The rise of populist parties across Europe has made the implementation of the orthodox economic reforms- espoused by the European Union to greater economic success and stability less certain. This could potentially cause renewed pressure on the more vulnerable sovereigns and potentially cause the breakup of the Euro area. Populism is a political doctrine- which proposes that the ‘common people’ are exploited by a privileged elite and which seeks to resolve this. The underlying ideology of populists can be left, right or centre. Recently Europe has seen a rise in the popularity of populist parties, on the right and left of the spectrum. Undeniably this will influence the economies of Europe.
The populist threat in Europe
The Euro has come a long way since its first use 18 year ago, and has brought a lot of benefits to the countries who use it. Notably the use of the Euro has expanded from 12 to 19 members in the last decade. Nevertheless, due to tumultuous political and economic times it is unlikely that the Euro will be embraced across the continent in 2017.
The wave of populism in Europe is manifested in a fragmentation of the traditional political centre and the rise of smaller parties who have all seen an increase in their popularity in recent years. These parties all have different origins in each European country, they generally promote policies that are skeptical towards the EU and are hostile to the Euro
Over the coming years populism will have an influential role in shaping economic conditions across Europe. Its role will arguably be more powerful than classical monetary and fiscal policies. This could potentially lead to market and investment uncertainties across Europe since populism is currently not well understood in economic consequences because it has been infrequent in emerging countries and virtually nonexistent in developed countries.
This year important elections in the Netherlands, France and Germany and Italy will be held. The electorate’s’ growing worry about migration and security have put fiscal and economic reforms to the bottom of the political agenda. Furthermore, favourable conjuncture (such as low interest rates, good exchange rates with the US and falling oil prices) have reduced the illusion of urgency created by financial and economic crisis. This implies that policymakers are unlikely to introduce long-term reforms with high short term political costs before the elections.
What will the consequences of populist surges be?
In today’s’ political climate parties whom are embracing populism, have identified the Euro as a scapegoat, and are expected to see an increase in influence and representation increase in member states. Even if none of these parties can form government, due to a lack of electoral support, it is likely that the populist wave will push mainstream parties to react differently towards the Euro.
The rise of populist parties across Europe could force member states to follow the trend towards national retrenchment. Nonetheless, the leaders of mainstream parties may decide to not engage in reform, due to the possibility of losing votes to a populist electorate.
European leaders are now faced with the pressure to bend in favour of increased protectionist measures, which could threaten the proposed idea of increased EU integration. If EU leaders were to waver towards increased protectionism this could potentially undermine the achievements of the 25-year Euro construction process. Previously any reform to the Euro has been based on consensus in France and Germany on which way to go forward. If Le Pen is elected upon an explicitly anti-Euro manifesto, the future of the Euro and of EU stability is likely to be threatened.
Though populist Donald Trump’s victory in the US presidential election in November was followed by a stock market rally, in Europe any positive economic impact of a populist election win on stocks would probably undermined by the risk of a Eurozone breakup. Nevertheless, European equities could have a good year if anti populist candidates that have gained traction over 2016 fail to win elections. But if a populist candidate was to win an election it is likely that the possibility of a Eurozone breakup would lead to shockwaves through markets and decreased investment confidence.
It is possible that populist gains in government could be bad for the economies of European countries as on 16th March 2017, as traders digested Dutch prime ministers Mark Rutte’s stronghold in the general election, the wave of fear that populism would engulf Europe died down and European stocks rose dramatically across European markets. However, investors will need to continually monitor the evolving European political landscape and be open to all eventualities including the possibility of more pro-European national leadership and 2017 being the high point of European populist policies.
What is the future of the Eurozone?
- 2016 has been a tumultuous year for Europe and it is likely to continue into 2017.
- If populist victories are made it is likely that the future of the Euro will be threatened in conjunction with the European Union itself.
- Populists are likely to try and impose more protectionist measures to try and slow down the perpetuating phenomenon of globalisation.
- To determine the true future of the Eurozone it is likely that we will have to wait and see the outcomes of 2017’s European elections.