The rise of populism in Europe is intensifying governance and geopolitical risks, but the economic effects are limited for now, says Moody’s Investors Service.
In a new report, the rating agency said support for right-wing populist politicians is growing in various parts of Europe, with populists in power in Italy and Hungary, and forming part of coalition governments in several other countries.
“The populist right also made gains in June’s European Parliament elections, and polls indicate growing support in France and Austria ahead of upcoming elections,” it noted.
These trends are increasing political polarization in Europe, and making it trickier to form stable, effective governments in various countries, Moody’s said. Increased polarization risks weakening institutions in these countries too, it said.
“Similar dynamics also risk hampering the effective functioning of EU institutions,” it added.
Alongside increased polarization, some populists actively seek to weaken institutional safeguards, Moody’s said.
However, these movements have so far had little impact on countries’ economic and fiscal positions, it noted.
“The track record of most sovereigns where populist, right-wing parties are or have been in power, in particular Hungary and Poland, shows they have had little impact, positive or negative, on our assessments of economic and fiscal strength,” it said. “However, potential risks remain for some.”
In particular, populist policies on immigration, the EU and Russia raise risks, the report said.
“Economic strength would weaken if opposition to immigration were to limit the influx of workers needed to fill growing labour shortages,” it said.
Rising tensions within the EU and the pro-Russia stance of some populists could weaken Europe’s response to geopolitical risks — a potential negative for sovereign credit ratings, it suggested.