POWERSHIFTS, PANDEMIC AND POPULISM IN EUROPE: Reflections for Canadian Financial Services

  • Global Risk Institute
Flag of the European Union


This paper explores recent political changes, or “power shifts”, in four of the largest European economies. Over the course of 2021-22, Italy, the Netherlands, Germany and France have hosted or will soon play host to major elections and/or leadership transitions. These countries are all principal architects of continental integration, dating back to the creation of the European Coal and Steel Community in 1952. At times, the four states also reflect conflicting viewpoints in deliberations over political and macroeconomic policy.

Canadian financial institutions (FI) have exposure to the European markets to varying degrees. Power shifts in these markets may have a significant impact given the exposure. After providing a contextual overview of the EU’s COVID-19 response, and background on each of the power shifts, this paper outlines three future narrative scenarios which may be used by FIs for risk management planning and assessment purposes. The three scenarios are:

Muddling Through — A scenario in which political developments, and the economic recovery from the global pandemic, are uneven and incongruous across the EU. Tensions rise between member-states over the deployment of the European recovery fund. National political changes trend toward the centre-right, or in one case, toward rancorous but ineffective populism. The European project stagnates as the prospects for greater fiscal union dim and financial stability risks increase.

Ever Closer Union — A scenario in which the EU and its member states mount a coordinated and pervasive recovery from the COVID-19 pandemic. The European recovery fund is methodically distributed and powers inclusive economic growth, with a focus on sustainability and digitalization. Early successes in “building back better” help to restore popular faith in both national and European institutions. National politics leans definitively toward an activist centreleft, while populist parties lose ground. Support for European integration improves, with movement toward more permanent joint fiscal arrangements, and the commensurate benefits to financial stability and investment. Supply chain resiliency stops short of outright protectionism.

Fury & Fragmentation — A scenario in which the backlash against neglected economic disparities post-pandemic, and the criteria for the recovery
fund, nurture far-right populism in recipient nations. Cooperation in Brussels breaks down and Euroscepticism begins to rise. Voters in some of the
largest economies elect nationalist governments that threaten EU solidarity and the single market. In others, centre-right governments grow more fiscally conservative. Attempts at further European integration falter, financial risks increase, and opportunities for new investment narrow. Calls for greater supply chain resiliency impose new protectionist barriers. Yet local political risks to foreign investors are limited by national economic interests.