Active is: Navigating geopolitics

European election results provide relief – for now

27/05/2019
European elections Vote active

Summary

While the pro-European vote held up in many countries, the result will likely be a more fragmented European Parliament that may slow decision-making. Most challenging for European leaders could be the signs of increasingly polarised electorates.

Key takeaways

  • Support for mainstream pro-European parties has held up, with a significant overall surge in support for populist and Eurosceptic parties failing to materialise.
  • The European Parliament will likely end up more fragmented, with the smaller parties – of whatever political persuasion – having a greater influence in alliance-forming.
  • Most challenging for European leaders could be the signs that their national electorates are growing increasingly polarised.
  • A strong showing by Green parties reflects citizens’ increasing focus on climate-related issues and policy – providing a key pointer for ESG investors.
  • Looking ahead, sovereign spreads are likely to be the most sensitive to increased political uncertainty and event risk, including snap elections.

Early results from the European parliament elections suggest that mainstream pro-European parties have largely held their ground, as a significant overall surge in support for populist and Eurosceptic parties failed to materialise. The major centrist parties have, however, seen big losses as the liberals, Greens and populists gain ground. The substantial increase in the Green vote in a number of countries – reflecting the progress that Green parties have made in national and local government across Northern Europe – chimes with the greater importance placed on environmental issues.

The results come against the backdrop of the highest voter turnout since 1994, expected to exceed 50% – the first time that turnout has increased since European elections were first held in 1979. This outcome underscores the importance of the results and augurs well for the democratic strength and legitimacy of the European Parliament.

While mainstream parties remain the strongest force, the result could make for a more fragmented European Parliament where the smaller parties – of whatever political persuasion –have a greater influence. The traditional blocs, while likely still in the majority, will need to seek new alliances, and the smaller parties may play a critical role in this alliance-forming.

Increasing polarisation of view

The European Parliament, as co-legislator alongside the European Council – comprising heads of state or government of member states – has a decisive vote in around 90% of legislative proposals, including on single market issues and trade deals. It also formally elects the next EU Commission’s President, who will be nominated by the Council.

A more fragmented Parliament could make majority-based EU-level policymaking more complicated and less predictable, at a time when a strong and consistent stance is needed from the EU in areas such as trade.

This more complicated parliamentary dynamic will, however, be familiar to many European leaders who are experiencing greater polarisation among their own national electorates. Indeed, the European elections confirm the trend we have seen in recent general elections in countries such as France, Italy and Germany, with an added element of the politics of protest that the European elections can engender.

Political uncertainty not going away

The major takeaway? These results reflect the trend seen in recent national polls, underscoring that European electorates remain divided at a critical time for the region. After six years of continuing growth, the eurozone economy has shifted into a lower gear on account of softer external demand and some country- and sector-specific factors – including disruptions in the German car industry, the “gilets jaunes” protests in France and rising political uncertainty in Italy.

While GDP growth will come to rely almost entirely on domestic demand, the fundamental backdrop for private consumption and investment remains solid for the time being, with favourable labour market dynamics and financing conditions. That said, future progress is also reliant on a more stable political environment that is conducive to growth.

Many European leaders will be relieved that populist parties did not make deeper inroads; the anti-EU movement has not yet achieved the critical mass to cause real trouble. The results don’t, however, dispel the political uncertainty that has become pronounced in Europe. Country-specific political risks in member states such as Italy are already well flagged.

Shaping the future of Brexit

In the UK, the results came against the backdrop of the resignation of Prime Minister Theresa May and the imminent race to replace her as Conservative Party leader and Prime Minister. The new Brexit Party –which campaigned for a “hard” exit from the EU on World Trade Organisation terms – scored a notable victory, winning 32% of the vote and pushing the Conservatives into fifth place on just 9%. The results may increase the calls by Conservative Party leadership candidates to adopt a “no deal” stance on Brexit. That said, and underscoring the polarisation evident in the election results, the Liberal Democrats were the night’s other big winner, coming second with 20%. They campaigned unequivocally on a “stop Brexit” ticket; anti-Brexit parties polled a combined 40% of the vote.

More countries, including Greece, Austria, Portugal and Poland, will go to the polls in the coming weeks and months in what has already been a busy year for national elections. The warnings are clear: unless there is clear progress towards positive outcomes, the politics could sour towards more populist politicians in the years to come as the next election cycle approaches.

The shrinking of traditional platforms (centre-left and right) and the shift to both “European reformist” parties and populists shows that voters are urging a change of policy priorities at the EU level. First, political resistance against EU fiscal rules is growing, with populists calling for austerity policies to be abandoned. Some fiscal loosening in Europe is already underway and more should not be ruled out. Second, a focus on climate protection has been shown to mobilise young voters in particular.

Investment implications

  • The fact that pro-European parties remain the strongest force in the European Parliament should be a relief for financial markets. While EU policy-making doesn’t face quite the hurdles that a bigger populist insurgency would have created, political uncertainty hasn’t gone away.
  • These polls will help shape Brussels’ policy agenda for the next five years, including on EU budget and taxation, climate policy, migration policy and further moves towards European integration. They also pave the way for a changeover in top EU posts, such as Commission President, EU Council President and ECB President. The elections for these posts will be an early litmus test for whether we see functioning, cooperative institutions at an EU level.
  • The biggest immediate implications from the European elections could be for national politics, including the future Brexit process in the UK, and government formations in Spain and possibly Italy. For the latter, there is the risk of an early election and renewed budget clash with Brussels, with the EU Commission potentially sending a warning on the Italian budget as soon as 4 June 2019.
  • While country-specific risks are already well flagged, sovereign spreads are likely to be the most sensitive to increased political uncertainty and event risk, including snap elections.
  • With the Green vote showing that climate change and climate protection are firmly on the agenda, environmental, social and governance (ESG) investing may become a European brand for businesses globally.



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Active is: Anticipating what’s ahead

The ECB is a long way from normalising monetary policy

by Franck Dixmier | 03/06/2019
ECB monetary policy

Summary

Continued uncertainty means the ECB continues to put the normalisation of its monetary policy on hold. Any rate hikes remain a long way off, but the 6 June meeting will see the Bank present revised economic forecasts in light of the current low inflation environment.


Key takeaways

  • The European Central Bank (ECB) has entered a pause in its monetary policy normalisation, prompted by the uncertain economic outlook, a high-risk environment and a sharp fall in inflation expectations.
  • In this context, we do not expect any rate increases in 2019 or 2020.
  • The ECB must provide answers regarding the drop in inflation expectations, which have fallen to historically low levels.