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Populism: another reason for ECB caution

Populism: another reason for ECB caution

Right-wing surge counters Juncker's euro call

by David Marsh in Warsaw

Mon 23 Oct 2017

A surge in right-wing parties across a broad swathe of central Europe presents a mounting challenge for the continent's cohesion, in a trend that will have wide-ranging economic as well as political repercussions.

In the Czech Republic, the eurosceptic Ano (Yes) party founded by Andrej Babiš, a scandal-ridden tycoon who has made a fortune from chemicals, food and media, won a clear victory in Saturday's parliamentary elections. With 30% of the vote, 20 percentage points ahead of rivals, Babiš is on course to become prime minister.

Babiš' triumph follows a surge in support on 15 October from Austria's radical right Freedom party, with an electoral score of 26%, and the gains for Germany's Alternative for Germany in the 24 September German elections, making the far-right group the country's third largest parliamentary force. 

Disarray among establishment parties across Europe – amplified by the intensifying independence tussle between the Madrid and Catalonian governments – may be an additional reason why the European Central Bank this week displays extreme caution in phasing out easy money policies.

Electoral upsets and a swing to the eurosceptic, anti-immigrant right among the newer members of the European Union make further widening of the euro area highly improbable in coming years. This diametrically counters the call by Jean-Claude Juncker, the European Commission president, for the single currency to unite all EU members after Britain leaves.

Discontent with the European status quo across the EU's eastern members is likely to rise further, as a result of a budgetary squeeze after the UK quits the 28-nation bloc, according to speakers at the annual conference of Narodowy Bank Polski, the Polish central bank, in Warsaw. Paweł Samecki, NBP board member and a former European commissioner, said central and eastern Europe would no longer receive annual EU inflows amounting to 3%-4% of GDP. Such capital transfers, which in the past had been responsible for between one-third and half of public investment, would henceforth decline by around half, Samecki said. 

Iain Begg of the London School of Economics and Political Science, an expert on European integration, termed 'implausible' proposals by French President Emmanuel Macron and Juncker for a higher EU budget to offset the effect of the UK departure. Despite attempts to push the budget into new directions, the EU's spending was still basically geared to the same fields as in 1988 before the fall of the Iron Curtain. He pointed out that Britain's annual contribution to the EU budget outstripped the combined payments of all the 13 new member states of central and eastern Europe. This would lead to severe problems in distributing resources to worse-off EU states. 

Grzegorz Gorzelak, professor of economics at Warsaw university, said support for the EU could 'diminish very dramatically' if incoming payments subsided at the same time as eastern countries were asked to shoulder more burdens such as accepting immigrants from outside Europe.

The worrying issue for European leaders is that pro-EU support is subsiding at a time when largesse is flowing from Brussels and economies are growing at close to full capacity. If payments decline at the same time as economies cool, the currents of eastern European populism could swell into a destructive tide.

David Marsh is Managing Director of OMFIF.

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