What Iceland’s election tells us about post-crisis European politics

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Iceland was supposed to be different.Iceland Flag IconEuropean_Union

In allowing its banks to fail, neo-Keynesian economists have argued, Iceland avoided the fate of Ireland, which nationalized its banks and now faces a future with a very large public debt.  By devaluing its currency, the krónur, Iceland avoided the fate of countries like Estonia and others in southern Europe trapped in the eurozone and a one-size-fits all monetary policy, allowing for a rapid return to economic growth and rapidly falling unemployment.  Neoclassical economists counter that Iceland’s currency controls mean that it’s still essentially shut out from foreign investment, and the accompanying inflation has eroded many of the gains of Iceland’s return to GDP growth and, besides, Iceland’s households are still struggling under mortgage and other debt instruments that are linked to inflation or denominated in foreign currencies.

But Iceland’s weekend parliamentary election shows that both schools of economic thought are right.

Elections are rarely won on the slogan, ‘it could have been worse.’ Just ask U.S. president Barack Obama, whose efforts to implement $800 billion in stimulus programs in his first term in office went barely mentioned in his 2012 reelection campaign.

Iceland, as it turns out, is hardly so different at all — and it’s now virtually a case study in an electoral pattern that’s become increasingly pronounced in Europe that began when the 2008 global financial crisis took hold, through the 2010 sovereign debt crisis in the eurozone and through the current European-wide recession that’s seen unemployment rise to the sharpest levels in decades.

Call it the European three-step.

In the first step, a center-right government, like the one led by Sjálfstæðisflokkurinn (Independence Party) in Iceland in 2008, took the blame for the initial crisis.

In the second step, a center-left government, like the one led by Jóhanna Sigurðardóttir and the Samfylkingin (Social Democratic Alliance) in Iceland, replaced it, only to find that it would be forced to implement harsh austerity measures, including budget cuts, tax increases and, in Iceland’s case, even more extreme measures, such as currency controls and inflation-inducing devaluations.  That leads to further voter disenchantment, now with the center-left.

The third step is the return of the initial center-right party (or parties) to power, as the Independence Party and their traditional allies, the Framsóknarflokkurinn (Progressive Party) will do following Iceland’s latest election, at the expense of the more newly discredited center-left.  In addition, with both the mainstream center-left and center-right now associated with economic pain, there’s increasing support for new parties, some of them merely protest vehicles and others sometimes more radical, on both the left and the right.  In Iceland, that means that two new parties, Björt framtíð (Bright Future) and the Píratar (Pirate Party of Iceland) will now hold one-seventh of the seats in Iceland’s Alþingi.

This is essentially what happened last year in Greece, too.  Greece Flag IconIn the first step, Kostas Karamanlis and the center-right New Democracy (Νέα Δημοκρατία) initially took the blame for the initial financial crisis.  In the second step, George Papandreou and the center-left PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα) overwhelming won the October 2009 elections, only to find itself forced to accept a bailout deal with the European Commission, the European Central Bank and the International Monetary Fund.  In the third step, after two grueling rounds of election, Antonis Samaras and New Democracy returned to power in June 2012.

By that time, however, PASOK was so compromised that it was essentially forced into a minor subsidiary role supporting Samaras’s center-right, pro-bailout government.  A more radical leftist force, SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), led by the young, charismatic Alexis Tsipras, now vies for the lead routinely in polls, and on the far right, the noxious neo-nazi Golden Dawn (Χρυσή Αυγή) now attracts a small, but significant enough portion of the Greek electorate to put it in third place.

The process seems well under way in other countries, too.  In France, for examFrance Flag Iconple, center-right president Nicolas Sarkozy lost reelection in May 2012 amid great hopes for the incoming Parti socialiste (PS, Socialist Party) administration of François Hollande, but his popularity is sinking to ever lower levels as France trudges through its own austerity, and polls show Sarkozy would now lead Hollande if another presidential election were held today.

It’s not just right-left-right, though. The European three-step comes in a different flavor, too: left-right-left, and you can spot the trend in country after country across Europe — richer and poorer, western and eastern, northern and southern.

Voters United Kingdom Flag Iconin the United Kingdom ended Gordon Brown’s tenure at 10 Downing Street in May 2010, replacing Labour with the Conservative Party and David Cameron, though polls now show Cameron falling far behind Labour and Ed Miliband in advance of elections expected in May 2015, with the far-right, anti-Europe United Kingdom Independence Party polling at historically high levels.

The Partido Socialista Obrero EspañSpain_Flag_Iconol (PSOE, Spanish Socialist Workers Party) took a drubbing in the November 2011 Spanish elections as voters replaced prime minister José Luis Rodríguez Zapatero with Mariano Rajoy and the center-right Partido Popular (PP, People’s Party), though Rajoy, who has pushed through further budget cuts and tax hikes, is now arguably just as unpopular as Zapatero ever was, with Spanish unemployment rising above 27% this spring.

Incyprus_world_flag Cyprus, the new center-right president Nicos Anastasiades came to office in a near landslide to replace his stridently leftist (nearly communist) predecessor, Demetris Christofias on a pledge to finalize bailout talks with Europe.  That bailout came, only days into Anastasiades’s administration, though with a deal that initially would have confiscated nearly 7% of Cypriot deposits under €100,000, leaving him largely discredited among Cypriots from the outset, with his administration set for a very tough road ahead.

The three-step seems to have happened all at Italy Flag Icononce in Italy, with Silvio Berlusconi leaving office in November 2011 with the country in financial crisis.  Fifteen months later, the center-left only narrowly edged out the center-right in the February 2013 parliamentary elections, its leader Pier Luigi Bersani has been forced to resign, and the Partito Democratico (PD, Democratic Party) has been forced into a ‘grand coalition’ with Berlusconi’s allies and Berlusconi’s center-right now leads polls for elections that seem likely to take place sooner rather than later.  This has happened at a time when one in two Italian voters either abstained from voting earlier this year or supported the protest movement headed by activist Beppe Grillo, the Movimento 5 Stelle (M5S, the Five Star Movement).

It’s Germany Flag Iconwhy, despite nearly every poll showing that Germans favor the center-right Christlich Demokratische Union (CDU, Christian Democratic Union) over the center-left Sozialdemokratische Partei Deutschlands (SPD, Social Democratic Party) in September’s federal election, and they favor CDU chancellor Angela Merkel for reelection by an even wider margin against the plodding SDP leader Peer Steinbrück, Merkel’s reelection is far from certain, especially with the emergence of Germany’s first largely euroskeptic party, the Alternative für Deutschland (AfD, Alternative for Germany),

It’s also why I think Bulgaria’s May 12 parliamentary ebulgaria flaglections are essentially a toss-up, too — Boyko Borissov (Бойко Борисов) and the center-right Citizens for European Development of Bulgaria (GERB, Граждани за европейско развитие на България) ousted Sergei Stanishev and the center-left Bulgarian Socialist Party (BSP, Българска социалистическа партия) from power in 2009, but Borissov’s popularity has plummeted and despite polls showing GERB with a narrow lead for reelection, Stainshev and the Bulgarian Socialists could well win next month.

Meanwhile, Europe’s economic crisis shows no signs of abating.  Various forms of austerity measures (i.e., budget cuts and tax hikes) reduce demand for goods and services at a time when European economies remain on the edge of recession, in recession or in deep depression.  But with such high public debt and the spectre of prohibitively high bond yields that could close access to debt financing on reasonable terms, many European governments feel they have no option but to rein in spending to within 3% of GDP, thereby depriving themselves of the tool of government-led stimulative spending to jumpstart economic growth.

At the same time, the eurozone has added a new layer of complexity for struggling countries, especially those on the periphery — the one-size-fits-all monetary policy has left costs too high for many countries on the eurozone’s periphery to be competitive, making exports too expensive.  Whereas Italy or Greece may have in the 1980s simply devalued the lira or the drachma, or may have pursued a more aggressive monetary policy, there’s virtually no chance that the inflation-wary European Central Bank will do enough to goose southern European economies out of depression.  That’s left no choice but a painful series of adjustments that economists call ‘internal devaluation’ — the grueling process of lowering labor costs to make a country’s goods and services more competitive.  Unless, of course, a country were to leave the eurozone, which could potentially free countries now struggling in the eurozone to correct their own economies, but which could also cause global market disruptions as investors fear the implosion of a global reserve currency.

The political worry is that as economic troubles continue indefinitely and as both mainstream politicians of the left and right are left helpless to address the economic and monetary crises in Europe, new parties will fill the void.

In more benign cases, it means a more fragmented political system and perhaps a greater representation of voices in national politics, especially those who have been harmed the most in the past five years of economic destruction.  That’s already led to governing crises whereby the remnants of both the center-right and the center-left are forced to join forces, despite relatively opposing views on economic policy — thus the ‘grand coalition’ headed by Enrico Letta that came together over the weekend after two months without a new Italian government.

It’s no secret that European leaders are wary of Hungarian prime minister Viktor Orbán, his party Fidesz, and the less-than-democratic way in which he’s dominated Hungarian government, or the way in which Romanian prime minister Victor Ponta has often trampled roughshod over democratic institutions as well, despite the overwhelming victory of his center-left alliance, the Uniunea Social Liberală (USL, Social Liberal Union) in December 2012.

But as the crisis continues, more radical and malevolent forces could also emerge — imagine a world where Golden Dawn places first in the next Greek election, or where Cameron is forced to form a coalition with UKIP, or even a world where a German euroskeptic party wins significant support for the first time.  With European parliamentary elections coming in May 2014, and with likely two key referenda on Catalan and Scottish independence in 2014 as well, the concern is that the moderate pro-European consensus that’s existed by and large consistently since World War II in western Europe and since the end of the Cold War in eastern Europe could take a radical turn without economic improvement.

Photo credit to Kevin Lees — Dusseldörf, Germany, July 2010.

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