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Conservative New Democracy ruling party supporters wave national flags and shout slogans during a pre-election campaign speech of Greece's Prime Minister Antonis Samaras (not pictured) in Athens, May 23, 2014. Greeks vote both in local and European Parliament elections on Sunday. (ALKIS KONSTANTINIDIS/REUTERS)
Conservative New Democracy ruling party supporters wave national flags and shout slogans during a pre-election campaign speech of Greece's Prime Minister Antonis Samaras (not pictured) in Athens, May 23, 2014. Greeks vote both in local and European Parliament elections on Sunday. (ALKIS KONSTANTINIDIS/REUTERS)

EU election results jeopardize era of austerity Add to ...

The rise of the European Union’s populist, anti-establishment parties will put the region on a new course that will test, and possibly unravel, its decades-long economic integration effort.

Their popularity surged on Sunday in the EU election, calling into question Jose Manuel Barrosso’s recent comment that “the problem with Europe is not that we have too much Europe, it’s that we have too little.”

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Millions of voters begged to differ with view of the president of the European Commission (the EU’s executive arm). Parties that opposed the ever increasing power of the EU’s institutions, or want out of the EU or the euro zone, won almost 30 per cent of the vote. That won’t be enough to sabotage the pro-integration agenda in the EU parliament in the near term – the pro-EU parties won a majority, though a reduced one – but it will be enough to ramp up the Euroskeptic pressure in the countries where they came on strong.

The big question now, in the wake of the election, “is whether austerity fatigue could translate into further integration of budgetary policies,” said observers at Société Générale.

“For instance, social democrat leaders ... may once again be tempted to propose an investment-led recovery program,” they said in a research report.

“Given the current political background, it is doubtful that such ideas could materially gain ground. The rise of Euroskeptic parties would likely push right-leaning parties into more conservative and less risk-sharing positions. The most one can expect is further relaxation of budget targets for France, Italy, and Spain. But this will not boost much GDP growth.”

While the equity and debt markets took a relatively benign view of what French Prime Minister Manuel Valls called an electoral “shock, an earthquake,” the rising populist parties do have the potential to reshape the entire European project over the long term.

The Euroskeptic parties trounced the ruling centre-right and centre-left parties in at least four EU countries, humbling them in several others. The biggest victories came in France and Britain, the EU’s second- and third-biggest economies, after Germany. In France, Marine Le Pen’s xenophobic Front National, which advocates full withdrawal from the EU and the euro, the currency used in 18 of the EU’s 28 countries, won 25 per cent of the vote, pushing president François Hollande’s ruling Socialists into distant third spot.

On Monday, she gave a hint of her agenda when she declared that the French “no longer want to be led by those outside our border, by EU commissioners and unelected technocrats. They want to be protected from globalization and take back the reins of their destiny.”

In Britain, Nigel Farage’s UK Independence Party, whose goal is to bust up the EU, won 28 per cent, putting the ruling Conservatives on the run and obliterating their coalition partner, the Liberal Democrats.

Euroskeptic parties on the right and the left also won in Denmark and Greece. The success of Greece’s radical left Syriza party, which wants to end or dilute the austerity programs that it blames for smothering the economy, has rattled the ruling coalition, which has only a two-seat majority, and may trigger an election. They also did well in Spain and Hungary, but lost ground in Italy, which had Europe’s biggest Euroskeptic party, the Five Star Movement, and Netherlands.

Even Germany, traditionally the most pro-Europe of the EU countries, now has an elected Euroskeptic party. While Alternative for Germany, as it’s called, picked up only 7 per cent of the vote, the figure was enough to prove that not all Germans buy into Chancellor Angela Merkel’s vision for a unified Europe, where EU and euro zone institutions would have enormous power to determine the fiscal direction of member countries, right down to budget deficit limits and privatization programs.

Steen Jakobsen, chief economist and investment officer at Denmark’s Saxo Bank, said the election exposed a widening rift between the mainstream politicians’ view of Europe and that of the electorate.

“Europe’s politicians and its voters have never been further apart,” he said. “The price for that is a continued flow of miscommunication which will leave Europe weaker, with less decision power and ever-widening rifts.”

How could the new breed of populist parties remove momentum from the European integration project?

In Britain, the UKIP’s phenomenal success is bound to push Conservatives into taking increasingly Euroskeptic views. Mr. Cameron has already demanded an overhaul of the EU to make it less bureaucratic, less costly and less involved in the laws and regulations that govern everything from environmental standards to corporate takeover policy.

The UKIP’s election victory can only ensure that Mr. Cameron will make good on his pledge to hold an in-out referendum on EU membership in 2017 (assuming the Conservatives win the election). If the UKIP can match its EU election popularity in Britain’s 2015 general election, the prospect of an EU without its second-biggest economy will become a very real possibility.

The Front National could have even more influence on the EU’s direction than the UKIP. That’s because the Front National is challenging the weak and increasingly unpopular ruling Socialists, who won only 14 per cent of the vote. While Ms. Le Pen wants to kill off the euro, she has a socialist streak and, like Greece’s Syriza, wants to end the austerity measures so beloved by Germany.

Some economists think that if austerity goes, so will the economic reforms that France (and Italy, Spain, Greece and Portugal) need to make their economies competitive.

“The FN’s success at the polls accentuates the divergence between France and Germany, economically as well as politically,” said Nicholas Spiro, managing director of London’s Spiro Sovereign Strategy. “France looks and feels like a country that’s throwing in the towel on the reforms being demanded of it and is more and more uncomfortable with its membership in the euro zone.”

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