German voters and Catalan separatists show that the risk of a fracturing Europe, though small, is not trivial.
The data on real activity and confidence out of Europe continue to be strong, with a number of business and household confidence numbers at multi-year highs. The surprises are positive, but only by a little. Political developments are less positive. The outcomes of two important recent political events in Europe — the German parliamentary election and an attempt by the region of Catalonia to hold a referendum on independence from Spain — were not entirely unexpected, and serve to underline an important lesson about Europe’s future.
The AfD becomes a factor
The German election unsurprisingly returned Angela Merkel of the CDU (Christian Democrats) as Chancellor. Germany’s second-largest party, the SPD (Social Democrats), had seemed poised earlier this year to mount a serious challenge, but that challenge faded very quickly, and the SPD ended up getting its smallest share of the national vote since the Weimar Republic. Just as in the Netherlands and France earlier in the year, the traditional, moderate left party lost, and lost badly. Chancellor Merkel’s own vote share was at the low end of expectations ahead of the election.
Just as in the Netherlands and France earlier in the year, the traditional, moderate left party lost, and lost badly.
The big gainer was a new party, the AfD, or Alternative für Deutschland. It began life founded by a couple of academics upset by Germany’s approach to the eurozone crisis, and its strongest initial supporters were people upset by the loss of monetary independence when the eurozone was created. The movement was subsequently hijacked by anti-immigration, pro-Russian rightists. AfD gained 12.6% of the vote in September and enters Germany’s parliament, the Bundestag, as the third-largest party.
Heading to Jamaica
The election results created several mathematical possibilities for a governing coalition, but only one politically feasible option, which is for the CDU to join with two smaller parties, the environmentalist Greens and the FDP (Free Democrats), a centrist partly traditionally known as pro-business and pro-deregulation (which are not always the same thing, especially in Europe). This loose federation, known as the “Jamaica coalition” because the black, green, and yellow colors used to represent the three parties also happen to be the colors of the Jamaican flag, brings together uneasy political partners. Although the parties have entered coalitions at the state level, this is not a grouping accustomed to working together. Negotiations over the formation of a federal coalition are going to be lengthy and difficult.
Separatism in Spain
Political developments in Spain also have consequences that will play out in the coming months. In the wake of Spain’s impressive economic performance in the past few years, the country’s politics have now come back into focus because of an independence “referendum” held in Catalonia during early October. The central government in Madrid, or at least the Prime Minister, Mariano Rajoy, has handled this situation quite badly. Spain’s Constitutional Court ruled that the referendum was illegal, but rather than ignoring it, Madrid attempted to enforce this judgement by sending in riot police from the rest of Spain. The resulting pictures of old ladies being beaten by uniformed thugs for the offence of voting hardly helped to give a good impression of the central government, especially when the justice minister praised the police for their “exemplary” action.
The central government in Madrid, or at least the Prime Minister, Mariano Rajoy, has handled this situation quite badly.
The eventual outcome is likely to be a reform that gives more regional autonomy and lowers somewhat the fiscal transfers from Catalonia to the rest of Spain. Getting to the eventual outcome is going to be hard, and events on the ground could get ugly.
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Against a backdrop of continued political challenges around the world, the global economy continues to do well and markets seem more encouraged by the growth than they are disconcerted by the political volatility.