3. Rise of extremist parties. They seem to be ascendant everywhere in Europe these days, on the right and on the left. In Greece, Syriza threatens the bailout while the neo-Nazi Golden Dawn received nearly 7 percent of the vote in May's elections. In Germany, the idiosyncratic Pirate Party has drawn a significant following. In France, Marine Le Pen's far-right National Front and Jean-Luc Mélenchon's Left Front are actually battling over the same voters, while in Italy, even corruption scandals and the resignation of its longtime leader, Umberto Bossi, hasn't stopped the virulently anti-immigrant Northern League from playing a role in Italian politics. And Geert Wilders's PVV has already caused one Dutch government to fall and continues to play an outsized role in the Netherlands.
Europe is not about to lurch dramatically left or right. But the rise of these and similar extreme parties pose two big problems -- one short-term and the other long-term. First, they drastically increase the difficulty of forming stable coalitions, which in the European periphery makes imposing structural reforms and fiscal discipline hard and in the core makes agreement on comprehensive solutions even harder. The parliamentary structure of most European governments provides these smaller parties with disproportionate influence, as they are needed to create majority coalitions. Second, the extreme parties, both left and right, tend to be populist and anti-immigrant. Europe's economic woes are already decreasing its attractiveness as a destination for immigrants; xenophobia only exacerbates this dynamic. But Europe desperately needs immigration to combat its declining demography and rejuvenate economic growth.
4. Merkel gets bold. Perhaps more than Greek elections or Spanish balance sheets, German domestic politics may be the single-most crucial factor in shaping the response to the crisis. With federal elections scheduled for autumn of next year, Chancellor Angela Merkel, her allies, and their challengers gauge every move and its impact on that vote -- and the regional and local ones in the interim. Merkel has stepped up to a leadership role that few would have predicted only a year ago. But her calm and deliberate leadership style is calculated to kick the can down the road while ensuring that she can deliver her party and the German people. Merkel may well move to support a more ambitious and robust response, especially around federalizing eurozone banking-sector governance, and garner support from center-left parties (the Social Democratic Party and the Greens) that would set herself up to take the helm of a grand coalition government following next year's elections, if she's unable to win outright.
But Merkel's current governing coalition includes her own Christian Democratic Union (CDU) and its partner, the Free Democratic Party (FDP) -- a far less popular party rapidly plummeting in the polls. The FDP remains staunchly opposed to any move that smacks of European fiscal union, and Merkel's CDU boasts a large contingent of skeptics as well. If she bucks her own party and the FDP, Merkel could potentially save Europe. But that would be a bold move from a chancellor who has rooted her effectiveness and popularity in incrementalism.