Eurosceptic parties are likely to renege on their pre-election promises if elected, according to rating agency Standard & Poor’s (S&P).
In a report assessing the rise and likely impact of euroscepticism, the agency concludes that political parties espousing an antipathy towards the EU will ultimately chose financial and macroeconomic stability over revolution.
Stability will depend upon domestic banks retaining access to “lender of last resort” financing from the ECB, it said.
As a result, even a eurosceptic government is likely to compromise on its election promises, so that it could remain eligible for the ECB support.
Its conclusion could be tested sooner rather than later with Greece’s far-left Syriza party favourites to win the country’s general election on Sunday.
The agency's analysis, entitled European sovereign creditworthiness might diminish if eurosceptics take power, said high unemployment, declining real wages, credit constraints and public spending cuts have all fed into support for eurosceptic parties. Their popularity has also benefited from perceptions of corruption and cronyism among the traditional political parties, it said.
There is no denying the rise in support for these parties could "trigger major policy shifts" in individual member states, the agency said, noting that 2015 will see a busy electoral year in Europe, with six general elections scheduled.
It suggests there are two distinct varieties of eurosceptic parties: those that oppose the fiscal compact and advocate default, and those that favour exiting the EU or EMU.
In the first category, it places Ireland's Sinn Féin, Podemos in Spain and Syriza in Greece, which want to remain as euro zone members but advocate policies, including default, that are unlikely to be compatible with EMU membership, or with maintaining continuous access to ECB financing.
The report correlated euroscepticism in these states to the high levels of public debt; Greece (177 per cent of GDP), Ireland (119 per cent of GDP) and Spain (96 per cent of GDP). It said none of these states had yet been able to rebuild its fiscal buffers to face the next crisis.
The second group of eurosceptic parties, which include the National Front in France; Austria's Freedom Party; Golden Dawn in Greece; the Freedom Party in The Netherlands; and UKIP in Britain, are explicitly calling from an exit from the EU or the euro zone.
S&P said if a net debtor country exited the euro zone, it would make sovereign default inevitable. The country’s debt would become foreign currency, while the economy would be redenominated in a new, and much weaker, local currency.
“All other things being equal, a 50 per cent devaluation of a country’s real effective exchange rate would double general government debt to GDP overnight,” the report said.
An EMU exit would also likely be preceded by substantial deposit outflows from the sovereign’s banking system, which would destabilise the national banking system.
The “co-dependency” of European economies, particularly within the euro zone union, means that there is a “real risk of contagion” from a euro zone exit or a euro zone sovereign default, the agency said.
To fight against rising euroscepticism, it said it expected euro zone governments to do more of what they have already been doing, including extending loan maturities and reducing interest rates on these loans.
