With elections in Portugal and Spain coming up in the second half of 2015, anti-establishment, anti-austerity parties are set to do well. In Spain, a leftist populist group called Podemos (We Can) – founded less than a year ago – is leading in the polls.
It’s easy to see why. The eurozone is stagnating. Any boost to the economy from quantitative easing could prove too little too late, and troubled states are not allowed to borrow to boost growth.
There is little appetite for structural reforms, which tend to cause pain in the short term. Unless a depression is followed by a “substantial and sustained recovery”, says Wolfgang Munchau in the FT, “political systems convulse”. Spain seems stronger than Greece, but its GDP is still a tenth smaller than in 2007.
Back then, the employment rate was 66%; now it’s 56%. In other words, 10% of the labour market has just fallen away as people have given up looking for work. That’s a depression, even if it wasn’t as bad as Greece’s.
“With existing policies, Spain and Greece have no chance of reverting to normal levels of economic activity in a generation,” says Munchau. Like Greece, Spain will have to restructure some of its debt, and only Podemos offers a debt restructuring policy. So Spain may well clash with the EU establishment this year.
Italy could also decide to leave if it can’t reach a deal to lighten its debt load within the euro. Three out of four of the main parties are turning against euro membership. The political risks to the euro, concludes The Economist, have never looked so great.