Europe's election season

March 12, 2017

Election season could bring dark clouds to European economy.

Nationalism triumphed over globalisation last year – Brexit, Trump and even Pauline Hanson’s One Nation campaigns drew strength from growing public frustration with free-market policies and the unrestricted cross-border movement of people and trade.

And 2017 may offer more of the same, particularly in Europe where national elections in the Netherlands, France and Germany offer opportunities for voters to voice their dissent. Meanwhile the UK government is expected to begin the process of leaving the European Union (EU) within weeks.

Politics aside, the outlook for European economies looks stronger than it has for many years with the euro area forecast to grow at 1.6% in 2017 and 1.8% in 2018. But of course, politics will have its say and it’s clear investors face heightened uncertainty in the months ahead.  

Dutch Elections
The Netherlands was the first to vote, with elections held on 15 March.

Recent polls had predicted that the anti-EU Party for Freedom (PVV) would double their seats and become the largest party in the Dutch parliament.

SBS reports that early vote counts and exit polls show the predicted surge in support for the party’s leader Geert Wilders has failed to materialise.

The PVV, which campaigned on an anti-immigration platform and vowed to hold a referendum on the question of leaving the EU, is expected to win 19 seats.

Prime Minister Mark Rutte’s People's Party for Freedom and Democracy (VVD) has secured the most seats from the multi-party vote, claiming 31 to 32 seats.

A coalition will be needed to form a government and other major political parties have made it clear that they will not form a coalition with the PVV.

French Elections
The first round of French presidential election will be held on 23 April.

It is unlikely any single candidate will win a majority in the first round, but according to recent polls, the National Front’s Marine Le Pen is predicted to attract about a quarter of the vote.

Le Pen has promised voters a referendum on leaving the European Union if she is elected. It’s not clear whether she would have political support for a referendum or that an “exit” vote would succeed.

Betting markets currently show odds of 2:1 for Le Pen to win the largest vote in the first round and financial markets have become increasingly nervous as she continues to lead the polling.

Either François Fillon’s Republican Party or Emmanuel Macron’s En Marche! Party – both of which sit closer to the French political center – is expected to make it through to the second round of voting and face off against Le Pen on 7 May.

Recent polls suggest Le Pen would lose the popular vote to either Macron or Fillon, but up to 34% of voters remain undecided so, even if the polls are accurate, there is certainly potential for a Le Pen victory.

German Elections
Elections for Germany’s federal parliament, the Bundestag, are scheduled for 24 September.

There has been much talk in the press of the increasing popularity of the Alternative for Germany (AfD) party, which has campaigned on an anti-immigrant, euro-skeptic platform. Current polls suggest it may win 10% to 15% of the vote so the AfD may win seats in parliament for the first time.

Two of the largest parties – German Chancellor Angela Merkel’s Christian Democratic Union of Germany (CDU) and Christian Social Union in Bavaria (CSU) – have a long-standing political alliance.

In the last election, the CDU/CSU secured 42% of the vote and formed a grand coalition with the main opposition party, the Social Democratic Party for Germany (SPD), to secure the required majority.

It is unlikely that the AfD will feature in any coalition government, but the sentiment change associated with the party gaining a larger proportion of the vote may ultimately influence policy.

Implications for investors
It’s difficult and dangerous to make confident assertions about the outcomes and market implications of this year’s European elections.

While it is possible, even likely, that there’ll be no major rupture in European politics in 2017, it is also possible that a surprise in any one of these elections could act as the catalyst for a euro area crisis.

The prospect of a departure from the common currency area of any one of its members would be far more damaging than the exit of the UK from the EU.

In Germany and the Netherlands, there will be a great deal of political noise but the euroskeptic parties are highly unlikely to win overall power.

The French election is another prospect altogether because Le Pen has a real chance at victory. She would likely seek to take France out of the EU, though it’s by no means certain she’d be able to do so without the support of Parliament. In fact, there are many potential barriers to a French EU exit.

But if it were to happen, a Frexit could trigger a crisis in the Eurozone and bring the long-term sustainability of the single currency and common market into question. The economic and market implications of such an event are hard to judge in advance, but the impact could be severe, with European assets and the euro likely to come under pressure.

Most commentators think Le Pen will lose, but the failure of the opinion polls to pick the outcome of either the Brexit vote or US presidential election, suggests the unexpected is entirely possible.

Investors should not to overreact either in advance or in the aftermath of political events. Instead, you should seek to ensure your risk exposures are consistent with your specific objectives and risk tolerance.

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