Pressure on Europe

The impact of the economic crisis has seen an increase in popularity for the more radical political parties, but how will the EU cope if they win power and how will the markets react?

EU POLITICS

Mainstream European political parties are under unprecedented pressure from the impact of economic crisis, and populist anti-European Union and anti-immigrant forces of the far left and extreme right on the rise.

So the future of the centrist consensus is under threat in general elections in Greece, Sweden, Portugal, Finland, Britain, Denmark, Spain, and Poland, along with cantonal and regional elections in France.

How will the EU cope if radicals win power in Greece or get into coalition in Denmark or even Britain? And how will markets react to the mere prospect? Will the risk of a “Grexit” from the eurozone be back on the agenda, and is the rest of the currency area now insulated from such a shock?

In Spain, the rise of anti-austerity party Podemos comes despite Spain’s improving economic outlook, underscoring a lingering malaise. General elections are likely to be held in the autumn and how Podemos fares will be a bellweather for similar movements across the region.

Elections in Sweden, Finland, and Denmark will show the extent of far right influence as well as Nordic reformist zeal. The Netherlands has local elections in March which will gauge the popularity of Geert Wilders’ far right PVV, which is leading in the polls.

The emergence of a three-party left-wing coalition in the eastern German state of Thuringia has unnerved chancellor Angela Merkel’s conservatives, who are without a natural partner on the right for the first time post-war after the crash of the Free Democrats.

She is now more dependent on the centre-left Social Democrats than ever. And their flirtation with the radical Left party promises to increase frictions in Berlin.

In Ireland, six years of austerity have transformed former IRA political wing Sinn Féin from nationalist outsiders to contenders to enter government, threatening the biggest shake-up of Irish politics in generations. Elections must take place by April 2016.

GREXIT

Greece will be one of the most important stories of 2015, particularly after the prime minister, Antonis Smaras, failed to have his presidential nominee elected in December.

The country now faces an election about 18 months earlier than anticipated, elections which could well sweep Alexis Tsipras and his radical left Syriza party — which wants to renegotiate the country’s bailout and have up half of the debt written off — into power.

Tsipras has been trying to make his party look less scary to Europe’s leaders — but he is sticking to his pledge to tear up Greece’s international bailout terms.

There doesn’t seem much prospect yet of contagion sweeping up other eurozone countries but that doesn’t mean it won’t happen. It could certainly affect politics in the eurozone periphery, giving a boost to anti-reform parties and fuelling the debate about the policy mix.

BREXIT

Either David Cameron or Ed Miliband will be the next British prime minister but whether alone or in coalition with one or other of the United Kingdom Independence Party, the Scottish National Party, the Liberal Democrats or the Greens is up in the air.

A Conservative win will mean a referendum in 2017 on Britain leaving the EU. If Cameron is re-elected, EU officials expect him to lay out his demands at a mid-June EU summit and a real negotiation to start after the summer break. If he is defeated, Europe will breathe a sigh of relief, but some deforestation of EU directives is likely anyway, as well as vigorous and acrimonious debate about new ways to make life miserable for EU migrants.

With an anti-immigrant grassroots movement gaining ground in Germany, this could be a big theme of 2015.

EU ECONOMICS

Will the ECB unleash full-blooded or only half-hearted QE? How severe will the political and legal backlash be in Germany and will the bond-buying be enough to revive inflation and growth?

Merkel’s government fears QE will discourage countries from reforming and could set the stage for the next financial crisis. How Berlin reacts if and when it is launched in early 2015, will be crucial to its success or failure.

The expectation is Berlin will work behind the scenes to limit it but that Merkel will steer clear of publicly criticising the ECB. The anti-euro AfD will be vocal in its criticism, cramping her room for manoeuvre.

A legal challenge to Germany’s constitutional court is not impossible. If the ECB goes ahead, the Swiss National Bank will have its hands full defending the €1.20 cap on the Swiss franc it introduced back in 2011 at the height of the eurozone crisis.

ONE PERCENT ECONOMICS

The eurozone is mired in economic stagnation with growth and inflation stuck below 1%. On top of the ECB’s efforts, will the Juncker initiative for a European Investment Fund deliver lots of project finance or will it be a damp squib?

One of the key macro questions is whether weak oil helps by increasing growth via higher consumption or pushes the eurozone into outright deflation.

Southern Europe continues to bear the brunt. Will Spain be able to deliver on its objective of 2% growth and create hundreds of thousands of jobs while cutting its high deficit?

Italy has stagnated for over a decade. It remains to be seen how brave prime minister Matteo Renzi’s government will be in dismantling cradle-to-grave labour contracts. Will he touch untouchable public sector jobs? Or is the region doomed to sub-par growth, high unemployment, and rising poverty?

STRUCTURAL REFORM

Could 2015 be the year of bolder structural reforms in France and Italy, or will they fall short? Can French President François Hollande and Italy’s Renzi face down vested interests and really shake up their labour markets and regulated professions?

If not, how will France avoid being fined for missing its EU deficit reduction targets yet again?

There may be a new attempt driven by Germany and the ECB, starting in February, to co-ordinate eurozone economic policies in a more binding way. Expect France and possibly Italy to resist and put the credibility of the euro project in focus again.

SINGLE MARKET

The Juncker commission’s other big initiatives — an EU energy union, a capital markets union and measures to complete the single market in the digital economy — will all be rolled out this year.

Taken together, these could create new economic opportunities, but they face resistance from lots of vested interests. How far will countries like Poland and indeed Germany agree to wean themselves off coal?

Can “clean” nuclear make a comeback? A commitment to produce an EU climate change programme to present to the global Paris climate conference in December may produce concrete measures such as projects to link power and gas grids, new import facilities, etc.

LUXLEAKS

European Commission president Jean-Claude Juncker is still under close scrutiny for his role in offering multinational companies low tax deals when he was prime minister of Luxembourg.

So far EU governments have rallied round but if evidence of wrongdoing were to come to light, he could face pressure to resign, a move that would trigger the departure of the entire European Commission.

How far will efforts to end corporate tax avoidance and harmonise aspects of EU corporate taxation get in the wake of the LuxLeaks disclosures?

Will the European Commission be able to sustain a case against Ireland, Luxembourg and the Netherlands for illicit state aid over corporate tax breaks? Will it be back to tax-dodging business as usual for the multinationals, or will the EU be able to do something effective?

TRADE

Brussels and Washington say they are pulling out all the stops to have a free trade deal, known as TTIP, drafted by the end of the year. The biggest of its kind in the world, both sides say it will boost their economies. But there are obstacles. Europeans are wary of being pushed around by US multinational companies and of US food standards and genetically modified crops.

CENTRAL AND EASTERN EU

Poland will aggressively build up its armed forces, having lost faith in Nato. Moscow may reciprocate and will try to assert more influence in friendly countries like Serbia, Bulgaria, and Hungary.

The Hungarians, Czechs, and Slovaks will lobby the EU to dilute sanctions because their economies are suffering.

The new Polish government has been erratic and is unlikely to get any better before parliamentary elections at the end of next year.

There are two possible outcomes. One is the centre-right party stays in power propped up by the ex-Communists. They will demand a date for euro accession and a more generous social safety net in exchange. The other is that the conservative opposition party let by Jaroslaw Kaczynski takes power. He is even more mercurial than when he was last prime minister, and is a big admirer of Hungary’s Viktor Orban.

Meanwhile, it is starting to look as though Mr Orban has passed the high-water mark of his popularity. His poll rating has plummeted in the past few weeks. Ill-thought through initiatives — the internet tax, followed more recently by a proposal to drug test journalists — have the hallmarks of an administration that is fraying and his gamble of cozying up to Russia for cash has not paid off.

UKRAINE/RUSSIA

Will the Ukraine conflict be resolved, contained or spread? The likelihood seems somewhere between answers two and three but with sanctions and weak oil savaging the Russian economy, might President Vladimir Putin seek an accommodation with the West, and on what terms?

The EU is due to review sanctions in July. The prognosis for Russia is continued sanctions, deep recession, and spiraling inflation. Putin is likely to keep a tight lid on dissent and whip up national pride and anti-US sentiment. He may, however, seek a way to reduce tensions by shifting position slightly on Ukraine, pulling out troops and weapons, and offering less help to the rebels than they want to try to get sanctions eased.

The prognosis for Ukraine is possible default. The government has to act to stem corruption and get people on board with reforms or risk protests. East Ukraine is likely to fester whether or not fighting continues. Moscow faces growing problems trying to foot the bill in east Ukraine and in Crimea but needs to do so to maintain support.

The worst-case scenario is that separatists backed by Russian forces, openly or not, push into southern Ukraine and take more territory, triggering tougher sanctions and increasing the danger of all-out conflict.


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