Winds of political change in Europe

One has to hope that European policymakers are paying close attention to Sunday’s dismal Spanish parliamentary election results. Not only do those results bide ill for the economic outlook in Spain, the eurozone’s fourth-largest economy; they also confirm a clear trend toward political fragmentation and weak coalition governments throughout the eurozone’s economically troubled periphery.

{mosads}Sunday’s election results can leave little doubt that Spain has moved from the two-party system — which characterized its political system for the past 33 years and which provided the country with relatively stable government — to a four-party system, which is likely to usher in a period of messy and weak coalition governments.

This break in Spain’s politics has been underlined by the decline in support for Spain’s two traditional parties, the Popular Party and the Socialist Party, from around 80 percent of the vote through much of the past 33 years to barely 50 percent in Sunday’s election. It has also been underscored by the meteoric rise of two upstart political parties, Podemos and Ciudadanos, who were both not represented in the last parliament but which between them got around one-third of the vote in this election. Not helping matters is the fact that a number of very small political parties representing regional interests, including those of Catalonia, might be needed to form a workable coalition government.

With no party coming anywhere close to a majority of the votes, a weak coalition government is almost a certainty. This will most likely only occur after a protracted period of horse-trading among the parties. It is far from clear whether the end result of these negotiations will be a center-right coalition or a center-left coalition less disposed to continuing with Spain’s austerity program. Given the animosity between the four main political parties, one cannot not rule out the possibility of a stalemate in these negotiations and of the need for fresh elections within the next three months.

The prospect of a prolonged period of Spanish political uncertainty comes at an inopportune time for the country — Spain was showing signs of having at last turned the corner after a devastating economic recession in the wake of the 2010 eurozone sovereign debt crisis. It also comes at a time when the global economic environment appears to have soured and when the period of ample global liquidity fueled by the Federal Reserve’s largesse appears to have come to an end. In these circumstances, the last thing that a heavily indebted Spain with a fragile economic recovery needs is a protracted period of political instability that might undermine both domestic and international investor confidence.

Spain’s economic and political outlook should be a cause of major concern to European policymakers given its very much greater degree of importance in the eurozone’s economy than Greece, Ireland or Portugal. It should also be of major concern since it seems to be confirming a clear pattern toward political fragmentation across the European periphery and beyond in the wake of Europe’s poor economic performance after its sovereign debt crisis.

It is particularly concerning that the prospect of political instability and an anti-austerity government in Spain follows the election of the far-left anti-austerity Syriza Party in Greece at the beginning of the year and the coming to power in Portugal of a left-bloc anti-austerity government in November. It has to be of equal concern that in the recent French elections, Marine Le Pen’s anti-euro National Front Party polled more votes than either of the two traditional French political parties and that in Italy, the star of Bepe Grillo, the leader of the populist anti-euro Five-Star movement, again seems to be rising.

The clear lesson that European policymakers should be drawing from the strong winds of political change that are now blowing through the European economic periphery is that years of economic under-performance do have adverse and troubling political consequences. Hopefully, if that lesson is drawn from Spain’s most recent electoral setback, European policymakers might become less complacent about the European economic outlook and they might come up with a coherent plan to kick start Europe’s rather anemic economic recovery.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.