• Bloomberg


Some 16,867 voters in southeast England ushered in a season of European political tumult that in an extreme scenario could lead to Britain exiting the European Union, Greece quitting the euro or Catalonia seceding from Spain.

Victory by the anti-EU U.K. Independence Party in a British parliamentary contest was fueled by the same sense of economic injustice and antagonism toward the status quo that will unsettle Europe in coming months. It also gave a flavor of the potential fallout, as the value of the pound tumbled against most of its 16 major peers.

“The markets have a lot to worry about,” Edmund Phelps, a Nobel Prize-winning economist at Columbia University in New York, said in an interview before the British vote. “It’s possible that we could see a swing toward the extreme right, and one must wonder what ramifications this would have for the European Union and the euro area.”

Since Greece’s runaway debt convulsed the euro region in 2010, Europe has avoided doomsday scenarios like the breakup of the EU, the euro or a member state. Whether those risks were banished or merely deferred will become clearer during the coming rounds of political jousting.

Early elections are beckoning in Greece, Catalonia, Italy and Austria — and that’s before scheduled ballots including in the U.K. in May, Portugal in September or October and in Spain at the end of next year. The re-emergence of political risk in Europe is cited by Royal Bank of Scotland PLC analysts including Alberto Gallo as among the “top trades” for 2015.

Protest Parties

Europeans rehearsed the revolt in last May’s European Parliament balloting, upping the vote count of anti-establishment parties to about 30 percent from 20 percent. But the motley groups failed to form a cohesive force and mainstream parties retained control.

Protest parties are now set to consolidate gains at the national level. UKIP, which wants to pull Britain out of the 28- nation EU, won a second seat in the House of Commons yesterday when Conservative defector Mark Reckless took the Rochester and Strood by-election.

UKIP’s advance is forcing Prime Minister David Cameron to play to opponents of immigration and the EU in the campaign for the May 7 general election. The keynote of a second Cameron term would be a referendum offering the British the chance to back out of the EU.

Britain’s relative economic health has failed to quell the UKIP insurgency. British growth of 3.1 percent in 2014 will top the euro area’s 0.8 percent, putting the U.K. ahead for the third year, according to EU forecasts. Britain’s unemployment rate is 6 percent, compared to 11.5 percent in the euro area.

German Solidity

In the wealthier northern tier of the 18-nation eurozone, UKIP-style movements have colored the debate, without making it into government. While Finland’s ruling National Coalition trails in polls for April’s election and a clash over taxes may splinter Austria’s coalition, there is no challenger in Germany to Chancellor Angela Merkel. Nor is one likely to emerge in 2015, with elections scheduled only in the city-states of Hamburg and Bremen.

France doesn’t need a national election in 2015: the campaign for the 2017 poll is off to a U.S.-style early start. President Francois Hollande, the least popular leader in modern French history, has pledged to bow out after one term unless the jobless rate drops from 10.5 percent. Stalking both Hollande’s Socialists and the center-right opposition underwhelmed by the impending return of Nicolas Sarkozy is Marine Le Pen’s National Front, currently topping opinion polls with its denunciations of foreigners and the euro.

Jobless Tremors

In the near term, Europe’s southern rim will produce the greatest tremors. Unemployment of 25.9 percent has replaced debt as Greece’s most damaging statistic, heightening the risk that Prime Minister Antonis Samaras’ coalition won’t survive until the next scheduled elections in 2016.

Samaras’ inability so far to extract debt relief from creditors is eroding his domestic support. The reckoning may come by February, the deadline for him to forge a supermajority in parliament to pick Greece’s next ceremonial president. A deadlock would trigger a new general election.

“The chances of avoiding early elections are vanishingly small,” said Dimitris Sotiropoulos, a politics professor at the University of Athens. “This is a problem for the country’s economic stabilization.”

An early poll may favor Syriza, a protest party nurtured by the debt crisis and the German-imposed austerity policies to get out of it. Syriza’s leader, Alexis Tsipras, rose to prominence by attacking the bailout conditions and defying creditors.

Podemos Surge

Europe’s north-south divide extends to its protest movements. While nationalism and hostility to open borders are the motivators in the north, southern European upstarts have taken Syriza’s cue in rebelling against lost economic opportunity. Politics in Spain, which was forced into a bailout, and Italy, which has escaped one, fit that pattern.

“We have in Europe cascading divergence, a deep gap between creditor and debtor states, nonexistent growth or recession for a number of years in a number of countries,” said Jan Zielonka, a politics professor at Oxford University. “The traditional pro-European establishment parties are now on defense. They are being fiercely attacked by new kids on the block.”

The newest kid is Podemos in Spain, home to Europe’s second-highest unemployment rate at 24 percent. The product of Spain’s version of the Occupy Wall Street movement, Podemos is outpolling the two main parties that have taken turns governing Spain since the 1980s.

Catalan Independence

Corruption allegations against Prime Minister Mariano Rajoy and some subordinates have transformed Podemos from a social-networking phenomenon a year ago into a potent force in the runup to national elections in late 2015.

Agitation for independence in Catalonia, Spain’s largest regional economy, is another by-product of hard times. Undeterred by the defeat of Scotland’s referendum on independence from the U.K., Catalonia this month staged a nonbinding poll that showed 81 percent in support of a breakaway.

Spain’s fate as a unified country hinges on the test of wills between Rajoy and Catalonia’s leader, Artur Mas. The pro- independence movement might call an early election for Catalonia’s regional assembly in early 2015, counting on a mandate for secession.

Renzi’s Call

“Early elections would accelerate the pro-independence agenda, which involves risks not only for the unionists but also the pro-secession supporters,” said Luis Benguerel, a fund manager at GPM in Barcelona.

Compared to the leaders of Greece and Spain, Italian Prime Minister Matteo Renzi is on a comfortable perch. Italy’s startup anti-politics party, the Five Star Movement, is on the opposition benches and Renzi can use the threat of sudden elections to keep his coalition allies in line.

But time isn’t on Renzi’s side. Italy’s economy will shrink for the third year in 2014, making it the eurozone’s second-worst performer during that span after Cyprus. Renzi has slowed Italy’s deficit-reduction timetable, but may reap little benefit: tax increases will kick in automatically in case of a budget overrun.

“Renzi’s popularity is still very high but may be dropping in the close future,” said Francesco Galietti, founder of researcher Policy Sonar in Rome. “Snap elections could be a way to reap a political dividend.”

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