It's A Movement: 'Nationalists and Populists Poised to Dominate European Balloting'

As Europeans assess the fallout from the U.K.'s Brexit referendum, they face a series of elections that could equally shake the political establishment. In the coming 12 months, four of Europe's five largest economies have votes that will almost certainly mean serious gains for right-wing populists and nationalists. Once seen as fringe groups, France's National Front, Italy's Five Star Movement, and the Freedom Party in the Netherlands have attracted legions of followers by tapping discontent over immigration, terrorism, and feeble economic performance. "The Netherlands should again become a country of and for the Dutch people," says Evert Davelaar, a Freedom Party backer who says immigrants don't share "Western and Christian values."

Even Europe's most powerful politician, German Chancellor Angela Merkel, is under assault. The anti-immigrant Alternative for Germany (AfD) party has drained support from Mrs Merkel's Christian Democrats in recent state and local elections, capitalizing on discontent over Germany's refugee crisis. In Austria the far-right Freedom Party has a shot at winning the presidency in balloting set for Dec. 4, after an election in May that the Freedom Party narrowly lost was annulled because of irregularities in vote counting. The populists are deeply skeptical of European integration, and those in France and the Netherlands want to follow Britain's lead and quit the European Union. "Political risk in Europe is now far more significant than in the United States," says Ajay Rajadhyaksha, head of macro research at Barclays.

There's a second test of populist muscle on Dec. 4, when Italy holds a referendum on constitutional changes proposed by the government of Prime Minister Matteo Renzi. Five Star is the leading opposition to the government's plan to cut the number of seats in Parliament's upper chamber and limit its powers, a move Mr Renzi is seeking to speed action on economic reforms. With the prime minister threatening to resign in the event of a "no" vote, growth-enhancing measures such as a corporate tax cut and help for Italy's fragile banking system could be off the table. "You might end up having a political crisis on top of an economic slowdown and a banking mess," says Bloomberg Intelligence economist Maxime Sbaihi. "Suddenly, stars could align for the worst."

Recent polls show the "no" forces narrowly ahead. If they prevail, an interim government would take over until elections could be held, probably in 2017, says Wolfango Piccoli, co-president of Teneo Intelligence, a political advisory firm in London. "The big winner would be the Five Star Movement," which could increase its 14 percent share of parliamentary seats, he says. Five Star probably wouldn't gain sufficient backing to form a government but would have enough seats to deny any other party a solid majority.

That scenario underscores what may be the biggest risk of the nationalist groundswell: increasingly fragmented parliaments that will be unable or unwilling to tackle the problems hobbling their economies. True, populist leaders might not have enough clout to enact controversial measures such as the Dutch Freedom Party's call to close mosques and deport Muslims. And while the Brexit vote in June helped energize Eurosceptics, it's unlikely that any major European country will soon quit the EU, Morgan Stanley economists wrote in a recent report. But they added that "the protest parties promise to turn back the clock" on free-market reforms while leaving "sclerotic" labour and market regulations in place. France's National Front, for example, wants to temporarily renationalise banks and increase tariffs while embracing cumbersome labour rules widely blamed for chronic double-digit unemployment. Such policies could damp already weak euro zone growth, forecast by the International Monetary Fund to drop from 2 percent in 2015 to 1.5 percent in 2017. "Politics introduces a downside skew to growth," the economists said.