2017 Geopolitical Forecast: Europe

> Major European elections are held amid rising populism

> Another challenging year for the European Union

> Brexit negotiations begin; Theresa May fights battles at home

POPULISM RISING IN A YEAR OF ELECTIONS

Three major European countries – the Netherlands, France and Germany – are set to hold general elections in 2017 and each is experiencing a surge in popularity for right-wing populist parties. This increased support was sparked by the large migrant influx of 2015 and has been driven by feelings of economic disenfranchisement and anti-globalisation.

Undoubtedly, extremist groups like ISIS and al-Qaeda will want to encourage the rising popularity of anti-migrant, right-wing groups in order to pursue their goal of pitting the Islamic world (which they claim to represent) against ‘the rest’. Thus, there is an increased risk of terrorist attacks in the coming year, particularly in the Netherlands, France and Germany, as these groups seek to instil fear and shape upcoming elections. A sharp rise in these types of incidents could swing support in favour of right-wing parties like France’s National Front, making them a pivotal risk factor of 2017.

NETHERLANDS

The Dutch head to the polls on March 15, making it the first major European election of the year. Although a relatively small country with a population of some 17 million, the Netherlands is a crucial ‘core’ EU member-state; its wavering support for the bloc could be catastrophic for Brussels. Perhaps more importantly, the results of the Dutch election will set the tone for the two much larger continental votes held later in the year. A victory for the right-wing populist Party for Freedom (PVV) is likely to embolden its counterparts in France and Germany.

The PVV has campaigned on the familiar populist platform: espousing nationalist, anti-EU and anti-migrant stances. Its leader, Geert Wilders, has seized on the victory of the Brexit campaign and called for the Netherlands to hold its own ‘Nexit’ referendum.

Current polling data puts Mr Wilders’ PVV ahead of its closest rival, the ruling centre-right People’s Party for Freedom and Democracy (VVD). However, on its current course the PVV is virtually guaranteed to fall short of a majority, and is also unlikely to be able to forge an effective ruling coalition with more moderate, centre-right parties. These factors diminish the likelihood that Geert Wilders’ populists will take power.

Nonetheless, the PVV will strengthen its position in the Dutch parliament in 2017, likely doubling its current holding of 12 seats. This will make the populists a considerable force in the legislative process.

FRANCE

The French presidential election will be the most important vote of 2017. Marine Le Pen’s right-wing National Front is expected to advance to the second-round runoff vote to be held on May 7 and represents the best chance of a European populist clinching office.

Le Pen will face fierce competition from Francois Fillon, The Republican’s centre-right candidate. Fillon came from behind in November 2016 to secure his party’s nomination.

Having earned the title of least popular president in the fifth republic’s history, incumbent Francois Hollande will not run for re-election. His replacement, former Prime Minister Manuel Valls, is not expected to make it to the second round. This will pose a dilemma for left and centre-left voters: vote for the hardline, fiscally conservative Fillon, support the anti-EU, anti-migrant populist Le Penn, or abstain altogether.

Fillon has his work cut out for him. The former prime minister is running on a platform of deregulation, fiscal conservatism and business-friendly reforms, including cutting some 600,000 public sector jobs to fund company tax breaks. This makes his platform unpopular with many centre-left voters, whose support Fillon will need in second round.

Marine Le Pen, on the other hand, supports protectionist economic policies that are traditionally the preserve of leftist candidates, including raising the minimum wage and lowering the retirement age. This makes her platform a more natural fit with the millions of centre-left voters who will be without a candidate in the second-round runoff.

However, Le Pen has also vowed to quit the EU and enact stricter border controls. Her anti-migrant rhetoric will also sit uncomfortably with liberals. Interviewed in November, Le Pen put it simply: “we are not going to welcome any more people, stop, we are full up”.

But the National Front’s hardline anti-migrant stance has struck a chord with a large segment of the public that has grown disenchanted with French society. Rightly or wrongly, these people blame a liberal migrant policy for their economic woes, as well as the uptick in terrorist attacks.

GERMANY

Germany’s general election will be held in September or October next year, making it the last of the major continental votes.

Chancellor Angela Merkel, who leads the centre-right Christian Democratic Union (CDU), is seeking a fourth term. Merkel’s liberal migration policies, which have seen more than a million people arrive in Germany in the past 18 months, have heaped pressure on her candidacy. Her allies, the Christian Social Union (CSU) – a slightly more conservative party based in Bavaria – have implored the chancellor to take a harder line on immigration.

Pressure is also building from the far-right Alternative for Germany (AfD), which made impressive gains in local elections throughout 2016. Following the Berlin Christmas market attack in December 2016, the AfD accused Merkel of failing to keep the country safe and blamed her open-door policy for the rise in extremist attacks. This sort of fear-inspired rhetoric will generate AfD votes, although it is highly improbable it will gain enough seats to form government.

The AfD has never before crossed the 5 per cent threshold required to enter federal parliament – something it is likely to do in 2017. Similar to the PVV in the Netherlands, the AfD will emerge from 2017 with substantially more political clout and, in all likelihood, with some 30 seats in the 630-member parliament. Despite this, the AfD’s hardline xenophobic policies make it unlikely to be included in any coalition government, which would necessarily involve at least one of the traditional moderate parties.

Significantly, internal pressure from the CSU and an assault from the AfD is likely to force Merkel to adopt stiffer policies on social issues. During the CDU’s party congress in late 2016, Merkel called for the Islamic full veil to be “prohibited wherever legally possible” – an ostensible concession to conservative elements within her party alliance. However, Merkel has resisted calls to tighten migration policy. Whether she can continue to do so yet also garner enough support to win a fourth term outright is questionable; protracted coalition talks are likely.

CAN POPULISTS GOVERN?

Another serious question, and one yet to be asked of any of the West’s current populist movements, is whether they can govern effectively. Many of these groups have found support among populations that are disenchanted with the establishment and thus willing to cast a protest vote in favour of firebrand figures touting radical change. Whether these movements can deliver on their promises when or if they find their way into government is unknown. Failure to do so is likely to result in their plunging popularity. However, if populists merely beef up their parliamentary presence but remain in opposition, these movements will maintain their ability to criticise the establishment while taking no responsibility for the direction of their respective societies.

THE EUROPEAN UNION

2016 was a difficult year for the European Union: Brexit, the concerted rise of anti-EU sentiment and continued financial issues all made life uncomfortable for those in Brussels. 2017 looks set to be just as challenging.

The single largest concern for EU officials (and one they can do little about) is the risk of another major member leaving the Union. Euroscepticism has risen considerably in the wake of the successful Brexit referendum and leaders across the continent have called for their countries to hold similar votes on EU membership.

It is the countries holding elections in 2017 that are most likely to hold a vote on leaving the bloc; anti-EU populist parties in the Netherlands and France have both pledged to do so if elected. Of the two, France is the larger risk to the future of the EU.

As outlined previously, Marine Le Pen’s National Front is the most likely of Europe’s populists to seize power. As the EU’s third largest economy and second most populous country, France’s departure would signal the collapse of the union. Yet even if Le Pen wins the election and is able to secure a Frexit referendum, it is unlikely a majority of French people will vote to leave the EU (and even more unlikely that the vote will be held in 2017).

Another threat to EU unity is emerging in Italy. In December 2016, voters rejected constitutional reforms favoured by EU-friendly Prime Minister Matteo Renzi, who was forced to resign. While a caretaker government hailing from Mr Renzi’s Democratic Party has been put in place until 2018, there is a reasonable possibility that Italy will hold fresh elections towards the end of 2017. In Italy too, populists have grown in stature, with the anti-establishment Five Star Movement (M5S) now the second most popular party nationwide.

Fears of an M5S victory in 2017 may also roil financial markets. Italy is home to some of the continent’s most overleveraged banks, which may struggle even more if M5S implements protectionist measures, thus raising the cost of borrowing.

Relations with Turkey will continue along their current rocky trajectory. Both Brussels and Ankara have interests in maintaining the relationship – particularly on matters of trade and investment – but social and political tensions will undermine any substantial progress on EU membership talks.

The lack of progress on a visa liberalisation program for Turks has been met by threats from Ankara to renege on the migrant deal struck in early 2016. With European capitals still trying to contain the backlash from the migrant influx of 2015, and some facing fresh elections, any increase in the flow of migrants from Turkey in the coming year will cause political and social volatility.

In this sense, Turkey may find itself with more leverage for Turkish President Recep Tayyip Erdoğan’s reaction to an attempted coup in July 2016, which has met with some criticism in Europe. The ensuing crackdown resulted in the arrest of some 35,000 people and suspension or dismissal of more than 110,000 civil servants. In 2017, Mr Erdogan is expected to push for a constitutional referendum to create a strong presidential system (with himself at the top). This may further strain relations between Ankara and Brussels.

BREXIT NEGOTIATIONS

One of the biggest political stories of 2016 was the UK’s decision to leave the European Union. 2017 will be the year the two sides begin negotiations on how the UK will leave the bloc and what rights and responsibilities it will keep.

UK Prime Minister Theresa May has promised to begin the process of leaving the EU – which is expected to take at least two years – by the end of March 2017. However, in November the High Court ruled that the government must put the decision to trigger Article 50 (the formal process that begins Brexit) to a parliamentary vote. The May administration appealed against this decision, with another ruling expected from the British Supreme Court in January 2017.

In the likely event that the government’s appeal fails, Theresa May will have to deal with significant political wrangling to get the bill through a divided parliament. Many lawmakers oppose Brexit, including some in May’s own Conservative Party. This will result in a protracted process that could delay the March 2017 deadline. Regardless, it is expected that MPs will ultimately support the triggering of Article 50.

When negotiations between London and Brussels do eventually start, the contours of the ultimate agreement will hinge on how the May government will seek to remain in the EU’s internal market. This market is key to the UK’s economy – particularly to its vital financial services sector – but Brussels has been clear that inclusion also requires London to allow for the free movement of people through its borders, accept regulations and contribute to the EU’s budget. Negotiations over these issues will be a drawn out process. EU officials will likely adopt a tough stance on granting concessions to the UK in an attempt to deter other member-states from leaving.

No deal on Brexit should be expected in 2017, but the negotiations process and resultant political manoeuvres will produce substantial market turbulence as the EU’s second largest economy peels away from the bloc.