European politics undergoing a revolution – Europe has been teetering on the edge of economic catastrophe for the past decade, and it seems not a month goes by without another crisis in one form or another emerging from the continent.
However, since the end of June when of the UK voted to leave the European Union, Europe’s economic troubles have taken a backseat (macro figures are improving for the first time since 2007), and now analysts are extremely concerned about the continent’s political stability.
Europe’s economy is fine, worry about European politics
A report from Morgan Stanley on European politics, published at the beginning of July summed up the situation perfectly. The report was published a few days after the UK’s referendum on EU membership, which may have some bearing on the conclusions drawn, but it is still a good insight into Europe’s political catastrophe. Indeed, according to Morgan Stanley’s research political instability across the Eurozone reached a record high at the beginning of July this year leading Morgan’s analysts to conclude that the greatest risk now facing Europe is not another economic crisis but a political one:
“Is it a replay of the 2008-09 or 2011-12 crises? Neither, we think. What’s different this time is that mainstream politics and policy, which have previously sought to provide a backstop, have less support in parliaments and within the population at large. When key elections and referendums create instability, this means less structural reform and extra uncertainty, which negatively affect the economy and weigh on currencies and risk assets. Given the growing importance of the protest parties, rising fragmentation in parliaments makes government formation more difficult, achieving an absolute majority less likely and, ultimately, the political risk premium higher.”
To avoid a political crisis which could lead to an economic crisis and potential breakup of the Eurozone, Morgan’s analysts believe the continent’s current ruling political parties need to learn three key lessons from Brexit and use these lessons to reinvent their own policies. Re-engaging young voters, addressing of the labour skills gap, integrating migrants and reducing income inequality across the spectrum should be at the forefront of European policymakers’ roadmap to re-stabilise the continent’s political environment.
Morgan’s report was published just after Brexit. Two months on and it seems as if Europe’s policymakers have only plunged their heads further into the sand. Business Insider has the most recent version of Morgan’s European politics update, which contains the following chart.
After Germany’s Angela Merkel suffered one of the most serious blows to her political position over the weekend when her Christian Democratic Union of Germany (CDU) was knocked into third place by the anti-immigrant Alternative für Deutschland (AfD) in the chancellor’s home region, it’s clear that Europe’s political environment is getting more uncertain by the day. The risks of a political crisis for the region are growing. However, instead of addressing the issues which are angering the Germans (ie invasion by one million migrants), Merkel has doubled down and hopes she can ride out the crisis. Only time will tell if she is right.