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Populism in Europe

Article | 03 November 2016

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Workers walk over a giant flag of the European Union (EU) in front of the Parliament building in Bucharest

The UK’s vote to leave the European Union (EU) has triggered some extreme predictions of a referenda ripple effect and EU failure.

As investors continue to grapple with the aftermath of Brexit on financial markets, some political questions also loom in the background: Is this the first domino to fall in Europe? Who’s next? Many observers raised concerns about a Brexit contagion; some on the extremes even predicted a referenda ripple effect and rushed to claim that the EU was prone to failure.

From our perspective, these claims are exaggerated. We don’t see Brexit as a trigger for a break-up of the EU. Yes, there are protest parties across Europe, but they remain far from the helm of power. To pursue an exit from the EU, protest parties would have to firstly win an election, then be able to initiate a complex process that would have to, formally or informally, take into account the will of the people on that specific question.

As things stand today, findings do not suggest that Europe is falling apart; in fact the opposite is true.

Germany

In July 2016, following the UK referendum on EU membership, an opinion poll conducted in Germany by ARD (one of the main German TV stations), showed the number of Germans thinking the EU is a good thing (‘Has advantages’) climbing to 52% – the highest level it has ever been – compared with 39% just a month before. Meanwhile, only 11% of respondents thought membership is a bad thing, the lowest ever reading in this poll1.

Many are concerned about the recent surge of the right-wing AfD (Alternative for Germany) party’s approval rate. AfD has been gaining ground in opinion polls over 2016; its approval rate peaked in May at the height of the refugee crisis that struck Europe. Since then, the growth in AfD support has lost some momentum but the party still enjoys decent scores in opinion polls.

It’s important to note that while possibly able to display strong showings at local elections, particularly in rural East Germany, the AfD is far from being a serious contender to the mainstream CDU and SPD parties in Germany, lagging them by a considerable 20 percentage points (pp) and 10pp respectively on the national level1.

The AfD remains a single-issue protest party centered around immigration, without a serious programme or convincing leadership. In its current shape, the AfD does not pose a serious risk to the fundamental orientation of German politics, which is pro-EU, pro-euro and pro-NATO. This orientation reflects a genuine national interest and is shared by all parties of the political establishment, from the centre-right CDU/CSU to the two centre-left parties SPD and Greens and the small liberal FDP.

In a series of small steps over the last eight months, Germany has begun hardening its refugee and migration policies. As the current government continues down this path, steam would predictably be taken out of the AfD engine.

1 Source: Berenberg, 5 September 2016

Italy

Italy is the hottest political topic in Europe between now and Christmas, as Italians prepare to vote in a referendum also on 4 December 2016. The upcoming referendum is not related to the EU, but is a vote on Prime Minister Renzi’s plans for parliamentary streamlining and constitutional reform. The referendum might be used as a protest vote against the government, particularly by the populist Five Stars Movement, yet the stakes here are different and not comparable to the UK referendum: A ‘Yes’ vote would reinforce the structural reforms trend in Italy and lay the ground for future economic growth; a ‘No’ vote would likely only mean more-of-the-same…

Austria

A place in Europe today where a protest party can be considered a close contender for access to a public position is Austria; it’s key to note that the public office in question is the presidency, which is largely a ceremonial role in Austria and has very limited powers. In July 2016, a re-run of the presidential elections was ordered by the Constitutional Court, after populist presidential candidate Mr Norbert Hofer lost by a narrow margin to the more mainstream candidate Mr Van der Bellen. The re-run is scheduled for 4 December 2016.

Interestingly, even the Eurosceptic Mr Hofer declared that it would be wrong to imply that he favoured Austria leaving the EU bloc. “Without a doubt, it would be damaging for Austria to currently leave the EU,” he said, adding Austria should be actively involved in improving the EU, following Brexit.

Spain, France, the Netherlands

The first vote of any significance post-Brexit were the Spanish parliamentary elections in June: in contrast to most predictions, the EU-critical, radical left-wing Unidos Podemos grouping saw its tally of votes fall by well over 1m, suggesting that the rise of populist politics is not a one-way bet.

In France, expect a strong showing of the extreme right-wing and Eurosceptic Front National in the presidential elections next spring, whose support emboldened after the series of terrorist attacks; but also remember that getting through to the second round of voting is not a guarantee of success: don’t forget, Le Pen ‘père’ made it to the second round in 2002 then lost to Chirac by a landslide. In the Netherlands, the extremist, Eurosceptic PVV may be scoring well in opinion polls, but coalition-based Dutch politics mean that their ability to dominate a government after elections due by next spring is very limited, let alone calling for a referendum on EU membership.

Referendum hurdles

Calling and implementing a referendum on EU membership is much easier said than done, especially in the largest EU countries which, by the way, account for nearly 70% of the EU’s GDP. There are significant legal and political hurdles in each country which make referendum risk much smaller than many people believe. Figure 1 summarises these hurdles by country.

Populist risk exists globally (not least in the US) and is not a factor unique to Europe. With the exception of the UK, which has always remained at arm’s length with the EU, it has been wrong historically to underestimate the commitment of European politicians/institutions to the EU project. Despite the strict conditions imposed upon them after the sovereign debt crisis, and the multiple predictions by the rest of the world that they would have exited by now, all periphery countries are still in the EU and playing by the rules.

Nevertheless, one should not ignore the potentially beneficial winds of change blown by the Brexit vote. Rather than triggering a collapse, some observers in Europe see Brexit as a trigger for more serious reform and consolidation as opposed to less. Voices calling for deeper links and stronger ties between the EU members may find less resistance when the UK leaves the club.

Figure 1: Likelihood of EU referendums in large EU countries

Country Likelihood Notes
Germany Very unlikely Would require a change in the constitution.
France Unlikely Requires support of the President in most cases.
Italy Very unlikely Referendums on matters involving international treaties are prohibited by the constitution.
Spain Very unlikely Requires a proposal by the government and support from an absolute majority of parliament.
The Netherlands Unlikely The law prescribes that referendums can be carried out only for international treaties that have not already been approved.

Source: Cornerstone Macro, Policy Research report dated 30 June 2016.

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Tags: Equity, Europe, Market, Economic