Populist parties in the eurozone have had the wind at their backs for a number of years now. What is more, populist groupings made a better showing than ever before at the recent elections to the European Parliament – the political turbulence in Austria did not, in the end, have a lasting impact on election behaviour across the EU as a whole. Nevertheless, a certain habituation effect can be detected by now on the bond market. Where investors were apprehensive two years ago that Marine Le Pen might win the presidential elections in France, the populists’ latest successes at the ballot box have scarcely sparked any sizeable market movements. The market’s relative nonchalance is probably attributable to the fact that populist factions have learned from Le Pen’s defeat and are now more loathe to advocate extreme positions, e.g. that their country should pull out of the eurozone.
However, the relative calm and nonchalance of market actors could turn out to be founded on false premises. In periphery countries, political resistance to EU fiscal rules is growing: right-wing and left-wing populists alike are calling for austerity policy to be abandoned. Italy – above all the Lega and its chairman, Matteo Salvini – sees itself in the vanguard of this movement. The Lega’s decidedly favourable poll results spurred Salvini to put calls for a higher budget deficit at the heart of his party’s European election campaign. However, opposition to the EU’s rules is likewise mounting in Greece and Spain. Furthermore, the electoral success of the Socialists in Spain provides evidence that established parties are increasingly aiming to restore their political fortunes by partially copying populist positions.
Were more and more countries to turn their backs on the reform policy pursued to date, considerable risks would loom over the eurozone. Economic divergence would grow, whereas confidence in the debt sustainability of periphery states would wane. Were there a danger of countries being downgraded to non-investment grade status (a scenario which will threaten Italy during the coming years), investors would probably cold-shoulder the issuers concerned. The upshot would be a spike in risk premiums, and possibly refinancing problems. At that point, at the latest, core states would be in a dilemma. On the one hand, populist forces are putting pressure on their countries not to make any concessions to the E(M)U and, above all, not to incur any additional financial risks. On the other hand, the future of the common currency area could well hinge precisely on the ability of core and periphery to forge a compromise.