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Even on the assumption that European leaders have finally produced a coherent policy response to the European debt crisis, a clear downside risk remains associated with the longer-term political and economic outlook for Europe. The long-term demographic decline in the region will continue to accelerate, and at some point "austerity and reform fatigue" among electorates seems inevitable.
Yet public protests (so far) against what in some cases have been unprecedented adjustments to the social model have been surprisingly muted, despite the occasional dramatic television footage. And when, as is the case in Greece and Spain, general strikes have to be announced weeks in advance—or, as in France, hardly more people than usual are on the streets protesting during the summer (and vacation months)—it hardly seems like a spontaneous explosion of public anger against new austerity measures.
Across southern Europe, we are witnessing—with reform and austerity policies of the Spanish socialist party PSOE, Greece's socialist PASOK, and the Portuguese Socialist Party—the final demise of the old "European loony left." The creed of left-wing politicians espousing a retirement at age 55 as "a right" and the "lump-of-labor-fallacy" making it impossible to fire workers largely disappeared in Northern Europe 15 to 20 years ago when the Berlin Wall came down. Similarly, these types of mainstream left-wing parties never really emerged in democratic Eastern Europe, with the possible exception of Hungary.
Duly nudged by financial markets and the IMF, the mainstream center-left parties across Europe now embrace more market-oriented policies, the role of incentives and the importance of fiscal sustainability. Undoubtedly, it is only the fear of sovereign default that has converted socialist leaders like Papandreou, Zapatero, and Sócrates to the new religion of reforming pension systems and labor markets and cutting public wages. But they have now crossed the Rubicon.
The dire long-term demographic outlook, especially in Southern Europe, means that these countries cannot simply "grow out of their debts." Growth must come, instead, from fiscally sustainable policies and pro-market structural reforms. Once inside the eurozone, which is prohibitively expensive to leave, these and other countries have no choice but to adopt a fiscal strait jacket and the stringent monetary policies of the European Union's anchor country, Germany, and leave behind their traditional welfare policies of the past.1 With financial markets watching, it is both too expensive in the short term and too politically risky to engage in the large intergenerational redistributive conflicts that come from an expensive social safety net.
There are several implications to this abandonment of traditional policies and allies by the mainstream center-left parties across Europe. First is the possible revival of the political extremes in Europe on both the left and the right. Indeed, the two extremes have increasingly fused together politically into a populist cocktail of right-wing anti-immigration policies and left-wing support of welfare benefits, focused on lower-skilled workers and retirees.
The pattern has occurred in Northern European countries, where sufficiently skilled populist political leaders have emerged after the political shift of the mainstream center-left parties to the center—most recently with Geert Wilders's Freedom Party in the Netherlands, but also with Pia Kjærsgaard's Danish People's Party or the late Jörg Haider's erstwhile Austrian Freedom Party. These parties consistently get around 10 to 15 percent of the popular vote. Populist parties with a similar share of voters' support should therefore be expected in Southern Europe.
Second, however, in Europe's proportional representation (PR) political systems with multiple political parties, where 15 or even 20 percent of the voters at the two fringes of the political spectrum can easily be kept from power by a united center-left and center-right, there is little reason to fear that populist parties will gain political influence in an aging and thus generally more conservative Europe even in the long term. The greater likelihood is that on fiscal sustainability, the European center will hold and those opposed will remain marginalized.
Because of its demographic decline and other structural problems, Europe is not soon going to reemerge from this crisis as a rapidly growing part of global economy. Yet the continent is also not likely to revert back to its old unsustainable welfare state, or even noticeably slow down its ongoing reform.
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1. Sovereign long-term bond spreads for many eurozone members are now back to levels seen only in the mid-1990s, before the introduction of the euro.
