Europe's own 'tea party' risk

May 22, 2014: 3:40 AM ET
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Far-right parties such as France's National Front are expected to make gains in elections to the European Parliament this week.
LONDON (CNNMoney)

Europe has enjoyed a period of calm after years of crisis, but a predicted big protest vote in regional elections this week could shake markets out of their complacency.

Polls open Thursday for voters to elect members of the European Parliament, representing 500 million citizens. They're expected to back protest parties of right and left in greater numbers than ever before.

A backlash against austerity, unemployment, immigration and loss of national power to European institutions could push anti-EU parties to win about 25% of the 751 seats. In some of the 28 countries, they could even secure the biggest share of the vote.

While that won't derail the region's recovery in the near term, it could store up future trouble by destabilizing pro-EU governments in some countries and weakening the resolve of others to stick to painful economic reforms.

Growing popularity for fringe parties has drawn comparisons with the emergence of the tea party in the United States, and its ability to disrupt politics from a small base.

"The rise of the tea party in the U.S. is a lesson for the currency bloc," noted Kathleen Brooks at Forex.com. "Although the tea party does not have control of any of the major organs of power, it still has a loud voice in the halls of Washington."

Success for fringe parties will make for noisier debates, complicate passing EU laws and appointments to the EU executive.

Related: Protest parties shake up pivotal European elections

Mainstream parties say they will work together to ensure Brussels is not shut down.

"I think we will get a clear majority from the voters in Europe to continue the policy of stabilizing the common currency and strengthening the economy in all European countries," German finance minister Wolfgang Schaueble told CNN's Nina dos Santos.

Indeed, markets are likely to take Sunday's results in their stride.

That's because the EU is much better placed than it was two years ago. To quell the region's debt crisis and save the euro, policymakers rushed through a raft of laws on permanent bailout funds, tighter budget planning and oversight, and a banking union.

"In comparison, the to-do list for future legislation is arguably lighter and less crucial to safeguarding the European recovery," noted economists at UBS.

The economy is growing again, most governments have reined in new borrowing, and two states -- Ireland and Portugal -- have emerged from bailout programs. The European Central Bank is still ready to do "whatever it takes" to preserve the euro.

Investors have piled into Europe in response, sending stocks surging and slashing the premium governments must pay to borrow. The euro has been on a tear, flirting with $1.40 earlier this month.

Related: ECB holds fire but drops heavy hints

Yet, Europe's recovery remains fragile.

Unemployment is stuck near its record high of 12%. The debt mountain continues to grow. France and Italy need further reforms, and Greece is relying on a shaky government to secure growth and exit its bailout.

With many Europeans suffering a sharp fall in living standards, a big protest vote could make it hard for some governments to stay the austerity course.

After dropping to their lowest levels in years, borrowing costs for some eurozone countries have edged up recently, reflecting those concerns and weaker than expected growth.

Beyond the eurozone, investors will be watching the U.K., where an anti-EU party could win the popular vote. Analysts say that could boost support for Scottish independence, raising the chances of a messy break up after September's referendum.

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