Political fragmentation rises in Europe, SRCC risks run high among major economies

Inflection Points

In our Inflection Points series, we dive into our suite of 190+ country risk indices to highlight the myriad interconnected risks that businesses are having to contend with.

So far this year, the 2024 electoral supercycle and the ongoing economic and political impacts of the wars in Ukraine and Gaza have been the major themes underpinning the global risk environment. But with more crunch elections to come, and no clear path to peace in either conflict, the world remains in a period of heightened uncertainty.

This means it is more important than ever for companies to monitor and anticipate the risks impacting the resilience of their operations, supply chains and investments. This article highlights some of the major trends and signals emerging from our data, from rising political fragmentation in Europe to the potential for damaging unrest in major economies worldwide.

Political fragmentation impacting European governments

A highly charged political atmosphere and heightened civil unrest have underlined political polarisation in Western Europe. This has driven scores on our Challenges to Government Authority Index downward, creating policy uncertainty and regulatory challenges for businesses operating in the region.

Unsurprisingly, France is the biggest mover. President Macron’s surprise call for a snap election was informed by the far right’s strong performance in the European elections and the likelihood of his government losing confidence in the National Assembly. In the end, little clarity has emerged from the election, and a fractious minority coalition is our expected outcome for ongoing negotiations.

We expect policy gridlock to continue until new legislative elections are held, increasing uncertainty for businesses and depressing investment. Plans to cut France’s deficit and expand renewable energy investment are notably on hold and passing them through a divided parliament will be difficult.

Spain has also seen a significant increase in risk on the index. Prime Minister Pedro Sanchez’s administration was in effective policy paralysis earlier this year, as a controversial Catalan amnesty bill and regional elections in Catalonia prompted protests and complicated negotiations within Sanchez’s 10-party coalition, as well as the rollover of last year’s budget. With the passage of the amnesty bill, relations within the coalition are likely to normalise. The legislative gridlock should ease, allowing for the passage of a 2025 budget.

Elsewhere, budgets are likely to be the key political flashpoint for European government instability in the second half of 2024, as EU fiscal rules kick back in after their pandemic-era suspension. France will be placed in the EU Excessive Deficit Procedure later this year, requiring a fiscal stabilisation plan and further complicating government formation.

The increasing fragmentation of European politics makes budget negotiations more perilous for the rising number of coalition and minority governments. Negotiations over the budget have been the key dividing line in Germany’s coalition government, although the rising unpopularity of its constituent parties provides an incentive to come to an agreement. Unstable governments and tighter budgets are likely to depress business sentiment in general in Europe over the next six months.

Major economies facing heightened SRCC risks in year ahead

A major factor underpinning the rise in government instability – both in Europe and further afield – has been public discontent with the political status quo, driven in part by rising living costs and mounting inequality. These same socioeconomic grievances threaten to trigger bouts of damaging unrest in the year ahead, according to data from our SRCC (strikes, riots and civil commotion) Predictive Model, which forecasts the risk of severe protests that could result in insured losses.

Indeed, while 34 countries have registered a significant decrease in SRCC risks since the dataset launched last year (compared to 19 that saw a significant increase), 63 remain within the two highest risk categories of the model.

Crucially, the model shows that major developed economies and key emerging markets feature among the highest risk countries globally. South Africa, Brazil, the US, India, Bangladesh and France all fall within the list of the 10 highest risk jurisdictions. Among the world’s 10 largest economies, only Japan is assessed as low risk for the year ahead.

While the drivers of risk vary between countries, the model highlights several common factors that increase the risk of insured losses stemming from strikes, riots and civil commotion. Alongside recent protest size, income inequality and unemployment stand out, with a majority of the highest risk countries performing poorly on a combination of these indicators.

“There are clear warning signs that SRCC risks are set to remain higher for longer, and the likelihood of major episodes of unrest in the world’s cities over the next 12 months is still uncomfortably high,” says Torbjorn Soltvedt, our Associate Director of Insurance Insight. “Although global inflation is easing, elevated levels of socioeconomic pressure will provide fertile ground for civil unrest in many countries. For specialist insurers with experience underwriting SRCC risks, the prudent way forward will be to plan for a future where damaging civil unrest events occur more frequently.”

CSDDD marks new HREDD milestone

The EU’s formal adoption of the Corporate Sustainability Due Diligence Directive (CSDDD) in May served as another reminder of the growing convergence of human rights and environmental due diligence (HREDD) obligations.

The directive requires companies operating in the EU to address environmental concerns such as air and water pollution alongside human rights impacts within their operations and supply chains.

Data from our Water Pollution Index indicates that doing so will be no easy task: 26 countries, home to around 4.5bn people, fall within the highest risk category of the index, including Spain (ranked 1st and highest risk), India (2nd), Turkey (7th), Italy (9th), Vietnam (14th) and Mexico (16th).

Electric utilities, mining and oil and gas rank as the highest risk sectors for the issue within our Industry Risk Dataset, while agriculture also receives a high risk rating. Indeed, Spain’s position at the top of the rankings largely stems from nitrate pollution linked to farming, which has impacted access to tap water and tainted local ecosystems in recent years, triggering a recent fine from the European Court of Justice.

“In a world where second-order impacts from climate change and environmental harm increasingly hinder the enjoyment of human rights, it has become impossible to consider these risks independently from one another,” notes Sustainable Procurement and Human Rights Consultant Capucine May. “The interconnectedness of these issues is now being formalised into regulation, meaning that companies need to adopt a multi-disciplinary approach to thinking about their compliance, resilience and sustainability agendas.”

Risk data key to navigating increasingly uncertain world

As political instability, economic uncertainty and human rights and environmental concerns continue to intersect, businesses must remain vigilant. Those that integrate cutting-edge geospatial data and analytics stand the best chance of minimising their exposure to both short and long term threats in an increasingly complex global risk landscape.

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Inflection Points: Risks to watch 2024-Q3

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Jess Middleton

Senior Data Journalist

Laurent Balt

Analyst, Europe
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Inflection Points: Risks to watch 2024-Q3

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Webinar

Inflection Points: Risks to watch 2024-Q3

Hear about the rise in global political risk, unrest in the world’s major economies, and the growing importance of environmental concerns within the due diligence landscape.