Europe set for stormy political autumn

Strikes, social unrest and political upheaval could unsettle European financial markets from September but fears of a financial meltdown in the euro zone look to be overblown.

Europe has enjoyed a summer reprieve after the nervousness of May and June, when concerns about the political and economic health of Greece and Spain sent global markets reeling.

But from September, trade unions across Europe plan strikes and protests, Italy may face an early election, and Central and Eastern European nations are due for hard negotiations with the IMF, among the many issues ahead.

Labour Unrest

"The September and October editions of news magazines will almost certainly be covered in pictures of demonstrations, particularly in Spain and Greece," said Control Risks western Europe analyst David Lea. "Things will certainly get more interesting."

One day to watch will be Sept. 29, when trade unionists will take to the streets across most of the continent for a day of unified action against spending cuts. Media attention will focus on the scene of any violence -- which is perhaps most likely somewhere in southern Europe, either Greece, Spain or Italy.

An unexpectedly high turnout or particular violence could unsettle wider European markets in the same way as May riots in Greece that saw three die in a burning bank. But those deaths prompted widespread revulsion and organisers will be keen to avoid a repeat.

Particularly serious riots in one country could increase its debt yields and insurance prices in the form of credit default swaps -- but one of the reasons the European unions have organised coordinated strikes for September is to prevent markets punishing any one particular country.

Greek Prime Minister George Papandreou won a victory against striking truck drivers at the beginning of the month, forcing them back to work. Unions are likely to confront him again but, as in Spain, they are reluctant to oust a leftist government and risk bringing the right into power again.

Some analysts also believe there is a particular risk of labour unrest in Belgium, which has yet to form a government two months after a general election, and in France, as President Nicolas Sarkozy prepares for spending cuts.

In Britain, unions are likely to protest in September, but are seen largely keeping their powder dry for the new year, once cuts have begun to bite after an October spending review.

"They don't want to be seen as scaremongering too early," said Lea.

British legislation means any strike must be over specific employment disputes, making a general strike, or even a widespread coordinated stoppage, relatively difficult.

Emerging European IMF Worries

Some analysts believe some of the greatest risks could come from the more troubled eastern EU economies that have long had broad issues with International Monetary Fund and EU bailouts. Hungary, Romania and Latvia are most in focus. [ID:nRISKHU] [ID:nRISKRO] [ID:nRISKLV]

Talks aimed at reviving Hungary's IMF/EU financing deal collapsed in July after its new government refused to meet the lenders' budget deficit targets. Worries over Romania's ability to meet IMF targets are also growing, pushing up its bond yields. [ID:nLDE67I15B]

Latvia, long seen as one of the EU's most fragile economies, holds an election on Oct. 2. Its ruling coalition collapsed because of disagreements over IMF-inspired cuts and since then the government has continued as a minority.

Most expect it to survive until the election, but any new coalition might want to renegotiate the IMF deal. That could threaten Latvia's currency peg and spark a new round of worries over the region.

"The stories in Hungary, Romania and Latvia are separate -- they don't really have anything to do with each other," said Eurasia Group analyst Jon Levy. "But if you get problems in all three together, you could get a narrative forming of Eastern European slippage, and that could have a broader market impact."

Many Western European banks -- particularly Austrian and Swedish -- are heavily exposed to emerging Europe and could be particularly vulnerable.

Troubled Western European Governments

Western Europe could have its own political crises, with all governments under pressure as they try to push through harsh austerity measures. Italy looks set for a stormy autumn after Prime Minister Silvio Berlusconi fell out spectacularly with his ally Gianfranco Fini.

Berlusconi and his Northern League partners are both seen as keen for a snap election and have challenged Fini's rebel bloc to a confidence vote when parliament returns in September. But with the opposition in disarray, markets have been generally relaxed and might continue to shrug off further political noise.

Any emergence of obvious divisions within Britain's ruling Conservative-Liberal Democrat coalition, on the other hand, would rattle markets, hitting sterling GBP= and pushing up government debt yields. [ID:nRISKGB]

Most analysts expect the coalition -- Britain's first in decades -- to survive at least a couple of years, but the party conference season in October could see divisions within both parties rise to the surface.

Some two months after elections in the Netherlands and Belgium, both are still without governing coalitions after b showings by the Dutch far right and Flemish separatists.

Markets have generally been unflustered but prolonged delay in forming governments could filter through in bond yields.

Ireland's ruling coalition has also been showing periodic strains, and some analysts doubt it can survive through to an election in 2012. Any failure would be likely to widen debt spreads immediately.

The temperature also looks to be rising in the euro zone's core duo of France and Germany ahead of key regional elections in Germany next year and France's 2012 presidential contest. In both countries, the left is seen making a gradual recovery as austerity eats into the ruling parties' popularity.

Thousands took to the streets in Germany this summer to demonstrate against spending cuts, and pressure is growing on Chancellor Angela Merkel to impose higher taxes on the richest. That would put Merkel's Christian Democrats on a collision course with her centre-right FDP coalition partners.

In France, Sarkozy has a month to push through a deficit-shrinking budget slashing spending and raising the retirement age in the face of strike action and opinion polls that show growing support for a left-wing candidate in 2012.

That challenger will most likely be either Socialist party chief Martine Aubry or current IMF boss Dominique Strauss-Kahn.

But few see an immediate market impact from French or German politicking in the dying months of 2010.

"Germany and France are really stories for 2011," said Eurasia's Levy.

[Source: By Peter Apps, Political Risk Correspondent, Reuters, London, 25Aug10]

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