Political risk makes a comeback in Europe

The EU looked to have turned a corner as populists were beaten back in the Netherlands and France, but Italy, Austria and Brexit still pose risks

By Viktoria Dendrinou and Nikos Chrysoloras  /  Bloomberg

Thu, Oct 05, 2017 - Page 9

If the wind really is “back in Europe’s sails,” as European Commission President Jean-Claude Juncker put it last month, then it is still unclear where the bloc may be heading.

The beatings Spanish police handed out to separatists in the region of Catalonia on Sunday took investors by surprise, raising questions about whether the instability that has plagued the EU for the best part of the past decade is really over.

Regional identity politics is one of multiple issues that have been building up under the radar of political establishment in Europe, said Carsten Nickel, a managing director at Teneo Intelligence in Brussels.

The result is that just as the EU looked to have left its crisis years behind, the threat of more turmoil has leapt back onto the agenda.

“On the question of whether political risk is back in the EU, the answer is it never went away,” Nickel said. “The real work is ahead of us, whether you look at domestic reforms in France, Brexit negotiations or coalition talks in Germany.”

The electoral defeat of anti-EU populists in the Netherlands and France this year marked a turnaround for the bloc after the existential threat posed by Britain’s vote last year to leave the EU. The economy has since improved and the migration crisis subsided, and Brexit managed to unite the remaining 27 members rather than prompt others to head for the door. That momentum prompted Juncker’s optimism in a speech setting out his vision for the EU in coming years.

Yet the events in Catalonia are a reminder of the risks the bloc still faces, especially with uncertainty over the outcome of Brexit negotiations and upcoming elections in Austria and Italy — countries where the rise of euro-skeptic candidates could fan financial and political instability for the whole bloc.

In Italy, a new level of uncertainty is looming in the third-biggest economy in the eurozone, where political instability is a way of life.

With elections due early next year, the populist Five Star Movement is virtually tied in polls with the Democratic Party of Italian Prime Minister Paulo Gentiloni. Luigi Di Maio, Five Star’s 31-year-old candidate for prime minister, has called for a referendum on Italy’s euro membership as “a last resort” to force EU reform.

Before then, Italy faces its own, more limited test of unity. The anti-immigrant Northern League party is planning to stage an online “referendum” on Oct. 22 on more autonomy for the wealthy Lombardy and Veneto regions, with powers over taxes a key demand.

Meanwhile, Austria looks set for a return of the nationalist Freedom Party to a government coalition with the conservative People’s Party of Austrian Foreign Minister Sebastian Kurz after elections on Oct. 15.

Traditionally the strongest pro-EU force in Austria, the conservatives under Kurz have become less enthusiastic, and Kurz opposes plans to align social policies in the bloc advanced by French President Emmanuel Macron.

The euro slid against all of its major peers except the pound on the threat of more Catalan unrest, while the spread between 10-year Spanish and German bond yields reached the widest since June.

“There was too much complacency,” Eurasia Group managing director Mujtaba Rahman said, citing structural challenges faced by the EU in areas such as defense, internal security and the economy, as well as the rift between western Europe and governments in the east of the bloc. “The notion that populism is in retreat is overdone.”

Europe’s biggest economy is consigned to complex coalition-building after votes were siphoned away from German Chancellor Angela Merkel’s bloc and her main Social Democratic rival, and flowed instead to the anti-immigration, EU-skeptic Alternative for Germany party.

Still, a majority of Germans say they support Merkel’s prospective three-way coalition with the Free Democrats and the Greens, and the chancellor remains the bloc’s most powerful leader.

What is more, Italy’s referendum this month is mainly a campaign platform for the Northern League and, in any case, is not binding.

In Austria, the Freedom Party has previously toyed with a referendum on EU membership or leaving the euro, but its leader, Heinz-Christian Strache, has since toned down his rhetoric in an effort to remove obstacles for a coalition.

Europe’s other secessionist movements may be far from emboldened by events in Catalonia after the EU refused to offered any prospect of membership even if the region did break away from Spain.

The upshot is the euro crisis and the worst of the refugee crisis are in the past, their place likely taken by long-simmering internal EU problems, said Daniel Gros, director of the Brussels-based Center for European Policy Studies.

“This is not a return to the ‘polycrisis.’” he said.

However, even without international support, the separatist movement is draining the political energy from Spain, a country that until recently was the poster child for European reform.

For an EU seeking takeoff for a new phase of integration, that in itself is bad news.