If you’ve been paying attention, you know that the PIIGS are restless.
By PIIGS, we of course mean the EU periphery where over the past month or so, things haven’t exactly been playing out the way Brussels would prefer from a political perspective.
Take Portugal for instance where, earlier this month, after what amounted to inconclusive elections in October, Socialist leader Antonio Costa joined up with the Left Bloc and the Communists to overthrow the Passos Coelho government just days after the PM was reappointed by President Anibal Cavaco Silva.
Whatever you want to say about the likelihood that Portugal sticks by its explicit and implicit promises to the troika, the odds that some manner of break with Brussels over austerity, debt, or both occurs down the road are now exponentially higher.
This is precisely what Brussels and Berlin were hoping to deter by adopting a hardline stance towards the Greeks over the summer and indeed we may have gotten the first shot across the bow last week when some analysts reminded the world that should Portugal lose its last investment grade rating at DBRS, the ECB could theoretically cut Lisbon off from PSPP.
Meanwhile, in Spain, PM Mariano Rajoy is attempting to negotiate the Catalan independence bid while prepping for elections next month. In short, he needs to strike a delicate balance between being firm and coming across as autocratic. Either way, the political situation is fractious to say the least and the Catalonia “problem” only muddies the waters as the political establishment looks warily towards Pablo Iglesias and an ascendant Podemos.
Finally, in Italy, a recent poll showed that if elections were held today, comedian Beppe Grillo’s 5-Star movement would actually win. Here’s how Reuters summarized the situation earlier this month:
An opinion poll by the EMG polling agency put 5-Star on 27.3 percent, about five points behind Prime Minister Matteo Renzi's center-left Democratic Party (PD) on 32.2 percent, broadly in line with most other recent polls.
But this would leave both the two leading parties below the 40 percent threshold needed to avoid a run-off. The EMG survey was the first to put 5-Star ahead of the PD in a second round of voting, finding that it would take 50.6 percent to the PD's 49.4 percent.
It’s not hard to trace the proximate cause here. The periphery electorate is sick and tired of enduring austerity and persistently high unemployment and if voters were tracking debt-to-GDP ratios, they'd probably be even more sick and more tired of it because as we never tire of mentioning, not only are the "recoveries" not real, the debt isn't going down either.
It's the worst of all possible worlds.
In light of the above, we bring you the following interesting commentary from RBS' Alberto Gallo who has endeavored to put together a couple of interesting graphics, one of which depicts the incidence of social upheaval (described as either anti-government demonstrations, riots, assassinations, general strikes, and/or attempted revolutions) in Europe dating back to 1919 and broken down by depth of budget cut (i.e. how bad the austerity is/was).
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One question to ask is whether a link exists between economic stagnation and high unemployment with episodes of social unrest, both domestic and foreign. Research from VOX and CEPR analysing the occurrence of assassinations, riots, demonstrations and general strikes over the past 100 years suggests a link between social unrest and austerity and negative growth exists.
Even going by common sense, the story makes sense. Persistent low growth, high youth unemployment and increasing inequality have hurt Europe's young generation. Youth unemployment is in double digits in most countries. The wealth gap between the haves and have-nots continues to grow: people below 35 years of age only own 5% of all financial assets, according to ECB data - putting them far away from the windfall of QE. Domestically, one symptom of this situation has been the radicalisation of European politics, with the protest vote rising in most countries, from Greece to Finland.
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Note in the last graphic shown above that not all "radical" parties are created equal. Podemos is one thing and Golden Dawn is entirely another.
In fact, Golden Dawn's rising popularity (they won nearly 17% among unemployed voters in Greece's September snap elections) suggests that when the disaffected masses feel they have been let down by leaders who they thought promised change (i.e. Syriza), they will simply move further towards the end of the political spectrum in search of "salvation."
What all of the above underscores is that this is a dangerous time for the EU. Not only is the periphery vulnerable to the type of political and social upheaval we saw in Greece over the summer, and not only is it exceedingly possible that sometime in the not-so-distant future, Brussels could find itself in yet another protracted debt negotiation with one of the PIIGS, but the entire dynamic is complicated immeasurably by the worsening refugee crisis and by the intense feelings that crisis now engenders as a result of the events that unfolded in Paris last Friday.
Get ready Europe, it's going to be a bumpy ride.