. However the institutional resilience of the euro zone has been bolstered, reducing the potential for negative financial market fallout.
In 2017 European economic growth accelerated after two years of steady recovery, demonstrating that past efforts to improve the institutional resilience of the bloc have been largely successful; consumer and business sentiment surged and the pace of economic growth was unaffected by political uncertainty. Elections in the Netherlands, France, Austria, Germany and the Czech Republic continued to highlight the populist threat to the political mainstream, while Brexit negotiations began, a crisis broke out in Catalonia, EU-Russia tensions remained high and Greece almost failed to conclude its second bail-out programme review. We expect more geopolitical risk in 2018.
A number of political hotspots in 2018
Although the cyclical economic upswing continues, we expect political risk to remain high. Fragmentation and difficulties forming a government will continue to occur even in countries that are registering solid rates of growth, such as Ireland, and in traditionally politically stable countries, such as Germany. In Ireland, new revelations about the mishandling of a long-running policing scandal brought Leo Varadkar's Fine Gael-led minority coalition government to the brink of collapse in November 2017. Our view is that the government does not have the capacity or cohesion to address effectively the mounting economic and political challenges facing Ireland, and we expect a snap parliamentary election to be called in the first half of 2018.
Following Germany's federal election in September 2017, the failure to form a so-called Jamaica coalition, comprising the Christian Democratic Union (CDU) of the chancellor, Angela Merkel, and its partner, the Christian Social Union (CSU), along with the Free Democratic Party (FDP) and the Greens, dealt a blow to the authority of Ms Merkel. This was not the first shockwave to hit the German political scene in late 2017. The inclusion in the Bundestag (the lower house of parliament) of the far-right populist Alternative for Germany (AfD) caused a small tremor, despite polls having indicated for two years that this would happen. Germany is catching up with its neighbours in this respect, as recent elections across Europe show that electorates are increasingly favouring alternative or populist parties over mainstream parties and candidates. The result has been more political fragmentation, protracted negotiations to form governments and the emergence of unusual government coalitions. Elections held in the Netherlands, Norway, Austria, Iceland and the Czech Republic in 2017 illustrate this trend, and will mean a more complicated policymaking outlook across the region.
Popular disaffection with mainstream parties will persist
Difficult coalition negotiations in Germany between the CDU/CSU and the Social Democratic Party will now drag into early 2018, creating more political uncertainty at an already testing time for the EU. The populist challenge to the established parties is unlikely to dissipate, with a key election in Italy on March 4th set to result in a victory for the insurgent Eurosceptic Movimento 5 Stelle (M5S), which has proposed a referendum on Italy's membership of the euro area. Although referendums on international treaties are not permitted by the Italian Constitution, there would be a small risk of a non-binding vote on the euro if an M5S-led government were to come to power, unnerving financial markets and Italy's European partners. However, given M5S's hardline stance towards the established parties across the political spectrum, we believe that it is unlikely that M5S would enter any government constellation. Political fragmentation and the use of a newly approved, predominantly proportional electoral system means that none of the three main blocs will win a majority of seats, most probably resulting in another executive backed by a broad centre-left/centre-right coalition.
Brexit negotiations on the future trading relationship between the UK and the EU will also begin in early 2018 and have the potential to create internal discord among the EU27 as member states assign different priorities to the negotiating objectives. Meanwhile the Catalonia crisis, which burst into focus in October 2017, after pro-independence citizens voting in an illegal referendum were met with state violence, poses possibly the gravest threat to the cohesion of the EU. Following a declaration of independence in late October, the Spanish state suspended Catalonia's autonomy and assumed direct control of the region, charging pro-independence leaders with sedition, rebellion and misuse of public funds, resulting in some being imprisoned and others fleeing the country.
The attempt by the prime minister, Mariano Rajoy, to end the political crisis by calling an early regional election backfired badly. Pro-independence parties won sufficient votes to secure a majority in the regional parliament, despite facing serious political obstacles during the campaign. This was a serious blow to Mr Rajoy, who is viewed by many as having badly mishandled the Catalan question. The pro-independence parties are expected to form another regional government and press the national government for concessions. Mr Rajoy is unlikely to concede much, if anything, and the Catalonia crisis is therefore likely to persist, with negative implications for political stability in Spain.
The election result in Catalonia also represents a major blow to the two main national parties, the Spanish Socialist Workers' Party and the conservative People's Party (PP), led by Mr Rajoy. A surge in support for Ciudadanos ("Citizens"), which increased its share of the vote to 25.4%, partly at the expense of the PP, made it the largest single party in the new Catalan parliament, with 37 deputies. Mr Rajoy's mishandling of the Catalan crisis could benefit Ciudadanos at the next general election, which we expect to take place in 2018 or 2019 (before the end of the current parliamentary term).
Relations with neighbours will remain tense
Tensions between the IMF and some euro zone members on the sustainability of Greece's public debt are likely to flare up again in 2018. The discussion of debt relief has been deferred until after the third bail-out programme, which ends in August. Meanwhile, despite talk of a new roadmap to ease tension between the EU and Turkey, and improve co-operation in the main areas of interest such as security, trade and investment, neither side is genuinely interested in Turkish membership of the bloc anymore. The suspension of accession negotiations would almost certainly prompt Turkey to end its collaboration with the EU to stem the movement of migrants and refugees into Europe. However, both Turkey and the EU have an incentive to avoid a complete rupture, and we do not expect either side to take unilateral action to suspend accession talks.
East-West political tension is at its highest since the dissolution of the Soviet Union. European financial sanctions imposed in response to Russia's annexation of Crimea in March 2014 and Russian counter-sanctions prohibiting EU member states from exporting food products to Russia are likely to remain in place for years. In mid-2017 Russia's retaliatory import ban was extended to the end of 2018, and the EU has expanded its sanctions on Russia to include three Russian engineering companies and three individuals, including the deputy energy minister. EU sanctions will continue to be renewed fairly smoothly every six months. Some EU countries oppose sanctions, but will not break ranks with the bloc. We do not expect a significant improvement in relations, but, despite the occasional spike in tension and frequently hostile rhetoric, longstanding historical diplomatic, political and economic ties will mitigate a complete breakdown. We expect Vladimir Putin to win the Russian presidential election in March.
Resilient to risk
Developments in Greece and Italy are obvious areas of concern, highlighting the persistent vulnerability of the single currency. However the commitment of the European Central Bank to the euro has largely neutralised speculative pressures in the bond markets stemming from adverse outcomes in these countries. In line with the economic recovery, a rise in popular support for the euro and EU membership has also helped to insulate the negative fallout from these political hotspots. The disjuncture between a relatively benign economic outlook and high levels of political risk-a key feature of 2017-is likely to persist in 2018.
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