If there were a single image that summed up the quick rise of Europe's anti-establishment parties, is was the one of Alexis Tsipras and Pablo Iglesias together, on stage, at an anti-austerity rally in Athens just before the Jan. 25 Greek election. Wearing their trademark open-neck blue shirts – no neckties ever for them – their arms were outstretched, as if in celebration, as the crowd cheered them on.
Mr. Tsipras, the leader of the radical left Syriza party, would win that election; Mr. Iglesias, leader of Podemos (We Can), the Spanish equivalent to Syriza, would top the polls in Spain, much to the distress of the mainstream parties.
The image implied that the populist revolution had arrived in Europe, where the centre-right and centre-left parties that had ruled for decades were in full retreat as voters grew angry at the stalled recovery, the harsh austerity measures and the obscene unemployment levels.
But could January have been the peak of the populist movement? Shortly thereafter, Syriza was riven by infighting as its efforts to make a breakthrough with its bailout masters in Brussels and Berlin went nowhere. Podemos's rise stalled as spring approached. In Britain, the UK Independence Party, whose goal is to yank Britain out of the European Union, won only one seat in the May 7 election; even UKIP's leader, Nigel Farage, got shut out. Beppe Grillo's anti-establishment Five Star Movement, Italy's biggest opposition party, lost momentum. While the Euroskeptic Finns Party placed second in Finland's election, their vote tally fell by two points.
Investors have applauded the apparently flattening popularity curve of the protest parties. Bond yields, with a little help from the European Central Bank's ultra-easy monetary policy, have sunk throughout the euro zone. The rage against the middle-party machine seemed less shrill as the economy improved. The falling euro and oil prices, and the ECBs €1.1-trillion ($1.3-trillion) quantitative easing program, helped.
Not so fast. Rumours that the populist surge is over might be exaggerated, greatly so.
Consider last Sunday's local and regional elections in Spain, where the ruling Popular Party lost a lot of ground to Podemos and another political upstart, Ciudadanos. The opposition Socialists fared even worse than the Popular Party. In Madrid and Barcelona, the movements on the left sent the mainstream parties packing. In Madrid, the Socialists and a Podemos-backed coalition will almost certainly form a ruling partnership. The candidate in Barcelona supported by Podemos, Ada Colau Ballano, came first in the mayoral election. She called her win a "victory of David against Goliath."
In Britain, the election of a single UKIP member of Parliament said more about the grossly skewed first-past-the-post electoral system than it did about UKIP's popularity. In fact, UKIP won 3.9 million votes – 13 per cent of the total – making it the third-largest political force. The party finished second in 120 constituencies, suggesting it is poised for a breakthrough in the next election. In Greece, Syriza and Mr. Tsipras remain hugely popular even though their game of chicken with the EU, the International Monetary Fund and the ECB, if lost, could easily trigger Greece's exodus from the euro.
Marine Le Pen, leader of France's Le Front National, a protest party that uneasily occupies both the right end of the political spectrum (anti-immigration) and the left (social welfare and trade protectionism), is holding her own. She is pushing her party closer to the mainstream in a bid to make a splash in the 2017 presidential election, an effort that saw her oust her firebrand father, Jean-Marie Le Pen, from the party for dismissing the Holocaust as "a detail of history."
The appeal of the protest parties on the left and right, or a blend of both, varies in each country. If there is one theme that connects them, it is their conviction that the mainstream parties are corrupt, intellectually bankrupt old warhorses that have failed to improve the lives of the people. Some voters blame the mainstream parties for prolonging the recession through feckless economic policies that have produced no growth and no jobs. Other voters are convinced the great European integration project is a sovereignty-robbing exercise designed to enrich big corporations and Germany, the one country that seems to have leveraged the euro to competitive advantage. Still others, like the neo-Nazi Golden Dawn party, are ferociously anti-immigrant and not much else. Syriza and Podemos have concluded that austerity has backfired and they're probably right.
Political fragmentation has taken hold in Greece, Italy and France. Now it's Spain's turn. It's an open question whether the mainstream parties will be able to douse the revolutionary flames even as economies return to some semblance of health.
If fragmentation continues, investors beware. Messy coalition governments tend to be unstable. They will find it difficult to push through economic reforms, assuming they even want to do so (Syriza insists that pension reform and most privatizations are off the table). In extreme cases, the Euroskeptic parties will succeed in stalling or even reversing European integration. All the opposition parties in Italy are anti-euro. In Britain, all of the main parties are anti-EU to some degree. The risks to investors might be a lot greater than they appear. Just because a few countries have returned to growth does not mean they have become investment havens again.