September 26, 2023

IntelBrief: How Will Europe’s Cost-of-Living Crisis Impact Political Stability?

AP Photo/Petr David Josek

Bottom Line Up Front

  • Although general inflation and energy costs have lowered from last year’s record-high peaks, the cost-of-living crisis in Europe continues to impact citizens’ views of government institutions and support for far-right political parties.
  • According to the European Central Bank, inflation for the euro area will likely average 5.6 percent this year and will hit low- and middle-income households as persistently high prices for goods and services reduce purchasing power.
  • Amid widespread dissatisfaction with national government and EU economic responses, thousands of protestors gathered in Prague in mid-September over the government’s economic management and support for Ukraine.
  • The cost-of-living crisis – alongside the contentious and heightened debates over migration – will likely be a determinative factor in upcoming European elections, including Poland’s next month and the European Parliament’s in 2024.

Although general inflation – including energy costs – is below last year’s peaks, the cost-of-living crisis in Europe continues to impact the purchasing power of citizens, their views of government institutions, and their support for far-right political parties. Much of the crisis is rooted in the lingering impacts of the COVID-19 pandemic and the war in Ukraine, with the latter upending Europe’s fragile post-pandemic economic recovery, increasing food and commodity prices, and exacerbating global inflationary pressures. According to the European Central Bank, inflation for the euro area will likely average 5.6 percent this year, up from a prior forecast of 5.4 percent. Although this projection is down from the peak of 8.4 percent, it is likely to hit low- and middle-income households, as persistently high prices for goods and services have reduced workers’ purchasing power.

Oil production cuts, which Saudi Arabia and Russia have extended to the end of 2023, has led the International Energy Agency to warn of a potential surge in oil price volatility, which could increase energy costs for consumers as well as inflation. Moreover, a growing number of credible analysts and institutions are pointing to rising corporate profits as a key driver of inflation, undercutting corporate defenses that the rising price of goods was in line with their own underlying rising costs. Corporate profits accounted for almost half of the increase in Europe’s inflation over the past two years, according to estimates by the International Monetary Fund (IMF). The IMF data suggests that corporate profits, rather than workers’ wages, were the biggest factor driving inflation in 2022, and will likely be the case in 2023 – implying that Europe’s businesses have been better shielded than workers from the adverse cost shocks of energy and commodity prices.

The cost-of-living crisis, including increased energy costs, has led to widespread frustration among the European electorate, as Europeans are increasingly dissatisfied with EU and national government responses. According to polling data released in June from the European Union’s bi-annual public opinion survey, 65 percent of survey respondents were not satisfied with the response of national governments – and 57 percent with the EU’s response – to the increase in food and energy prices. The EU also found that Europeans still consider inflation to be their number-one concern, though concerns about the European energy supply saw “a sharp decrease.” The survey data came after the European Commission recommended that member states redirect spending on measures shielding citizens from high energy prices towards the bloc’s austerity measures by the end of 2023. The data reflects a disconnect between EU economic policies and the experience of average European citizens, who are still facing the brunt of high prices – however lower than some previous peaks – and anticipating future price increases this winter after last year’s unexpectedly mild winter defied widespread predictions that price spikes would significantly damage European solidarity towards Ukraine.

Frustrations over government responses have led to a wave of protests across the continent. In mid-September, an estimated ten thousand demonstrators gathered in Prague’s central Wenceslas Square to protest the Czech Republic’s pro-Western government. Uniting a seemingly disparate – but increasingly aligned – far-left and far-right, protestors demanded the government’s resignation over its economic management and military support for Ukraine. It was the country’s third such demonstration this year organized by a new political party known as “PRO,” which has a nationalist, pro-Russian, and anti-Western platform. Although smaller than a similar protest in September 2022, where an estimated seventy thousand far-right and far-left groups coalesced around pro-Russian positions, the recent demonstration highlighted the ability of opposition groups to capitalize on the atmosphere of resentment and inflation, albeit, with a pro-Moscow stance. Underscoring this dynamic, Czech police stated in a social media post that they had detained one man at the protest on suspicion of supporting genocide for wearing a patch of the notorious Russian private military company the Wagner Group. Although Czech leaders have not publicly blamed Moscow for this latest rally, the convergence of groups on the far-right and far-left on the cost-of-living issue, with a penchant for pro-Russian talking points, is reflective of the years of concerted efforts by Moscow to exploit frustrations with Brussels and the governing establishment, as well as societal rifts in Europe.

The impact of the cost-of-living crisis – alongside the continent’s contentious debates over migration – will likely be a determinative concern for voters in several important upcoming European elections. In Poland’s upcoming October elections, the cost-of-living crisis has been identified by analysts as a critical issue for voters as the country continues to struggle with high inflation – an estimated 10.1 percent last month, according to the country’s statistics office. While the number is certainly high, it also reflects an eighteen-month low. A far-right, free market movement, known as the Confederation Liberty and Independence (Confederation for short) has capitalized on voters’ grievances over economy – particularly those of young men – and recent polling in the country suggest that the movement may emerge as a kingmaker in the election. The Confederation, similar to other European far-right parties such as the AfD in Germany and Vox in Spain, has captured the support of youth partly through presenting themselves as “anti-system” or anti-elite. This has resonated with those frustrated with the response of national governments, institutions, and the EU to globalization and economic management. These issues will also likely be an important factor in the upcoming European Parliament elections in 2024. Whether the bloc, along with its member states and other European national governments, can adequately address the issue and voters’ economic concerns will significantly impact political stability on the continent, as well as support for interconnected issues such as the war in Ukraine.