Political Risks in the Eurozone

Political risks in the eurozone

October 2012

Economic Research Department

Table of contents

Introduction 3 Finland 4 Germany 5 Slovakia 6 France 7 Austria 8 The Netherlands 9 Belgium 10 Greece 11 Portugal 12 Ireland 13 Italy 14 Slovenia 15 Spain 16 Summing up 17 Appendix 1 18 Colophon 19

Economic Research Department publications are also available on the internet at www.rabobank.com/economics

Completion date: 8 October 2012

October 2012 Rabobank Economic Research Department 2 Introduction

Looming euro-fatigue? The eurozone’s south is implementing austerity measures while the north is buying them the time to do so. Economic issues regarding this approach are usually extensively discussed. But what are the political risks that might render this strategy unfeasible? Figure 1: Austerity and reform

Responsiveness to OECD reform recommendations, 2010-11 From an economic perspective, the current 1.0 GR setup of solving the eurozone crisis seems to 0.9 0.8 be clear. As can be seen from figure 1, the ES 0.7 IE Southern European member states and Ireland AT 0.6 PT undergo severe austerity measures and 0.5 FI IT structural reforms in order to reduce budget 0.4 FR 0.3 deficits and to regain competitiveness. By NL 0.2 offering financial assistance, the Northern BE 0.1 DE European member states are buying them the 0.0 024681012time to do so. Variation in the underlying primary balance as a percentage of potential GDP from 2010-12 Source: OECD Going for Growth 2012 This setup, however, is subject to political risks both in the north and in the south. As the BBC notes in an August 2012 article, “there is, of course, the possibility that the Greek [read: Southern Europe and Ireland] people, fed up with rising unemployment and falling living standards, will make it impossible for the government to continue with austerity”. Such a scenario would be a classic example of austerity fatigue. More precisely, austerity fatigue can be described as the phenomenon that countries may not be able to implement austerity measures for a sufficiently long period of time to stabilize the public debt ratio and prevent default. Usually this is either due to popular protest of citizens, changes in government or voting power in parliament, or a combination of these factors

On the other hand, however, a phenomenon that we would call support fatigue may emerge in countries providing financial assistance to troubled member states. In line with an 2012 article in The Independent noting that “Greece in particular is testing German [read: Northern European] patience”, there is a risk that either citizens oppose further help or that changes in government or voting power may occur. As opposed to austerity fatigue, support fatigue is usually not so much articulated via popular uprisings, let alone violent protest.

This Special aims to identify the political risks in 13 eurozone countries which may lead to either support or austerity fatigue. For each country, a spider web graph is attached, providing a quick overview of each country’s score along five risk dimensions. Appendix 1 gives a short explanation of each risk dimension.

Bastian Halbach [email protected]

October 2012 Rabobank Economic Research Department 3 Finland

Finland is known for its conservative approach towards support measures, perhaps most descriptively demonstrated when Finland –as only country–requested collateral from Greece and Spain before approving further support. In fact, the political situation in Finland carries significant Figure 2: Dimensions of risk: Finland risk. After complex negotiations, the 2011

Political stability: election yielded a six-party coalition govern- Number of parties in government ment (figure 3). Finland is used to coalition 10 8 governments and is known for its political Political stability: Social unrest: Amount 6 Historic experience pragmatism. As a result, the country has not of protest recorded with coalition 4 governments experienced snap elections since 1983. But a 2 0 six-party coalition is new, even for the Finns. The Eurosceptic party of the ‘True Finns’ is the Political stability: Risk Public sentiment: of uprising euro- Eurobarometer largest opposition party and keeps rising in sceptic parties popularity as the crisis continues. Municipal

Legal constraints: elections on 28 October 2012 will provide Signs of constraints during ESM another indication of the current public senti- ratification process 1 (low risk) - 10 (high risk) ment in Finland. Source: Rabobank An important aspect to consider in order to understand the Finish sentiment, is the severe austerity and recession Finland went through in the 1990s (figure 4). Countries with such recent austerity experience tend to be stricter on other countries, in part because they feel to be in a more legitimate state to do so. Recent discussions that Finland may leave the eurozone altogether seem nevertheless unlikely at this point, not least because their entire post-Cold War identity is centered on Europe. Rather, Finland poses a big risk in not approving both further support packages and further EU-integration. Even in case of approval, Finland will likely slow down the process and may require further special treatment to prevent them from blocking solutions to the crisis.

Figure 3: Current parliament composition (seats) Figure 4:Austerity in Finland during the 1990s

index % 125 18 1 120 16 KOK - Liberal conservative 44 115 14 35 Gvt. SDP - Social democratic 110 12 VAS - Democratic Socialism 105 10 VIHR - Ecologists 100 8 SFP - Liberal (Swedish 39 minority interests) 95 6 42 KD - Christian democratic Gvt. 90 4 PS - National conservatism (True Finns) 85 2 KESK - Finnish Centre 6 80 0 Gvt. 9 Gvt. 10 14 Aaland representative 90 91 92 93 94 95 96 97 98 99 00 Gvt. Gvt. Real GDP per capita, index 1990=100 (l) Unemployment rate (r) Source: European Election Database Source: Reuters EcoWin

October 2012 Rabobank Economic Research Department 4 Germany

Germany remains a strong supporter of both the EU and the euro but operates under two constraints. First, recent appeals at the Constitutional Court against EU-related measures have demonstrated the potential legal boundaries for further EU-integration. Second, in the run-up to Figure 5: Dimensions of risk: Germany the September 2013 elections, a degree of

Political stability: gridlock in parliament due to electoral cam- Number of parties in government paigning is to be expected. Major decisions 10 8 such as to directly capitalize troubled banks Political stability: Social unrest: Amount 6 Historic experience through ESM will likely be postponed. of protest recorded with coalition 4 governments 2 0 We do not see a risk in the election outcome itself. The two traditional coalitions –SPD/ Political stability: Risk Public sentiment: of uprising euro- Eurobarometer Greens or the currently governing CDU/CSU/ sceptic parties FDP (figure 6)– would currently get insufficient

Legal constraints: votes to form a government (figure 7). A coa- Signs of constraints during ESM lition of SPD, Greens and FDP has been ruled ratification process 1 (low risk) - 10 (high risk) out by both SPD and Greens. The Pirate party Source: Rabobank may pass the five percent hurdle to enter parliament, but the chance that any of the established parties would collaborate with them is very small. A coalition of CDU/CSU and the Greens is an unlikely option based on negative experiences in a regional government. Most powerful would be a grand coalition of CDU/CSU and SPD, which would exhibit a vast majority. For the second time in postwar Germany, a grand coalition has been in power from 2005 to 2009. During this period, the government was able to adopt comprehensive legislation, including measures to fight the immediate conse- quences of the financial crisis of 2007/08. Based on their common pro-European stance, a grand coalition would make Germany a constructive partner in furthering EU institution building.

Figure 6: Current parliament composition (seats) Figure 7: Recent German poll

% % 40 40

9 35 35 30 30 CDU/CSU - Christian Democrats 25 25 10 FDP - Liberals 20 20 44 Gvt. SPD - Social democrats 15 15 10 10 Greens - Green party 5 5 0 0 14 The Left - Socialist

42 Gvt.

Election 2009 outcome Poll as of 16 September 2012

Source: European Election Database Source: European Election Database; Forsa 2012

October 2012 Rabobank Economic Research Department 5 Slovakia

Slovakia’s 2012 election outcome yielded a single-party absolute majority government of the social democrats with 83 of 150 seats in parliament (figure 9). The right-wing populist party SNS missed the five percent hurdle and did not re-enter Figure 8: Dimensions of risk: Slovakia parliament (figure 10). Political stability: Number of parties in government 10 Newly elected Prime Minister Robert Fico leads 8 Political stability: the first single-party government since Slova- Social unrest: Amount 6 Historic experience of protest recorded with coalition 4 kia’s independence, reducing the risk of politi- governments 2 cal gridlock. These are favourable outcomes 0 adding to Slovakia’s overall stability and sup- Political stability: Risk Public sentiment: porting a favourable attitude towards the EU. of uprising euro- Eurobarometer sceptic parties Not least because his election was largely based on votes from the pro-social and pro- Legal constraints: Signs of constraints during ESM European platform, Robert Fico’s election ratification process points at a pro-European attitude in Slovakia. 1 (low risk) - 10 (high risk) As a response, shortly after elections, Fico Source: Rabobank emphasized his country’s role within the EU and underlined his support for further EU- integration.

In addition, the voting out of both Iveta Radicova’s centre-right government in general and the nationalistic SNS party in particular can be expected to have a further positive impact on the tense foreign relations with Hungary, which in turn may smooth diplomatic relations in the region as a whole.

Figure 9: Current parliament composition (seats) Figure 10: Election outcomes 2010 and 2012

% % 50 50 Smer-SD - Social 6 Democrats 40 40 9 KDH - Christian 30 30 Democrats 20 20 10 OL'aNO - Conservatives 10 10

14 0 0 44 MH - Social/Hungarian Gvt. minority

42 SDKU-DS - Christian Democrats

SAS - Liberal

Election 2010 outcome Election 2012 outcome Source: European Election Database Source: European Election Database

October 2012 Rabobank Economic Research Department 6 France

France has proven to be a reliable and stable eurozone member. Forecasts that the election of socialist President Hollande, who enjoys a majority government (figure 12), would both slow down eurozone crisis management and distort French-German Figure 11: Dimensions of risk: France relations have so far turned out to be wrong. Political stability: Number of parties in In particular, Hollande and Merkel have government 10 demonstrated their willingness for constructive 8 Political stability: cooperation. Social unrest: Amount 6 Historic experience of protest recorded with coalition 4 governments 2 Internally, Hollande faced challenges in order 0 to live up to his election pledges and to

Political stability: Risk Public sentiment: produce sustainable national finances at the of uprising euro- Eurobarometer sceptic parties same time. To this point, he was able to fulfill a range of his promises; hence, that case has Legal constraints: Signs of constraints during ESM been sorted out for now. Overall, though ratification process difficult, these internal issues are unlikely to 1 (low risk) - 10 (high risk) affect EU-politics at this point. Source: Rabobank

Figure 12: Current parliament composition (seats)

52 PS - Socialists 12 10 EELV - Environmentalists

PRG - Left-wing 280 Gvt. UMP - Conservatives 194 FDG - Left-wing

NC - Centrists 17 Gvt. 12 Other Gvt.

Source: European Election Database

October 2012 Rabobank Economic Research Department 7 Austria

Like France, Austria has been a stable partner, usually moving closely in line with developments in neighbouring Germany. As Germany, they will hold general elections in September 2013. This is not expected to change the core political land- Figure 13: Dimensions of risk: Austria scape much. Social democratic Chancellor Political stability: Number of parties in Werner Faymann is expected to be confirmed government 10 in office (figure 14 and 15). 8 Political stability: Social unrest: Amount 6 Historic experience of protest recorded with coalition 4 Recently, multi-billionaire Frank Stronach has governments 2 appeared on the political stage, setting up the 0 new political party Team Stronach. Based on

Political stability: Risk Public sentiment: economic liberalism and euro-skepticism, of uprising euro- Eurobarometer sceptic parties according to recent polls the party is expected to be able to possibly receive more than 10% Legal constraints: Signs of constraints of votes on a national level, largely by absor- during ESM ratification process bing votes from the somewhat eurosceptic and 1 (low risk) - 10 (high risk) right wing BZÖ (Alliance for the Future of Source: Rabobank Austria) which had previously disagreed to an offer to cooperate with Stronach (figure 15). Overall, therefore, support for euro-sceptic parties remains below 15% at this point; developments until the election in 2013, however, should be monitored.

In all, though, Austria is unlikely to change its supportive stance in EMU crisis management.

Figure 14: Current parliament composition (seats) Figure 15: Poll as of 29 September 2012

% % 35 35

21 30 30 SPÖ - Social Democrats 25 25 57 20 ÖVP -Christian Social Gvt. People's Party 20 20

FPÖ - Liberals 15 15

Greens - Green alternative 10 10 34 5 5 BZÖ - Right-wing 51 0 0 Gvt. SPÖ ÖVP FPÖ Greens Team BZÖ Stronach Election 2008 outcome Poll as of 29 September 2012

Source: European Election Database Source: GallupInstitute Austria

October 2012 Rabobank Economic Research Department 8 The Netherlands

Despite the fact that snap elections had to be announced in early 2012 after the populist PVV party had withdrawn its support for Mark Rutte’s minority government, the Netherlands have been a stable and supportive eurozone member, largely moving Figure 16: Dimensions of risk: The Netherlands in line with Germany. Political stability: Number of parties in government 10 September 2012 snap elections yielded a 8 Political stability: favourable outcome in terms of EMU crisis Social unrest: Amount 6 Historic experience of protest recorded with coalition 4 management (figure 17 and 18). The two governments 2 biggest parties –the VVD (conservative 0 liberals) and PvdA (Labour Party) – were able

Political stability: Risk Public sentiment: to gain an unexpectedly large share of of uprising euro- Eurobarometer sceptic parties parliament with an additional ten and eight seats, respectively. At the same time, Legal constraints: Signs of constraints during ESM although remaining the third largest party in ratification process parliament, the anti-Islam and anti-EU PVV 1 (low risk) - 10 (high risk) party led by Geert Wilders lost nine seats. Source: Rabobank Eurosceptic, or at least sceptic of the current crisis management, SP (Socialist Party) failed to win the large number of seats that was predicted by the opinion polls months before the election (figure 18).

Although coalition talks are ongoing at this point, a stable and EU-supportive government is expected to be formed. The switch from a minority government to a majority government will clearly add to government stability.

Figure 17: Current parliament composition (seats) Figure 18: Election outcomes 2010 and 2012

seats seats VVD - Liberal 45 45 2 2 40 40 4 3 PvdA - Labour 5 35 35 PVV - Populist, anti- 41 12 immigration/euro 30 30 SP - Socialist 25 25 CDA Christian Democrat 20 20 13 D66 - Liberal 15 15 10 10 CU - Christian 5 5 GreenLeft 15 0 0 SGP - Christian

38 PvdD - Animal Party 15 50-plus 2010 2012 Source: European Election Database Source: European Election Database

October 2012 Rabobank Economic Research Department 9 Belgium

Although, or perhaps because of, hosting major EU-institutions, Belgium has adopted a remarkably low-key appearance in terms of EU-politics. Despite Belgium’s well-known internal issues, largely based on ethnical and cultural conflict, it has Figure 19: Dimensions of risk: Belgium supported all EU-measures to fight the crisis Political stability: Number of parties in and deepen integration. After 589 days of government 10 being governed by a care-taker administration 8 Political stability: and lengthy coalition talks, socialist Elio di Social unrest: Amount 6 Historic experience of protest recorded with coalition 4 Rupo became Prime Minister of Belgium (figure governments 2 20). At several occasions he stressed the 0 importance of supporting troubled eurozone

Political stability: Risk Public sentiment: members, deepening European integration and of uprising euro- Eurobarometer sceptic parties regulating financial markets in a sensible manner. This underlines the perception of Legal constraints: Signs of constraints during ESM Belgium as reliable EU member, despite its ratification process internal issues. 1 (low risk) - 10 (high risk)

Source: Rabobank

Figure 20: Current parliament composition (seats)

PS - Social Democratic 1 12 MR - Liberal 1 26 Gvt. CD&V - Christian 13 Democrat SPA - Social Democrat

VLD - Liberal 18 Gvt. CDH - Christian Democrat 27 N.VA - Ethnic regional (Flemish) ecolo-green 17 Gvt. 9 VB - Ethnic regional Gvt. Flemish 13 13 LDD - Liberal Gvt. Gvt. PP

Source: European Election Database

October 2012 Rabobank Economic Research Department 10 Greece

Greece continues to pose severe political risk. Although the current government can be considered the most favourable outcome after two elections and complex and intricate coalition talks, it is not very stable. First, Greece is not used to coalition governments as it was virtually perma- Figure 21: Dimensions of risk: Greece nently governed by a single party since 1974.

Political stability: Second, the current coalition is not intrinsically Number of parties in government motivated to cooperate but rather has been 10 formed under outside pressure, which makes it 8 Political stability: Social unrest: Amount 6 Historic experience more fragile. Then again, the coalition boasts of protest recorded with coalition 4 governments a sizeable majority (figure 22), which allows 2 for some defections within the parties when 0 voting on hard measures. Political stability: Risk Public sentiment: of uprising euro- Eurobarometer sceptic parties Recently, the leaders of Prime Minister Sama- ras’ coalition parties had a very hard time Legal constraints: Signs of constraints agreeing to another austerity plan, indicating during ESM ratification process first signs of dissonance. From a positive per- 1 (low risk) - 10 (high risk) spective, it can be expected that the Troika, Source: Rabobank recently reviewing Greece’s austerity efforts, will take this situation into account and will not demand too harsh measures in order to not jeopardize coalition stability. Further, recent polls indicate that the major government party, New Democracy, still lies slightly ahead of the main opposition party, Syriza figure 23).

Greece continues to be most likely to suffer from popular protest. After protests had slowed down throughout 2011, the latest talks about the Troika findings and the announcement of further austerity measures have started a new wave of more broad based demonstrations. Given the size of the economic adjustment and the fragility of the government, Greece will continue to be most susceptible to austerity fatigue.

Figure 22: Current parliament composition (seats) Figure 23: ND only slightly ahead of Syriza

% % 35 35 ND - Liberal Conservative 12 30 30 18 PASOK - Social Democratic 20 25 25 DIMAR - Democratic 20 20 129 Socialism Gvt. SYRIZA - Far-Left 15 15

10 10 71 ANEL - National Conservative 5 5 XA - Far-right (Golden Dawn) 0 0 17 33 Gvt. Gvt. KKE - Communism ND Syriza Pasok Anel XA-Golden Dawn Election 2012 outcome Poll as of 7 September 2012 Source: European Election Database Source: European Election Database; Proto Thema, AFP

October 2012 Rabobank Economic Research Department 11 Portugal

Portugal exhibits a stable two-party Social- and Christian-Democratic government (figure 25) with the next elections far ahead in 2015. It has been a remar- kable case in that hitherto not only almost the whole parliament, but also unions and business associations supported all auste- Figure 24: Dimensions of risk: Portugal rity measures. Even voters acknowledged the

Political stability: need for reform and increasing belt-tightening Number of parties in government except for comparatively minor protests. 10 8 Political stability: Social unrest: Amount 6 Historic experience A recent decision of Prime Minister Coelho to of protest recorded with coalition 4 governments reduce company costs and refund them via 2 0 cuts in workers’ take-home pay, however, drastically altered this situation. All actors Political stability: Risk Public sentiment: of uprising euro- Eurobarometer strongly opposed his plans and the largest sceptic parties public protest so far emerged. Most impor-

Legal constraints: tantly, even some government MPs articulated Signs of constraints during ESM their discontent with the proposed measures. ratification process 1 (low risk) - 10 (high risk) The opposition Socialists, which up to now had Source: Rabobank supported the government, announced that they would not vote in favour of such a measure. In the end, the plan has been aban- doned. This can actually be seen as a clear example of austerity fatigue at work.

We expect the Portuguese government to be able to come up with other measures to keep the reduction of the budget deficit on track. However, resentment has been ignited and is likely to stay. As can be seen from figure 26, recent polls show that Coelho’s party’s (PSD) voting share fell from 39% in 2011 elections to just 24%. The need for continued austerity and reform will continue to put pressure on the governing coalition. Therefore, despite the generally favourable setting up to now, government stability should be closely monitored.

Figure 25: Current parliament composition (seats) Figure 26: Governing coalition losing in polls

% % 40 40 8 16 35 35 PSD - Social Democratic 30 30 25 25 CDS-PP - Christian 108 Democratic People's Party Gvt. 20 20 PS - Democratic Socialism 74 15 15 CDU - Communism 10 10

BE - Socialism/Communism 5 5 24 Gvt. 0 0 PSD PS CDS-PP Election 2011 outcome Poll as of 17 September 2012 Source: European Election Database Source: European Election Database; Reuters

October 2012 Rabobank Economic Research Department 12 Ireland

Ireland has historically had a rather fragmented political landscape, with many minority governments or coalition governments with only a small majority. As a positive development, 2011 elections have yielded a politically stable government coalition of two parties (figure 28). Figure 27: Dimensions of risk: Ireland However, the left-wing republican and euro-

Political stability: sceptic Sinn Féin party receives increasing Number of parties in government support. Most recently, debates in the run-up 10 to the referendum about the Fiscal Compact 8 Political stability: Social unrest: Amount 6 Historic experience have amplified Sinn Féin’s popularity. With of protest recorded with coalition 4 governments their critical stance on the Fiscal Compact and 2 the EU in general, they receive 18% of votes 0 in recent polls (figure 29). The fact that the Political stability: Risk Public sentiment: of uprising euro- next general elections are only scheduled for Eurobarometer sceptic parties 2016, works as a risk mitigant. The referendum for the Compact itself yielded 60% of Legal constraints: Signs of constraints votes in favour. While this is not a large majo- during ESM ratification process rity, it should nevertheless been seen as 1 (low risk) - 10 (high risk) positive outcome as the Irish voted in favour Source: Rabobank of tighter European fiscal rules while under- going severe austerity and reforms.

On the other hand, the need to enact further austerity and reform in the years to come will make it increasingly harder for the coalition to cooperate. This is evidenced by the recent tensions between the coalition partners surrounding health care measures. Also, the pushback of Germany, The Netherlands and Finland on the possibility of directly and retroactively recapitalizing banks by the ESM will make changing the terms of the bank bailout for Ireland harder. This has the potential to further undermine the popularity of the government. As such, despite the relative success of the governing coalition to date, the stability of this coalition and the rise of Sinn Féin should be further monitored.

Figure 28: Current parliament composition (seats) Figure 29: Sinn Féin receives increasing support

% % 20 20

Fine Gael - Christian 15 15 Democratic 14 Labour - Social Democratic 76 Gvt. Fianna Fáil - Republicanism 10 10 19 Sinn Féin - Republicanism 5 5 Other 37 Gvt. 0 0 1992 1997 2002 2007 2011 Poll 3/2012 Votes for Sinn Féin in parliamentary elections Source: European Election Database Source: European Election Database; RedC Research

October 2012 Rabobank Economic Research Department 13 Italy

After the resignation of former Prime Minister Silvio Berlusconi in 2011, a tech- nocratic cabinet with the support of three parties has been put in place led by Mario Monti (figure 31). He has been able to push through a range of austerity measures and reforms, but much remains to Figure 30: Dimensions of risk: Italy be done on (implementing) structural reforms.

Political stability: It is likely, however, that pressure on Italy Number of parties in government must increase before stricter measures will be 10 applied. Monti recently announced that he will 8 Political stability: Social unrest: Amount 6 Historic experience not run in the next election, which will be held of protest recorded with coalition 4 governments in April 2013, although the UdC party had 2 offered to him to run as its top candidate. He 0 has, however, indicated that he would consider Political stability: Risk Public sentiment: of uprising euro- a new term as Prime Minister if the political Eurobarometer sceptic parties situation would mandate that. A possible renewal of the electoral law and future opinion Legal constraints: Signs of constraints polls will give an indication of the possibility of during ESM ratification process an election outcome that yields a stable coali- 1 (low risk) - 10 (high risk) tion government. Source: Rabobank

A newly founded party –the Five Star Movement– receives some 15% of the votes in recent polls (figure 32). The Five Star Movement, founded and led by former comedian and artist Beppo Grillo, is an anti-establishment and euro-sceptic party. In some speeches, an exit from the eurozone has been proposed.

The rise of this party leads to a further dispersion of the political landscape and elections resulting in a stable government are not very likely. Therefore, the 2013 election carries considerable risk. Reform efforts may well slow down after the elections while at the same time the political uncertainty may well put renewed pressure on Italy’s government bond yields.

Figure 31: Current parliament composition (seats) Figure 32: Election 2008 and poll for 2013

% % 40 40 29 12 PdL Liberal 35 35 60 Conservatives 30 30 PD - Social Democracy 25 25 36 Gvt. 20 20 276 UDC - Centre/Christian Gvt. Democratic 15 15 LN - Regionalism/Right- 10 10 wing IdV - Centrism 5 5 0 0 217 Other PDL - People PD - Five Star LN - League UdC - Union IdV - Italy Gvt. of Freedom Democratic Movement North of the of Values Party Centre

Election 2008 outcome Poll as of 7 September 2012 Source: European Election Database Source: European Election Database; Ipsos 2012

October 2012 Rabobank Economic Research Department 14 Slovenia

Slovenia, having entered the EU in 2004 and subsequently introducing the euro in 2007, has proven to be a stable country in terms of supporting the EU and EU integration despite unfavourable economic conditions. Slovenia has regularly been referred to as pole of stability in the re- Figure 33: Dimensions of risk gion as it did not get so much involved in regional-ethnic conflict. This is at least partially Political stability: Number of parties in due to its location being somewhat at the government 10 border of the Balkan conflict region and the 8 Political stability: Social unrest: Amount 6 Historic experience fact Slovenia was the most ethnically of protest recorded with coalition 4 governments homogenous region. 2 0 Although Slovenia is currently governed by a Political stability: Risk Public sentiment: five-party governing coalition, there is no of uprising euro- Eurobarometer sceptic parties worrying sign of instability (figure 34). The next parliamentary elections are scheduled for Legal constraints: Signs of constraints 2015, hence giving this government some time during ESM ratification process to further implement austerity and reform 1 (low risk) - 10 (high risk) measures. Source: Rabobank In fact, as another positive development, the populist right-wing party SNS has lost votes since 2004. In the 2011 election, it missed the five percent hurdle to enter parliament (figure 35). This further underlines Slovenia’s pro-EU attitude after having voted with 90% in favour for the EU accession in 2003. Further, Slovenia has also become a NATO member and is, for example, involved in the ISAF mission in Afghanistan, which can be seen as another effort to become a respected player on a global scale. In all then, we see Slovenia to continue having a government in favour of further EU integration and to be able to push through the necessary austerity and reform. But given the task at hand, it should be monitored for the risk of austerity fatigue setting in at some point.

Figure 34: Current parliament composition (seats) Figure 35: Right-wing party SNS in decline

% % 7 7 10 SDS - Conservatives 6 6 DL - Liberals 26 5 5 Gvt. DESUS - Pensioners' Interests 4 4 SLS - Conservatives 28 3 3 NSI - Christian Democrats

8 2 SNS election result, % of votes 2 Gvt. PS - Social Democrats 6 1 1 4 6 Gvt. SDS - Conservatives Gvt. Gvt. 0 0 1996 2000 2004 2008 2011

Source: European Election Database Source: European Election Database

October 2012 Rabobank Economic Research Department 15 Spain

In Spain, Prime Minister Mariano Rajoy operates under the favourable setting that he leads a single-party majority government (figure 37). The term runs until 2015, thus leaving a lot of time to implement further reforms. Rajoy him- self, however, is highly unpopular among Figure 36: Dimensions of risk Spanish voters currently, as figure 38 indi-

Political stability: cates. As long as his People’s Party remains Number of parties in government showing unity, this does not pose a risk 10 though. Compared to Greece, popular protest 8 Political stability: Social unrest: Amount 6 Historic experience in Spain has been modest. New consolidation of protest recorded with coalition 4 governments measures have recently led to renewed pro- 2 test. Given the continued need for austerity 0 and reform, a rise in the frequency and size of Political stability: Risk Public sentiment: of uprising euro- demonstrations is likely. This would be in line Eurobarometer sceptic parties with what we have observed in Portugal.

Legal constraints: Signs of constraints Further, Spain is facing early elections in three during ESM ratification process regions –the Basque Country, Galicia, and 1 (low risk) - 10 (high risk) Catalonia– in October and November 2012, Source: Rabobank respectively. Prime Minister Rajoy is born in Galicia and it has been one of the Partido Popular (PP) strongholds. That makes it very important to him to see the PP remain the biggest party there, especially since it will be seen as a referendum on his policies. Losing the elections in Catalonia does not pose a direct threat to government finances since we do not expect the region to declare independence anytime soon and the region is in fact working on reducing its budget deficit. It does reinforce the image of a Prime Minister that seems not to be in control. Overall, thanks to the single-party government, the situation can still be regarded as stable. However, given the renewed wave of protest and uncertainty with respect to regions, these aspects need to be further monitored.

Figure 37: Current parliament composition (seats) Figure 38: Spanish people unhappy with Rajoy

% % 50 Thinking about the eurozone crisis, 50 which European politician, if any, do you think is 45 showing the best leadership during the crisis? 45 40 40 54 35 35 PP - Conservatives 30 30 25 25 186 PSOE - Social Democratic 20 20 Gvt. 15 15 110 15 others 10 10 5 5 0 0 Angela Merkel, Francois Mariano Rajoy, José M. Herman Van German Hollande, Spanish Prime Barroso, Rompuy, Chancellor French Minister President of thePresident of the President EU Commission EU Council

Source: European Election Database Source: Cicero Research 2012

October 2012 Rabobank Economic Research Department 16 Summing up

Figure 39 visualizes the preceding discussion of political risks in 13 eurozone member states. In addition to this overall risk assessment of each country, there are several upcoming events that should be monitored. First, in October there will be several EU-level meetings. The Eurogroup and ECOFIN Council of 8 and 9 October together with the European Council of October 18 will give an indication of how EMU crisis-management will be continued, specifically as to how the ESM will be put into use and how the roadmap towards further EU integration will be laid out.

Then, as mentioned before, there will be regional elections in Spain in October and November as well as in Finland in October. These elections will provide an indication of the current public sentiment in these countries.

Figure 39: Political risks in the eurozone Further, the importance of April 2013 parliamentary election in Italy has been pointed at. In addition, the run-up to this election should be monitored, as it will be interesting to see whether or not Prime Minister Monti will be able to implement unpopular further reforms before he steps down. A possible renewal of the electoral law and future opinion polls will give an indication of the possibility of a hung parliament

As for Austria and Germany, national elections will take place in September 2013. The fairly low risk of these elections themselves has been pointed out above. However, as for Italy, the run-up to elections should be monitored. Particularly in Germany we might see a political Source: Rabobank gridlock situation, as parties will attempt to differentiate themselves from each other during electoral campaigns. Further, Chancellor Merkel should not be expected to take any unpopular decisions shortly before election, such as for example to allow to directly recapitalizing troubled banks via the ESM. Therefore, Germany might slow down EMU’s crisis- management process until end-2013.

Lastly, although we have focussed on possible support-fatigue in a number of member states, it should be monitored whether some northern eurozone countries may experience austerity fatigue as well. Such a combination of both fatigues would considerably increase the risk of non-supportive behaviour in furthering EMU crisis-management and EU integration.

Bastian Halbach [email protected]

October 2012 Rabobank Economic Research Department 17 Appendix 1

This appendix gives a short explanation of the risk dimensions in the spider-web graphs used in the study.

Political stability 1: Number of parties in government As a simple measure of political stability, the number of parties currently forming the government has been looked at. It is important to note that the mere number of parties can be considerably mitigated or amplified by, among others, the overall political landscape and historic experience with different types of governments. Political stability 2: Historic experience with coalition governments Countries’ political landscapes and cultures differ, which can be seen –among others- by looking at how many parties used to form the government in a historic perspective. Combining this risk dimension with the number of parties in the current government provides a good indication of the current political stability. Political stability 3: Risk of uprising euro-sceptic parties For each country, it has been identified whether or not small and rising or established euro-sceptic parties exist in the country’s political landscape. Then, to evaluate the actual risk of such a party, the party’s popularity has been assessed by means of election outcomes and polls and its level of euro- scepticism has been looked at. Legal constraints: Signs of constraints during ESM ratification process The ESM ratification process has been chosen as proxy for potential legal constraints. This makes sense because future EU-integration can be expected to require a similar legal type of ratification process as the ESM process, for example including further transfers of budgetary autonomy to the EU-level. The more obstacles had to be overcome for the ESM, the higher the risk score for future legal constraints. Public sentiment: Eurobarometer In order to measure public sentiment, two recurrent Eurobarometer survey questions have been used: 1. "There should be more coordination among euro- area governments." 2. "Having the euro is good for the EU." The higher the approval ratings of these statements, the lower the according risk scores. Social unrest: Amount of protest recorded The amount of social unrest has been measured by a type of word-counting approach. A ratio has been created of the number of relevant results of the Google search for "[country] protest against EU austerity 2012" on the first results page, divided by total results. As a second, somewhat difficult to measure input, it can be looked at the type of protest. It is important to differentiate between ‘constructive’ protest, i.e. directed against a specific measure, and protest which is getting closer to a ‘rebellion’.

October 2012 Rabobank Economic Research Department 18 Colophon

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Author: Bastian Halbach

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