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Nov 4, 2014 | 21:33 GMT

5 mins read

Conversation: Europe's Growing Political Fault Lines

Mark Fleming-Williams: Hello, my name is Mark Fleming-Williams. I'm the economy analyst here at Stratfor and today I'm joined by Adriano Bosoni, our Europe analyst, to talk about Europe's economy. Adriano, this morning the European Commission released a revised forecast for the coming two years of the European economy. Could you tell us a little bit about that please?

Adriano Bosoni: Yes Mark, what we saw today was the European Commission revising down its forecast for the main economies in Europe. We will see this year stagnation in France, a contraction of economy in Italy and, more important, we will see Germany, the main economy of the European Union, not growing as much as expected. And this will keep on adding pressure on the European Central Bank to do something to generate growth and we know how controversial the recent moves by the European Central Bank have been.

Mark: Absolutely. The pressures on the European Central Bank have been driven by the fact that the two sides of Europe have got different solutions to the fact that the European economy is in crisis at the moment. On the one side you've got Germany, and the Germans think that the solution to the crisis is that everyone's got too much debt and that you need to lower the debt across Europe in order to be able to create a healthy economy. And then on the other side you've got the French and the Italians who believe that the crisis in Europe is caused by low growth. And they recognize that, as the Germans want, they need to undertake structural reforms, but they just don't want to do it at a moment when the economies are so gloomy. They want to create growth first of all and then solve their problems after in a more pleasant environment. And part of that would require more spending and the Germans don't like that because the spending's more likely to come from Germany.

Adriano: And the important thing to keep in mind is that no matter who wins this fight, the other side will feel the political repercussions. If the Germans win the argument and we see more austerity in Europe, we will continue seeing countries in periphery feeling the impact of those measures, which has political repercussions. We've seen in France the spectacular growth in popularity of the National Front, who proposes France leave the euro. Or, we've seen recently the opinion polls showing that the left-wing Podemos party in Spain is currently the most popular party in the country, which is a consequence of corruption, but also austerity measures. But if France and Italy win, we will see the political repercussions in Germany, because Germany will have to underwrite some kind of stimulus, which is going to create frictions with the conservative sectors in Germany. And we've seen the rise of the anti-euro Alternative for Germany party, and we've seen sectors of the German government criticizing all the policies that are being proposed by the French and the Italians. So no matter who wins the argument, the other side is going to have to deal with the consequences.

Mark: Absolutely. So what we're kind of saying is that where previously perhaps it was more an economic crisis, what we're seeing is it's moving from being an economic crisis more to being more of a political crisis and the pressures are coming through into the political parties and into the political spectrum. Obviously this is going to start playing out in elections at key points to watch and in 2015 we've got elections in the U.K., which is scheduled for May 2015. And the U.K.'s always been a little bit Euroskeptic, but recently the rise of UKIP suggests that UKIP are going to be a very important, have an important role to play in these elections. But then the second major one is the Spanish election, which will happen, the general election, which will happen before the end of next year. And as you've already mentioned Podemos have been rising recently and the two traditional parties are going to have a problem to face basically whether they form a growing coalition or perhaps one of them considers doing the unthinkable and joining into a coalition with Podemos.

Adriano: And those elections will only be the starter for the real conflict in Europe that will happen in 2017 when the two largest economies in the bloc and the core relationship in Europe, the French and the Germans, will have general elections that will be marked by this context that we are describing. It's going to be either a French disenchanted voters voting for the National Front, or German voters upset with the direction of Europe voting for Euroskeptic parties. So France and Germany are in a blinking game and no matter who gets its way, the other side will feel the impact. And this relationship could go under significant, significant strain in the next three to four years and will continue to have consequences in the European Union.

Mark: So the next three years look like they're going to be quite important for Europe. This is a subject we're going to be tracking for the next few years at Stratfor. For more information on this and other topics, please look at our website.

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