Which populism?
European populism crosses several boundaries. It is present – if with different degrees of intensity – in both western and eastern Europe, small and large countries, the core and periphery of the eurozone and in members and non-members of the euro. Despite their aggressive anti-establishment rhetoric and their resolve to overturn the status quo, populists are far from being a uniform political movement. Instead, they cover the whole political spectrum, from right to left, which includes both soft and hard Eurosceptic2.
Left-wing populists share fairly similar platforms and are mainly active in the periphery. They usually emerge after corruption scandals involving mainstream parties, and they propose aggressive anti-austerity policy agendas. Some examples of these are Greece’s Syriza, Italy’s Five Star Movement or Spain’s Podemos. However, their attitudes towards the euro are ambiguous, with the Five Star Movement as the staunchest advocate of a break-up.
They range from nationalist and xenophobic movements, such as France’s National Front, Austria’s Freedom Party, Hungary’s Jobbik, Italy’s Northern League, and Greece’s Golden Dawn, to anti-EU movements, such as the UK Independence Party, to traditionalists, such as Finland’s True Finns, who promote a Christian Finnish identity. Will populism make a mark at the next general elections? Although populism is a widespread phenomenon, not all European countries are equally vulnerable. Our populism barometer, which ranks the populism risk across the EU according to the popularity of the most radical movements, shows that, with the exception of the UK and Denmark, radical parties pose the greatest threat to members of the eurozone (Austria, France, Greece, Italy, Spain). In these countries, populists are currently polling at more than 20% and they have improved their popularity since the European Parliament (EP) elections. In France, the National Front won 25% of the vote in the EP elections but is now polling 30%. The situation in Greece is similar. There, Syriza increased its support by 5pp, to the current 31% from 26% last May. In Austria, the right-wing Freedom Party gained 19% of the vote last May but it now has 25% of popular support. In Italy, the Five Star Movement is on a soft decline (it still polls 19%), whereas the Northern League is catching up, having seen an increase from 6% in the EP elections to the current 10%, according to recent surveys. In Spain, the brand-new, left-wing movement Podemos – after posting an already impressive 8% in the last EP elections – is now leading the polls at 26%, whereas in Germany, which is faced with a moderate populist risk, Alternative for Germany has probably established itself in the German political landscape after the results in federal states and the EP elections. Finally, although the UK Independence Party is polling below its EP percentage, its support for the 2015 general election has kept increasing over the last year and a half, moving from around 10% in early 2013 to the current 16%.
In some countries, mainstream parties are attempting to stem populism by partially borrowing the policy agendas of the most-radical movements. In the UK and France, the conservatives are adopting aggressive anti-immigration stances. In Germany, Chancellor Angela Merkel dished out more promises of pension payments ahead of November’s elections in Brandenburg and Thuringia, which did not appear to significantly stem the support for Alternative for Germany. Also, in the periphery, populists have impacted the policy priorities of mainstream forces. The growing focus on pro-growth measures might be interpreted as a way to address the anti-austerity sentiments that characterize leftwing populism. In contrast, populists are trying to build momentum by coordinating with one another in order to create pan-European movements. Italy’s Northern League is reaching out to France’s National Front, whereas the Five Star Movement is coordinating with the UK Independence Party within the EP. But these alliances do not seem sustainable in the long run, given the diverging policy priorities of each of these movements.
Good news…
Good and bad news can be extrapolated from the analysis above. The good news is that, as of now, no populist party has the absolute majority necessary to form a stand-alone government in the next elections (chart 5). In France, for instance, according to runoff polls, the National Front will only win against the Socialist Party, while it trails the UMP by a wide margin (15-25pp). So the probability of a Marine Le Pen presidency remains low. In Italy, populism does not seem to be a realistic threat to political stability. As mentioned above, the combined share of votes between the Five Star Movement and the Northern League would not surpass 30% – and these two parties are unlikely to form an alliance. Thus, in Italy, the probability of a populist government coming to power is very low. Finally, the implementation of sovereign QE by the ECB will likely increase popular support for Alternative for Germany before the federal elections scheduled for 2017. However, the lack of an absolute majority does not exclude a scenario in which populists rise to power in countries such as Greece, Spain or Italy. Should snap elections be called in Greece (in case a new president is not elected in December), Syriza will likely receive the most votes. To have an absolute majority in the Hellenic Parliament, the winning party is expected to control 151 seats. According to recent opinion surveys, Syriza would control around 140 seats. Therefore, it will likely try to form a coalition government with POTAMI – a brand-new center-left party which had a discrete success at the last EP elections. Even if Syriza manages to form a coalition government, it is unlikely to last long. POTAMI has a much-softer attitude towards the EU. At the same time, if Alexis Tsipras, Syriza’s leader, compromises on European issues, he will antagonize many members of his party, whose views on European affairs are more radical.
In Spain, the situation appears to be even more complicated. According to current surveys, Podemos would win 112 seats, as opposed to the 176 required to control the Congress of Deputies, and the smallest parties would not have enough support to form a coalition government. We thus envisage two scenarios: In the first, the Socialist Party (109 seats) and Popular Party (87 seats) form a coalition, thus marginalizing Podemos. Recent events confirm this scenario. On December 2, Popular Party chief Maria Dolores de Cospedal said her party would consider an alliance with the Socialists. We assign a significant probability to this scenario and we do not expect any pre-electoral commitment from the two parties. In the second scenario, Podemos and the Socialists join forces to form a government together. Although this coalition is politically and numerically feasible, we believe that divergent attitudes towards the EU would soon emerge and undermine the stability of the alliance. Recently, the leaders of both parties publically declared that any such alliance is not realistic. Only pragmatism might induce Podemos to put aside its antiestablishment rhetoric. 11 December 2014 Economics & FI/FX Research.
In Italy, in case of snap elections, if the center right pulls off an unlikely victory (low probability), the Northern League could enter the government, as in the past. However, it would be a minority in the executive branch and would be unable to significantly affect policymaking. …and bad news
The bad news is that radical movements are increasing in popularity at a rather impressive pace. It is quite likely that in the months leading up to the elections, they will strengthen further. The main approval drivers will be economic variables. Chart 5 depicts a negative relationship between the popularity of anti-EU movements in the last EP elections and the economic performance of their countries. If the employment situation does not improve, discontent, frustration and tensions will arise, thus creating the ideal environment for the populists to thrive. In contrast, if there are signs of economic expansion, voters might change their minds at the last minute and opt for more-palatable mainstream parties. Moreover, as we have already witnessed in some countries, mainstream parties might be tempted to promote extreme policy stances, if they feel the pressure of the populists. This might lead to major political earthquakes, regardless of the electoral performance of the populists. In the UK, for instance, the existential dilemma of EU membership ranks high on the political agenda of many mainstream conservative politicians, not just the UKIP. What will happen if populists rise to power? As of now, populists would rise to power only in a coalition with more-moderate actors. For this reason, they will be forced to revise their anti-EU stances. This transformation is already happening spontaneously. Podemos has changed its anti-euro stance, and Syriza is no longer threatening to tear up the bailout program or to default on debt. The question begging to be answered is how populists would behave if in power. Turmoil period. If populists rise to power, we foresee a period of political and financial turmoil. In Spain and Greece, which are the two countries where populists are more threatening, we envisage a policy path that includes the desire of Syriza and Podemos to remain in the eurozone but with a substantial change in other policies, many of which will violate EU agreements. Depending on specific circumstances, these policy deviations might include discretionary fiscal expansion, government support/guarantees associated with work programs, implicit or explicit curbing of immigration and the nationalization of banks. In reaction, the rest of the eurozone, including the European Commission and the ECB, is likely to become very vocal in its condemnation but lacks a clear active response. At the same time, markets, including fixed income, equities and possibly domestic businesses and households, are likely to react negatively with a sell-off in sovereign bonds and equities. With the situation slipping out of control, European institutions might start a “game of chicken” with the populist government. With unorthodox policies in place domestically, a European Stability Mechanism (or IMF) program will remain unlikely, which means that the ECB will not be able to trigger OMT. Depending on the severity of the situation and political hostility, the ECB might also deny the non-compliant country the use of Emergency Liquidity Assistance to support its banks. If the ECB has already launched a sovereign QE program, we suspect that this would probably be suspended for the country in non-compliance. Populists will then be at a crossroads and will have to either compromise or play hardball.
