Wednesday, May 21, 2014
High importance but low interest - what to expect from the European elections
For financial markets, the direct impact from this week’s European elections should be limited. The indirect impact, however, should not be underestimated. Up to now, the interest for this week’s European elections remains very limited. Despite the fact that for the first time ever the biggest European parties each nominated a single front-runner to increase the ties with the voters (and Europe), the voter turnout will probably be lower than the 2009 all-time low of 43%. Since the first European elections in 1979, the importance and powers of the European Parliament has constantly increased, while at the same time voter turnout has plummeted. Back in 1979, the voter turnout was still 63%. Some commentators have argued that a further drop in the voter turnout could put the legitimacy of the European Union is at stake. At the same time, it has become an unpleasant tradition that European elections are often used as national protest votes. A closer look at the parties’ political manifestos shows that with the recent calm on financial markets and some improvement in peripheral countries, the economic crisis has not only disappeared from front page news but also seems to have lost importance to most political parties. Looking at the different party manifestos shows that on average the economic crisis is only the fourth or fifth important topic. Other topics like the environment or foreign policy often receive more attention. In short, the conservative parties propose a consolidation of the current crisis management, including the finalizing of the banking union. The Liberal Party has put forward more automatic sanction for the fiscal framework, while the Social-democrats are proposing the mutualizing of responsibilities in EMU but also an end to the Troika missions in its current set-up. The Green Party is still in favour of a debt redemption fund, Eurobonds and the separation of banks activities, while the left-wing socialists stand for the biggest u-turn in economic policies with debt forgiveness, an end to austerity and privatisation, direct government financing by the ECB and an end to the entire new fiscal framework. Obviously, in European elections, these manifestos and promises have to be taken with an even bigger pinch of salt than at national elections. First of all, the European Parliament has to confirm the next European Commission and its president but its influence on economic policies can be limited. Moreover, national party siblings do not necessarily subscribe to the European ideas of their same party family. This leads to a funny situation in which national party manifestos can differ from the European ones. From a financial market’s point of view, this week’s elections should have a first-round and a second-round impact. The first-round impact and markets’ main attention currently seems to focus on the results of the euro-sceptic parties at both the left- and right-wing political spectrum. Latest polls suggest that these parties altogether could take between 25% and 30% of the 751 European Parliament seats. Currently, it sometimes looks as if more attention is given to the smaller, extreme parties than to the others. In our view, it is also striking that political campaigns in Europe are often limited to whether to be in or out Europe or whether voters want more or less Europe than on details and policy options. Anyway, in our view, as long as euro-sceptic parties remain below or at the predicted 30% of all seats, the impact for markets and the European economy should be limited. Up to now, most euro-sceptic parties have not been able to develop a significant level of coordination, preventing them from having influence in actual policy decisions. Moreover, the remaining 70% of non-euro-sceptical parties will simply be forced to work closer together in the next mandate. In addition, let’s not forget that despite increased powers, the overall influence of the EP in the Brussels decision-making process is limited. While the first-round effects from this week’s election should be limited, the second-round effects could be more explosive. What are these second-round effects? In our view, these second-round effects are at least twofold. The first one could be an institutional clash. As often stressed during the election campaign, the next European Parliament will – for the first time ever – have to confirm the next president of the European Commission. This is why the big parties all nominated their own front-runner, who should then become the next Commission president. However, the Treaty text leaves some room for interpretation, stating that European governments nominate a candidate “taking into account the elections to the European Parliament”. This candidate will then be elected by European Parliament. Comments by some government leaders suggested that a compromise candidate should not be excluded, possibly leading to a clash between Parliament and the Council. The other second-round effect, and probably the biggest risk for the EU, markets and economic policies, will be indirect through the impact increasing populism has on domestic politics and, in turn, the position of governments towards Brussels. In this regards, the results in France, Italy and Greece will be very important as they could again derail national politics and policies, giving rise to renewed discussions and controversies about austerity, reforms and debt sustainability. All in all, in the near term, this week’s European elections should be a non-event for financial markets. However, the second-round and spill-over effects on national politics could bring back some shivers to Brussels and financial markets.