The European Union parliamentary elections kicked off today and the markets barely blinked, even though the motley collection of Euroskeptic parties, a few of which want to bust up the EU and the euro zone within it, are on course to win 25 per cent or more of the votes.
The strong showing by the Euroskeptic parties, ranging from France's Front National to Italy's Five Star Movement, is apparently already priced into the market. Investors are in no panic because they know that a quarter of the votes does not make a majority. The mainstream centre-left and centre-right parties will certainly emerge on top when the last of the votes are tallied on Sunday and they are largely in favour of greater economic and political integration. "More Europe" could be their motto.
But the markets may be underestimating the secondary effects of an election that will give substantial representation to Euroskeptics. They and their parties think the EU and the euro zone have been, at best, economic disappointments, or at worst heavy handed institutions that have consigned many of the southern European countries to a state of permanent stagnation.
In a note published this week, ING Financial Markets economist Carsten Brzeski said that while "the first-round effects from this week's election should be limited, the second-round effects could be more explosive."
There will, of course, be some repercussions in the EU parliament. While the Eurosceptic parties will not have a majority, they will do their best to impede or dilute legislation that would, for instance, launch a proper banking union.
Their power will increase if they are able to form alliances, though that's not certain. Most of the extreme right and extreme left parties have little love for one another; even the parties on the right may not be able to form a cohesive block. Note that the Front National, led by Marine Le Pen and Nigel Farage's United Kingdom Independence Party (UKIP), were at war even before the first vote was cast. Mr. Farage considers the Front National racist and anti-Semitic. Indeed, a stunning remark made on Tuesday by Front National founder Jean-Marie Le Pen (Ms. Le Pen's firebrand father), appeared to prove him correct. He said the Ebola virus would cure the "population explosion" and by extension Europe's "immigration problem."
The potentially bigger post-election repercussion will be felt at the national level. EU elections are often used as national protest votes. If the Euroskeptic parties do well, their success will put the national mainstream parties on the defensive, forcing them to alter their domestic policies or risk losing popularity.
It's already happening. With the Front National coming on strong, former French president Nicolas Sarkozy, of the centre-right UMP party, on Wednesday called for "profound" overhaul of the EU, with tighter integration for the 18 euro zone countries and less power for the other 10 EU countries that do not use the euro.
Here are four countries whose domestic economic and political agendas face turmoil after the EU elections.
Greece: Recent polls suggest that the radical far left Syriza party, which wants Greece's austerity program scrapped even if it does not necessarily oppose the use of the euro, will win the affections of about 28 per cent of Greek voters in the EU election. If it does, the coalition government of prime minister Antonis Samaras, which has only a two-seat majority in parliament, may not be able to survive. A snap election could easily put Syriza in power, jeopardizing Greece's austerity and privatization programs. You can bet investors would send Greek bond yields soaring if that were to happen.
Italy: Beppe Grillo's Five Star Movement is Europe's biggest Euroskeptic party. In last year's national elections, it won 25.5 per cent of the votes and, at worst, will place second, behind the Democratic Party, in the EU elections. If the EU elections reinforce the Five Star's popularity, the Italian parliament may rethink Italy's commitment to greater European integration, perhaps even the use of the euro. Italians' love affair with the euro is waning fast as the economy sinks again. Five Star wants a referendum on the currency's continued use.
Britain: UKIP won almost 17 per cent of British votes in the 2009 EU election. Its surging popularity in the current election could push it into first place, beating prime minister David Cameron's Conservatives. If that were to happen, UKIP might be able to make a splash in next year's British election. UKIP wants Britain to leave the EU. Its ever louder voice can only push Britain closer to an exit. Mr. Cameron has already promised to hold a referendum in 2017 on EU membership if his government is re-elected.
France: Like UKIP, the Front National wants out of the EU. It also wants out of the euro. It could pace first in the EU election, beating both the conservatives and the ruling Socialists, under besieged president Francois Hollande. While it is unimaginable that France will leave the EU or the euro, the Front National will try its best to gum up any moves to bring Europe closer together.
Eric Reguly