European elections bring worries to markets

The radical revolt in the European Union, after a swing to populist and far-right parties the European Parliamentary elections, poses a threat to mainstream politicians.

| 10 min read

European Commission President Ursula von der Leyen suspended her usual bureaucratic and inclusive speech after the European elections to say she wanted to keep the extreme right and extreme left out of European government. She plans to forge a wider coalition of the centre and the moderate pro-EU-right and left-wing traditional parties.

The truth is years of indifferent economic performance and concerns about everything from migration to housing and from prices to employment has damaged many of the traditional centre right and centre left parties on the continent. In the last century, many countries had dominant Christian Democrat and Social Democrat alternatives that alternated in government depending on their relative success.

This century, many of them have been displaced or crippled by the arrival of populist parties of left and right that have had their moments of glory in power. Some of them, like Syriza in Greece and Five Star in Italy have, in their turn, been humbled by events and by bad choices. In the Netherlands, the Freedom Party was catapulted into first place in the general election last autumn. Now, in the European elections, the AFD in Germany, National Rally in France and the Brothers in Italy have all done well on anti-migrant, anti-establishment policies.

Who leads the EU?

In this latest European election, the EU is still in search of a true elected leader. In the distant days of Angela Merkel, she was widely accepted as the globally known face of the EU as well as of Germany. The EU turned to her when they needed help ironing out internal disagreements or forging a new consensus.

Chancellor Scholz has not established the same importance, and has faced a challenge from President Macron, who has taken more of a lead especially on defence and foreign affairs. The election has undermined both Scholz, whose party came third, and Macron, who watched as National Rally polled more than twice his result. The one main leader who fared well was Prime Minister Giorgia Meloni in Italy, whose Brothers party beat the Democratic party, with her ally Lega coming third.

Ms Meloni has proved to be an interesting case of a radical anti-migrant campaigner who has turned into a wilier European politician capable of making compromises with an establishment that dislikes what she campaigned for. It will be difficult to sustain the faith of her supporters whilst making too many compromises, so she will need to use her increased influence to be seen to be moving policy in the way her voters want.

Syriza in Greece and Five Star in Italy found that difficult when they were in office. Meanwhile, the relationship between Ms Meloni and Mrs von der Leyen becomes more important, assuming the latter constructs her coalition of support to be renewed in office. Mrs Meloni will need Mrs von der Leyen to add greater control of borders and faster growth to her plans.

President Macron’s gamble

To try to reassert his authority, President Macron – with three more years of his personal mandate to run – is chancing all on a hasty general election to try to reshape parliament more in his own image. He needs a Parliament that will vote through his laws and budgets and needs to demonstrate he has not lost control of France to National Rally. The 28-year-old Leader of National Rally, Jordan Bardella, who presided over the electoral success last weekend, called for an early election and Mr Macron accepted the challenge.

National Rally thinks it can build on its European Parliament success. Its aim is to use more moderate language and proposals to win over more voters. President Macron will be painting them as extremists and seeking to mobilise any voting alliance against them in the second-round runs-offs that characterise French elections. A French MP must be voted in by more than 50% of the electorate, so in the second round only the two top-placed candidates face off.

Should President Macron win a stronger position in the parliament with a minority presence only for National Rally, he would reassert his authority in the EU as the slayer of populism. If he fails to win a majority in the new parliament, he will continue to struggle on the domestic agenda and will be seen as a weaker figure. He retains the presidential powers over the armed forces and foreign policy, which sustain some of his overseas actions and statements. Winning a majority will be very difficult and implies a major turnaround compared to the European election results.

The first polls for the surprise French general election shows National Rally at around 34% with a possible 250 seats, the left alliance on 22% with 130 seats and President Macron’s centre alliance on 19% with a possible 140 seats. There are 577 seats in total, so 289 are needed for a majority. The Republicans, the old conservative party, with its allies are struggling on 9% and 47 seats. These figures would mean another defeat for the president, who has work to do to construct anti-National-Rally alliances in constituencies.

Forecasting a two-round election is more complex than a first-past-the-post system. President Macron has presumably gambled on whoever is the second placed candidate to National Rally attracting a majority of votes in the second-round run-off and calculated that National Rally will not win many seats outright with more than 50% on the first round. We need to see how the first few days of the argument and mood in France develop.

National Rally is talking to some Republicans and Reconquete and trying to reach out. The left has formed an alliance to oppose National Rally, bringing together Insoumise, the Communists, Socialists and Ecologists.

The decline of the German government

There have been calls in Germany for an early election this year instead of next. The crushing defeat, with Mr Scholz’s SDP only polling 14% in the European election, may lead to calls for confidence votes to test out if he still has the full support of the Greens and Free Democrats in his coalition. Given their poor showing in the elections, they are likely to prop Scholz up for a bit longer, though failure delivers its own disagreements and pressures to split.

The CDU is riding high in western Germany, and the AFD is doing well in the east. The AFD was driven out of the Identity and Democracy (I&D) Grouping in May over things said by Maximilian Krah, their lead candidate. He has now resigned. A way may now be found to allow the AFD to rejoin the I&D grouping.

Mrs Merkel’s strong position depended on the then success of the German economy, combining low inflation with good growth and strong public finances. Recent years have seen German inflation rise too high, to be followed by recession.

Chancellor Scholz has allowed spending and borrowing to trend upwards. Germany no longer seems special, with major structural issues surrounding industry, based on imported gas and the opposition to the internal combustion engine affecting the motor industry. Germany has lost some of its right to instruct others on how to conduct their economic policies, and the government has lost the sympathy of many voters over the poor economic performance.

It will be difficult for Mr Scholz to reinstate himself as the effective political leader of the EU. He needs to rebuild economic success and look to his coalition as he works out a way to rebuild his popularity in the long run up to an election in autumn 2025.

Some want to turn internal borders with other EU states neighbouring their country into defensible borders.

There are several big divides over policy between populists and mainstream pro-EU parties. Immigration is one of the biggest splits, where the populists tend to want countries to issue far fewer visas, and to send more people back to where they came from. They oppose ideas of burden sharing, getting more EU countries to take their share of total migrant arrivals. They often favour imposing national frontiers and taking a more active part in policing the border. Some want to turn internal borders with other EU states neighbouring their country into defensible borders.

The populists often oppose the consequences of EU austerity policies favouring fiscal expansion to help promote additional growth. They can sometimes be bought off by the EU offering generous funding to their countries, as the EU did towards Italy prior to the election of Mrs Meloni. They often promote subsidies, tax advantages and rules that favour domestic business activity and investment.

The Greens lost seats in the election and are a bit more on the defensive as a result. The EU will be under some pressure to abate the pace of its movement towards ‘net zero’ and the consequences for particular products and industry.

There is growing frustration at the extent of China’s control over markets for electric vehicles, batteries, wind turbines and solar panels.

Investors need to watch the French elections, which will determine whether President Macron can re-establish his power or whether there will be a fractious government in Paris, with president and prime minister at odds. The EU will seek to blunt and accommodate some of the demands of the challenger parties. All eyes will then turn to the defining battle of Trump against Biden in the US.

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European elections bring worries to markets

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