«In many EU countries the political support for the union has shrunk to half of the electorate, without counting that many voters of traditional parties have mixed feelings towards Brussels.»
After the referendum on Brexit, the European Union has been waiting with great anxiety for the election outcomes in the Netherlands and in France. For the first time, the possibility of an imminent outright collapse had materialized. In the Netherlands, Geert Wilders did not gather more than 13% of the votes, making less progress than expected. Then, twelve days ago, in the first round of the presidential election, French voters rallied behind the pro-EU and pro-business independent candidate Emmanuel Macron. Having secured the support of the main traditional parties, Macron is very likely to be the next president of France. A year before, Spain had overcome its political crisis with a minority government led the People’s Party which is unlikely to be challenged in the conceivable future. Nobody expect the German elections to be eventful. Merkel is likely to be confirmed. A surprise victory of Schultz’s Social Democratic Party would have no major consequences on Europe, given that both major parties German are strongly pro-EU.
Is the storm over? Not really. In the short run, the main risk factor is Italy. After the defeat in the constitutional referendum of December 6 that led Renzi to resign, Italy is run by a low-key government whose main mission is to avoid early elections that might precipitate the country into chaos. Eventually, democracy cannot be suspended, and Italy will run new parliamentary elections in a year from now, at the latest. The polls are far from reassuring for Brussels. The Five-Star Movement, a populistic party that conjugates radical leftist economic policies with an anti-immigrant stand, has been polling consistently close to 30%, leading (if by a close margin) the center-left Democratic Party. Two far-right parties (Northern League and Brothers of Italy) attract together about 17% of the intentions of vote, with Berlusconi’s mainstream right-wing «Let’s go Italy» polling at about 13%. Overall, a hypothetical (not impossible) right-wing coalition commands 30% of the vote, leaving Italy with three equally sized coalitions that are unable to communicate, not to say to engage in government cooperation. The bad news for Brussels is that both the Five-Star Movement and the two far right parties (together with part of the fragmented radical left) voice a strong anti-EU rhetoric. Together, these parties command about 50% of the votes. The good news for Brussels is that a cartel of these forces is not tenable.
Italy is too big to fail. With a public debt-GDP ratio at 140%, it is difficult to exaggerate the consequences of a deep political crisis. To avoid stalemate, Renzi wanted to change the electoral system so as to guarantee a strong majority to the largest party – betting that the Democratic Party would secure a plurality of suffrages. After the demise of his reform, Italy is set to go the next election with an electoral law that will favor fragmentation and post-election legislative bargaining. The best bet for Brussels is that «Let’s go Italy» opt for a moderate stand and part its destiny from the far-right parties, offering instead to form a parliamentary majority with the Democratic Party. Paradoxically, the hope for redemption comes from a hypothetical coalition between the two forces that antagonized each other bitterly over the last two decades.
The terms of the political debate have changed
The Italian case is not so unique as it might appear at first sight. For decades, the political dialectic in Europe has been characterized by the alternation in power of social democratic and liberal-conservative parties. These parties represented different ideologies and envisioned different models of society. The social-democrats advocated higher taxes and redistribution, more state interventions (e.g., through labor market regulations), and also more progressive views on a variety of social issues (women emancipation, gay rights, abortion, etc.). Liberal and conservative parties were instead proponents of more business-friendly rules, lower taxes and, in most cases, more social-conservative platforms. The two sides shared the common ideal of European integration, which appealed to political leaders from different ideological traditions such as Adenauer, Schmidt, Kohl, Mitterrand, and Chirac.
In recent years, the terms of the political debate have changed. Today, liberal and socialist parties have lost their centrality. The traditional parties have progressively been forced to make common cause to defend their shared values against the rise of new anti-system political forces. The celebrated victory of Van der Bellen in Austria was the result of all parties joining force against the far-right FPÖ candidate who collected alone more than 46% of the vote. In Spain, Rajoy could become prime minister thanks to the vote of his traditional socialist opponents. In France, Macron, himself an outsider but otherwise a mainstream candidates, gathers in the second round the support of what is left of traditional parties. Yet, if one sums over the vote shares of all anti-EU candidates (Le Pen, Mélenchon, Dupont-Aignan, Poutou, and Arthaud) one obtains a 47% vote share. Thus, Italy is no outlier: in many EU countries the political support for the union has shrunk to half of the electorate, without counting that many voters of traditional parties have mixed feelings towards Brussels.
Even if traditional European parties manage to survive, minority governments (such as those in Spain or Sweden) or unnatural coalitions (like the prospective coalition the Democratic Party and Let’s go Italy) will pay a high price in terms of quality of governance. First, their action is impaired by internally inconsistent views on economic policy. Second, the surge of populistic parties makes mainstream governments wary of reforms that might provoke discontent. In Italy, the new government led by Gentiloni has been preoccupied with sending conciliatory messages to a variety of special interest groups that were offended by Renzi’s activism in terms of labor market liberalization, school reform, taxi deregulations, etc. In addition, even governments that are committed to the European Union feel somewhat obliged to display a conflictive attitude vis-à-vis Brussels. In this environment, reform plans are set aside in favor of «live and let live» strategies.
No reforms will materialize anytime soon
Thankfully, there are some positive signs from the global economy. The US economy is on a steady path of recovery, China and other emerging economies are more resilient than expected. In the first quarter of 2017, Europe has struggled, but the economic situation may be getting better, hereafter. Yet, it is a fragile equilibrium, which is threatened by the persistence of high uncertainty. Recent research by Stanford’s economist Nicholas Bloom emphasizes the detrimental effect of economic uncertainty on investment and growth. According to the index of economic policy uncertainty he constructed (together with Baker and Davis), uncertainty in Europe has decreased mildly in the first quarter of 2017, after the shake-ups of Brexit and of the US presidential election. Uncertainty is likely to fall further after the second round of the French presidential elections, especially if good relations between European Union and the United States are restored. Further stabilization and low uncertainty would be a good omen for economic growth.
Taking stock, it is too early to claim that Europe has reached the calm after the storm. There are a number of important clouds ahead. In 2017, there will be the second round and ensuing legislative elections in France, elections in Britain and Germany. None of these events will deliver jolts. The big matter of uncertainty is Italy, whose political future is still in the air. Its fragile banking system can bring instability any time; a new sovereign debt crisis cannot be ruled out. What is worse, none of the reforms promised by Renzi in his heydays are likely to materialize in the near future. Among the realistic scenarios, the most optimistic one has no major political earthquake, some growth coming from an improved international situation, and a loss of appetite for adventures from Italian voters. In this scenario, Italy will be governed by an unremarkable coalition government that keeps the country in the European Union with a business-as-usual approach that excludes ambitious reforms. It is a grey scenario, and yet better than any likely alternative.