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Parliamentary Elections Underscore Challenges for EU

The worst of the European financial crisis may be over but if the results of the recent European parliamentary elections are any indication, the European Union (EU) still has many challenges to contend with going forward.

Krister Thelin, former deputy minister of justice in Sweden and a keen observer of European affairs, believes the results of the elections—most noteworthy in France, where the extreme right-wing National Front Party had a landslide victory and in the United Kingdom, where the UK Independence Party (Ukip) came out as a frontrunner—are evidence of a “battle for the soul of Europe.”

This dynamic, he said, will continue to shape the direction of European Union policy and membership going forward.

“I think we can agree that the Euro crisis is certainly behind us,” Thelin said. “We have really turned a corner with respect to Europe’s financial and economic woes, with countries like Greece and Ireland back on track.”

And with respect to ensuring that financial crises of the same magnitude do not occur again, European countries are on board with plans to strengthen banking and financial sector framework.

Clearly, though, there are a number of other issues that will continue to challenge the EU, and will come to bear in one way or another upon the future of member countries and of the EU itself.

“The European electorate has spoken loudly,” said Stephen Peak, head of European investments at Henderson Global Investors.

Investors like Peak may not have made any changes to their European positions but the forces at play in Europe will shape the EU going forward and in one way or another, impact countries, economies, markets and investments. Here are some of the key issues the elections have raised:

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Independence from the EU

At the height of the financial crisis, countries under duress expressed their will to leave the European Union. Today, that feeling is still strong, but from other quarters, namely France and the U.K.

Former British Prime Minister Tony Blair reportedly said the landslide victory of anti-EU parties in the polls showed “"deep anxiety, distrust and alienation from the institutions and key philosophy of Europe.”

Those leaders who believe in the European Union will have to think hard about how to keep it intact and meaningful in a context where nation states want more power and independence.

Not an easy task at all, Thelin said, but certainly key for Europe going forward, because even if currently, the center right/pro EU European Peoples Party still holds the majority in the European parliament, independence from the EU is a key item on countries’ lists, and likely to be fueled further by an upcoming Scottish referendum for independence, which, if successful, could in turn spiral onto Spain, where the region of Catalunya has been clamoring for its independence.

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Immigration

For outside observers such as Clem Miller, investment strategist at Wilmington Trust Advisors, the landslide victory of the extreme right National Front party in France is a strong wake-up call to the key issue for Europe today: Immigration. Over the past years—and even, some argue, since the time borders between countries were removed—Europe has experienced a boom in immigration, much of it illegal. The latest influx of thousands of immigrants from Syria has also drawn media attention.

On the one hand, Europe’s aging population makes a case for immigration. However, the anti-immigrant stance in many countries has been going on for a long time, and the election results have shown that it will be a key issue now in countries like France and even the U.K., Miller said.

“The fact that the National Front has come to such prominence in France is going to scare foreign investors, who already don’t like investing in France because it has such high taxes,” Miller said. “This is going to be a hit on the French economy, and for investors, a major consideration.”

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European Economic Recovery

European Central Bank president Mario Draghi has made it clear that Europe requires further stimulus, a quantitative easing of its own, and investors like Peak are all for this.

“Our viewpoint is that Europe is still in recovery mode – we never thought it would be straightforward and there’s definitely a need for stimulation,” he said. The hype around the elections, however, has detracted from Europe’s economic recovery, Thelin said, and even if the economies affected by the crisis have turned the corner, their recovery is as yet fragile.

“Until now, economic downside did play a role for voters but independence from the EU and this plague of xenophobia that’s swept through Europe are taking away from the important issues, including a free trade agreement with the United States, which would benefit Europe immensely,” Thelin said.

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