Thursday October 1, 10:09 AM
FACTBOX-Five risks to watch in Western Europe
By Peter Apps, Political Risk Correspondent
LONDON, Oct 1 (Reuters) - Ireland's Lisbon Treaty vote looks set to be the dominant political risk event of the coming month, but German, British, Greek and eastern European politics all have the potential to spin over into financial markets:
IRISH LISBON TREATY VOTE
Ireland's Oct. 2 referendum on the Lisbon Treaty could briefly impact markets, particularly the euro, eurozone debt and potentially credit default swaps markets.
A second 'no' vote from Ireland could at worst spark a crisis that could paralyse the European Union. Opinion polls point to a win for the 'yes' camp, but there are fears anti-government sentiment could make the vote tight .
Irish Finance Minister Brian Lenihan said this week some hedge funds which had bet unsuccessfully earlier in the year that Ireland would default on its sovereign debt, hoped to benefit from a 'no' vote in the CDS market.
Investors might take rejection of the Lisbon Treaty as reducing the enthusiasm of other EU states for supporting the country financially if needed to avoid defaulting on its debt.
A & (Paris: FR0000075160 - news) apos;yes' vote would shift attention to whether the Czech Republic and Poland would sign the treaty and whether British opposition leader David Cameron would try to block it with a referendum if he wins election next year .
GERMAN ELECTION AFTERMATH
Germany's Chancellor Angela Merkel may have secured the centre-right majority she wanted in the election but her battles look far from over.
She must thrash out policy compromises with the business-friendly Free Democrats (FDP), poised to return to government after 11 years in opposition. Reaching deals on tax and labour market policy, and agreeing steps to push down Germany's deficit, which is projected to rise to 6 percent of GDP next year, could be tough.
The FDP and its leader Guido Westerwelle want substantial tax cuts immediately, while Merkel would rather wait. The FDP wants to make it easier to fire workers, a no-go area for Merkel who has shifted her Christian Democrats (CDU) to the left.
The FDP has also been sceptical of Merkel's plans for Opel, the European unit of General Motors (NYSE: GM - news) which is due to be sold to Canadian group.
Meanwhile, the end of Merkel's 'grand coalition' with the Social Democrats (SPD) means she will face a more formidable left-leaning opposition in parliament.
For an analysis on potential policy clashes, click here . For all stories on the German election and aftermath, click here
BRITISH POLITICS
Investors have largely ignored British politics since 1997 as long as the Labour Party retained a commanding majority but are re-focusing on it in the run-up to the election Prime Minister Gordon Brown must call by June 2010.
Opinion polls have generally predicted a victory for the opposition Conservatives, but an outside chance remains Labour could close the gap leaving an inconclusive result.
That would be the worst possible outcome for investors and financial markets, who want Britain's next government to have a strong mandate to reduce a ballooning budget deficit that has prompted ratings agency Standard and Poor's to put the country on negative outlook.
The president of polling firm YouGov (LSE: GBB1VQ6H2.L - news) put the prospects of a Labour victory at 5 percent, a 'hung parliament' -- a parliament in which no one party has overall control -- at 30 percent and a Conservative victory at 65 percent.
Markets are focused on what action the two main parties would take to cut spending.
Shadow finance minister George Osborne said earlier this month the Conservatives plan a budget within weeks of a poll win. Conservatives have said they would ring-fence health and international development spending, but Osborne hinted the defence budget might not be exempt from cuts.
Investors will be watching the Conservative party conference next week in Manchester (MNCS.OB - news) for more clues.
Schools Secretary Ed Balls became the first Labour minister to identify cuts this month when he said he would target management jobs and teachers' pay
GREEK, IRISH POLITICS
Greece and Ireland remain the eurozone's weakest links and politics in both could potentially make reforms more difficult.
Greek Prime Minister Costas Karamanlis called a snap election for Oct. 4 for a fresh mandate to pursue reforms but polls suggest he will lose to the opposition PASOK socialists, whose programme is less austere but still includes cuts. Either outcome will be viewed as broadly market friendly.
But if neither side wins an outright majority, ushering in a second round of polling, reforms could be further delayed, building up economic strains and raising the prospect that Europe's richer economies might have to offer support. For full coverage of the Greek election, click here:.
Ireland is due to hold an election in 2012 but Prime Minister Brian Cowen's tiny governing majority must overcome multiple challenges to get that far.
Junior coalition partner the Green Party has told party members it will walk out if a revised programme for government is not passed at a special convention next month. A 'no' vote on the Lisbon Treaty could prompt a new election.
Even if Cowen survives, a budget vote before Christmas could be his undoing. As in Greece, markets will be happy if any new government has enough of a mandate to pursue reform but another fragile coalition might make that difficult.
EASTERN CONTAGION
Economic crisis in Eastern Europe may have eased somewhat since earlier this year thanks to a global recovery in risk appetite, but the region continues to pose risks to its richer western neighbours.
Many countries have been left dependent on financial support from the International Monetary Fund (IMF) and European Commission, and all need to make painful budget adjustments. But in several of the countries worst affected including Latvia, Hungary and Romania, passing those austerity measures is rendered much more difficult by local political factors.
Latvia -- which has seen one government collapse as a result of the financial crisis -- saw its parliament reject a plan to hike property tax earlier this month, the latest sign of coalition tensions that are frustrating some reforms demanded by the IMF.
Romania's ruling coalition is under pressure, raising questions over its ability to meet IMF loan terms .
Hungary's minority government has navigated the country from the brink of economic collapse but faces near certain defeat in an election next year, bringing new uncertainty that could threaten an IMF package.
Delayed elections in the Czech Republic did not stop the government approving sharp cuts in a 2010 budget, but analysts fear they could put off other necessary reforms.
Any renewed crisis in Eastern Europe could spillover into the West through banking sector contagion and the need for the EU to bail out its emerging economies to prevent wider crisis.
For stories from this week's Reuters Central Europe investment Summit, click here. Keywords: EUROPE RISKS/
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