30 December 2014

Britain’s date with history

First-past-the-post combined with a now de facto six party system means that the outcome of the elections next May is ridiculously uncertain. There are about nine potential government formations, with different implications for the EU in/out referendum. Any government with David Cameron as Prime Minister, including another coalition with the Lib Dems, will have to stick to his promise of a referendum. A Labour-led government will put the referendum on ice, but there are a range of options in between. The Europe debate won’t go away no matter what.

Athens going rogue?

Grexit fears are back. Having failed to get its presidential candidate re-elected, the Greek government has been forced to call snap elections on January 25. Opposition SYRIZA continues to lead in the polls, promoting policies that are incompatible with Eurozone membership (while remaining pro-euro in theory). Exactly how this will play out if SYRIZA get into power is unclear but some form of debt renegotiation is likely, leading to a classic game of chicken between Eurozone debtors and creditors. Add talks over a credit line after the current bailout ends in February and Greece is again the most critical flashpoint in the Eurozone.

Do you wish to go back to a national currency?

National currency 52%
Euro 32%
Don't mind 11%
Don't know 5%
A December 2014 opinion poll showed that a majority of Greeks are now in favour of returning to the drachma "if given the option." This may prove to be a rogue poll, but whether prolonged austerity is starting to chip away at the traditionally strong public support for the euro in Greece will be a key issue to watch in 2015. Source: Orb-International

Spain lurching left

General elections in Spain are set for December 2015 at the latest, amid regional tensions and an economic recovery not yet felt by many voters. With far left Podemos – like SYRIZA, pro-euro in name, anti-euro in practice – polling at around 20%, the most likely outcome is a weak minority or a fragile coalition government that will find it increasingly difficult to stick to EU-mandated austerity and budget targets. With Podemos potentially the new king-maker of Spanish politics, expect more frequent and fiercer clashes between Madrid and Berlin.

France/Italy vs Brussels

France and Italy will both most likely bust the Commission’s budget targets next year, by some margin. If the Commission and Berlin push too hard, the political fallout will be serious. Think Front National. If too soft, it suggests the barrage of hard-won new Eurozone rules are for nought. As always, a European fudge to save face is the best bet. In the meantime, the French and Italian economies look set to stagnate – in turn fuelling domestic discontent.

ECB’s temporary sugar rush

The European Central Bank is expected to engage in some sort of Quantitative Easing early next year amid concerns over deflation and lack of demand. It’s likely to boost market confidence in the short-term, particularly given uncertainty around Greece. For a range of reasons though – banks still hoarding cash and Germany being the destination of the largest bout of QE – the operation will likely have limited impact and lead to disappointment.

The pivot to Berlin

Germany will continue to dominate European affairs, but the country’s internal clash between its twin-commitments to sound money on the one hand and Europe on the other, could be further complicated if other countries such Spain and Greece begin to seriously push back against austerity. In addition, Berlin’s willingness to take assertive stances in foreign policy will be constantly tested by Russia, whilst Germany itself may be on the verge of a potentially quite nasty debate over immigration (primarily non-EU). Watch whether Alternative für Deutschland will seek to tap into these sentiments.

Rise of Nordic populism

Sweden narrowly avoided a messy snap election but the grand coalition deal that was struck – guaranteed cross-party support for all budget proposals until 2022 – risks leaving the anti-immigration Sweden Democrats (SD) as the only de facto opposition party, boosting its support in the long-term. Denmark will hold an election with the most likely result a centre-right minority government ruling with the support of the immigration-nervous Danish People’s Party. Nordic consensus politics looks increasingly hard to pull off.

Clash of constitutions

In addition to the running North-South standoff, the European Court of Justice (ECJ) is likely to rule in favour of ECB bond-buying (OMT), which the German Constitutional Court (GCC) has said is illegal. Though QE may over-take OMT, it sets a very complicated precedent as the Bundesbank may not have a clear constitutional mandate to partake in certain ECB operations. Also, unlike OMT, QE does not come with economic conditions attached, meaning the GCC could well consider it illegal once the inevitable legal challenge is lodged. The ECJ will also rule in key cases involving the UK, including the location of euro-denominated business and EU migrants’ right to access benefits.

The other elections

Another Civic Platform-led government is likely in Poland – though Law and Justice is still in the running – meaning Warsaw will continue to be assertive over Russia and push back against changes to EU free movement rules. There will be no majority for the euro after the Polish elections. Portugal will also hold Parliamentary elections, with some potential push-back against austerity.

In other words, hang on to your seats.