Political Risk Is on the Rise in Europe. Here's Why.

9 MINS READApr 25, 2019 | 17:57 GMT
Albert Rivera, center, leader of Spain's center-right Ciudadanos (Citizens) party, leads a campaign rally in Renteria on April 14, 2019.

Albert Rivera, center, leader of Spain's center-right Ciudadanos (Citizens) party, leads a campaign rally in Renteria on April 14, 2019. Spain holds a general election on April 28, its third in less than four years.

  • Recent election results suggest that the political landscape in several European countries is fragmenting. This fragmentation will make general elections harder to predict and slow the formation of new governments.
  • Government coalitions will likely become more heterogeneous, which in turn will lead to more complex policymaking.
  • These developments will increase uncertainty about the policy direction of countries, leading to higher political risk across the Continent.
  • Increasing political volatility at home will make it harder for governments to participate in decisions at the continental level, potentially slowing the decision-making process in the European Union.

European politics has entered a period of political fragmentation. Across the Continent, mainstream political parties are losing ground to new competitors, parliaments are becoming more atomized, negotiations to form governments are taking longer and the overall policy direction of countries is getting harder to predict. This development is increasing political risk across the Continent, as companies, institutions and households are forced to operate in a political atmosphere that is becoming harder and harder to read.

The Big Picture

Political risk is on the rise in Europe, with the electoral landscape in some of the Continent's largest economies becoming more fragmented. In the coming years, political trends in Europe will force social, economic and political actors to operate in a context of increased uncertainty.

A Decade of Increasing Divisions

Election results in Europe's largest economies over the past decade show increasing divisions in the political landscape. This fragmentation has manifested in different forms. In some cases, the number of political parties represented in parliament has increased. In Germany, for example, the 2017 general election produced its most fragmented parliament in the postwar period with seven political parties winning seats in the Bundestag, up from five in the previous election in 2013. Similar sitiuations unfolded in the Netherlands, where the number of political parties in parliament rose from 10 in 2010 to 13 in 2017, and in the Czech Republic, where the number of parties winning parliamentary seats went from five in 2006 to nine in 2017.

In other places, the number of parties with seats in parliament has remained stable or even decreased, but mainstream parties have lost ground to new rivals. To assess this trend, we looked at the number of parties that received at least 10 percent of the vote, a symbolic electoral threshold that increases a party's chances of becoming a relevant political force, particularly in countries where coalitions of several parties are necessary to form governments.

Spain, which holds a general election on April 28, is this trend's paradigm. For decades, the center-left Socialists and the center-right People's Party dominated Spanish politics and would jointly obtain roughly 80 percent of the vote. In recent years, however, the popularity of these parties decreased as new forces emerged to their right and to their left. So, while there are fewer overall parties in Spain's parliament than a decade ago, the distribution of seats is much more balanced. In Italy, two parties received more than 10 percent of the vote in 2008; four did in 2018. That trend was mirrored in France, where four parties obtained more than 10 percent of the vote in the first round of elections for the General Assembly in 2017, up from only two in 2007.

A chart showing the results of the past three parliamentary elections in Europe's 20 largest economies, illustrating the Continent's political fragmentation.

Multiple factors are driving these developments. Across Europe, there is a widespread feeling that the traditional political forces are out of touch with the reality of millions of families, and voters are looking for new options. The economic crisis of the 2010s damaged the popularity of mainstream political parties and contributed to the emergence of new, sometimes anti-establishment, political forces on the right and the left. The immigration crisis has also contributed to the emergence of nationalist and anti-immigration parties across the Continent. The emergence of more extremist parties has forced centrist parties to move further to the right or to the left to compete, deepening polarization in many countries. This phenomenon is not exclusive to the European Union. In Norway, which is not a member of the continental bloc, the data also shows that the political landscape has become more fragmented.

Naturally, there are exceptions. In Poland, for example, the number of parties in parliament has been relatively stable, and the number of parties obtaining more than 10 percent of the vote has decreased over the past decade. Even so, Poland has become more polarized, and anti-establishment forces have become more popular (the anti-establishment Kikiz '15 party, for example, received the third-most votes in Poland's last general election, in 2015). In Hungary, the political fragmentation has basically taken place among opposition parties, as the governing conservative Fidesz party has received more than 40 percent of the vote in every general election since 2002.

Electoral Systems Matter

Electoral laws directly affect election outcomes. Most EU countries have some version of a proportional electoral system, in which the allocation of seats tends to correlate with the percentage of votes that each party received. Proportional systems tend to favor fragmentation because the composition of parliament is a relatively fair representation of voter sentiment.

A few European countries have other systems. In the United Kingdom, the candidate who wins the most votes wins the seat, which partially explains why the center-right Conservative Party and the center-left Labour Party still control most of the House of Commons. France has a two-round system: Unless a candidate obtains a certain number of votes in the first round, a runoff election takes place between the two most popular candidates. This explains why parties like the far-right National Rally and far-left Unsubmissive France are underrepresented in the National Assembly. In places like Belgium, the electoral system ensures that the country's different linguistic groups are represented in parliament, while countries like Romania allocate a specific number of seats to different ethnic minorities. Finally, there are countries, such as Italy and Hungary, that use a combination of electoral systems.

This explains why issues like the voting system and the design of electoral districts are heavily contested in many countries, as political parties often pursue reforms they hope will benefit them. Italy, for example, approved three different electoral laws in 2005, 2015 and 2017, while Greece recently eliminated a system that offered bonus seats to the most popular party. Sometimes the composition of a parliament is the result of a change in the electoral system and not necessarily the result of a meaningful change in voter sentiment.

What Political Fragmentation Means

The current trend of political fragmentation in Europe is likely to continue because most of the factors that precipitated it are still in place. In the coming years, this trend will affect politics in multiple ways:

  • General elections will become harder to predict. A more fragmented political landscape will make it harder for households, companies, pollsters and analysts to predict the result of general elections. In many European countries, gone are the days when a handful of parties dominated national politics, and economic, political and social actors could make relatively accurate predictions about what would happen after a general election. In the coming years, these actors will operate in a more uncertain terrain with fewer tools to predict political developments. This uncertainty could lead to higher volatility in financial markets, business and investor confidence, and consumer spending, to name a few areas where the impact could be felt.
  • It will take longer to form governments. More fragmented parliaments and a more balanced distribution of seats among multiple competing parties will prolong negotiations to form coalition governments. It took Germany's main political parties 86 days to form a coalition government after the country's general election in 2013. It took 136 days for the same parties to renew their coalition after the general election of 2017, and only after negotiations with other forces were aborted. In Spain, it took two general elections within six months (in 2015 and 2016) before a government could be appointed. This development will have at least two consequences. The first is that uncertainty will continue after the elections, as parties will spend weeks, if not months, negotiating agreements. The second is that this process will leave countries under the direction of caretaker governments that will probably postpone any meaningful policy decisions.
  • Government coalitions will be more heterogeneous, and the threat of early elections will be higher. More fragmented parliaments will mean more parties will be needed to form governments that control a majority of seats. This will make government coalitions more prone to political crises that could lead to their collapse as the interests and priorities of member parties diverge. In the Netherlands, Prime Minister Mark Rutte's first two governments (2010-2017) relied on a coalition of two parties. Rutte's current government, formed after the general election in March 2017, relies on four parties, the largest coalition since the mid-1970s. It took more than seven months for the parties to reach an agreement. The alternative to this situation is a minority government that depends on non-government parties to pass legislation. But political fragility is the price of this arrangement. This is the situation in Sweden, where the irruption of the nationalist Sweden Democrats in the general election of 2018 broke the traditional balance of power between center-right and center-left forces.
  • The policymaking process will become more complex. Fragmented parliaments and more heterogeneous government coalitions will cause the policymaking process to become more cumbersome. Italy, for example, is currently governed by two parties with little in common other than their rejection of the country's traditional parties. Measures are often announced by one party and criticized by the other, making it difficult for observers to decipher what exactly is going on. In Spain, the Socialist minority government was forced to hold an early general election after it failed to win support in parliament for its budget plan.
  • Domestic issues will make it harder for governments to focus on international issues. Growing political fragmentation will force countries to spend more time dealing with their domestic issues, and leave them with less energy to focus on developments beyond their borders. During the nearly five months that German parties spent negotiating a government, many relevant decisions at the EU level were postponed. This was particularly frustrating for France, which had recently proposed a series of deep reforms in the eurozone and had to wait for its main ally to form a government to start conversations. Spain is another example: During the last decade, the combination of an economic crisis and a succession of weak governments reduced Madrid's influence on EU affairs.

Many of the consequences of Europe's growing political fragmentation are already visible in several countries. In the coming years, the social, economic and political ramifications of these trends are likely to continue or even increase, especially as many of the Continent's largest economies are showing signs of a slowdown. (Italy is in a recession, while Germany recently lowered its growth prediction for 2019.) In Europe, political risk, and its close connection to economic risk, is here to stay.

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