Minority EU govts struggle
Europe’s growing number of shaky minority and coalition governments mostly managed to muddle through 2016 but their lack of political strength suggests they will not be pursuing many major policy initiatives in 2017. Opposition threats to flagship labor reforms in Spain and difficulties passing new residential rental laws in Ireland last week exposed the fragility of incumbents who returned to power this year but in a much weakened form.
Bulgaria is braced for months of uncertainty and threats to necessary economic reforms by the fall of its center-right minority government, while weeks of policy battles almost toppled minority administrations in Norway and Denmark. Ahead of 2017’s crowded election calendar, these struggles suggest that even if the centre-ground holds in the Netherlands, France, Germany and Italy, some victors may have to get used to rule by compromise and the risks that go with that.
“What electorates want is change, they’re just not sure what change and, if you’re a minority government, it’s very difficult to deliver that while also maintaining some form of credible economic policy,” said Commerzbank economist Peter Dixon. “Rollback (of policy) is a risk. You might end up in a situation where governments are unable or unwilling to push forward on the kinds of policy response that may be needed and if you have weak governments at a time of policy problems, that then leads to additional political risk.”
With estimates of planned borrowing next year indicating that euro zone governments have little intention of ramping up fiscal stimulus, that suggests that monetary policy in the shape of the ECB’s asset-buying program will continue to be the main stimulus to the region’s economies. In Ireland, Prime Minister Enda Kenny’s minority government relies on the cooperation of the main opposition party Fianna Fail to pass legislation, an arrangement that leaves it with “all of the responsibility, but none of the power”, according to Investec Ireland Chief Economist Philip O’Sullivan.
O’Sullivan made the remarks after Kenny’s Fine Gael had to battle to secure their rivals’ backing for new residential rent controls, a key policy initiative. Kenny has also so far been unable to stop a proposed law, tabled by opposition Fianna Fail, to hand the central bank powers it does not want to set mortgage rates.
‘No Big Bang’
They did easily agree their first budget in October and the pact has lasted longer than O’Sullivan and others predicted, the kind of makeshift stability Prime Minister Mariano Rajoy is hoping for as he bids to avoid legislative standstill in Spain. In just six weeks since his new government was sworn in, opposition proceedings have been initiated to scrap prominent education and civil rights laws, with the labour reforms credited for helping Spain rebound from its worst downturn in almost a century next in the firing line. — Reuters