As the de-globalisation movement gathers momentum, the basic assumption for all analysts should be that the political centre is dead. The “third way” as it was called, which drew in parties from Right and Left to a central consensus that pursued open borders economics is now political poison across the developed world as the losers of the movement, typically working classes, strike back via the polling booth.
The open question is which way will respective countries swing? The US has swung to the Right with an amalgam of policies that blend labour isolationism and corporate nationalism. The UK has swung to the Left, in an amalgam of labour nationalism and corporate isolationism. Both are headed towards the same spot via different routes with a focus on greater fiscal outlays to support the disenfranchised. Longer term both will struggle to deliver this as higher inflation and budgets deficits take their toll but in the short term the fiscal boost has triggered global reflation in markets.
The critical question for the global reflation now is which way will Europe swing? The Continent has a string of forthcoming elections that will pit these same political forces against one another, only it is much more vulnerable to an institutional break in continuity given its nascent political form. Thus the stakes for the deglobalisaton movement and global economy are much higher in Europe than elsewhere. If the polity swings Right it could end the European Union. If it swings Left then the union could accelerate integration. The stakes could not be higher.
The three elections that matter most are the French, German and, at some point, Italian polls.
First up is the French where the populist Right takes the form of Marine Le Pen whose National Front has been charging. She is now odds-on favourite to win the first round vote on 23 April 2017:
The second round on 7 May is much less certain. It is neck-and-neck who Le Pen will face. Either Francois Fillon on the old Right or Emmanuel Macron of the new Left. Le Pen trails both by a large margin but has been gaining swiftly:
Betting markets now have her trending very strongly:
If she gets in you can expect markets carnage as the euro becomes untenable. This is an end of cycle event in the making. However, if Macron is elected, markets will likely go completely the other way as a fiscal policy reversal becomes at least possible with closer European integration, though that will then swing on the German result. At least in the short term, the euro will rocket taking heat off the USD and European stocks and bonds will join the global reflation.
That brings us to the German election on 24 September. There we have contest between the old Centre-right party of Angela Merkel, the Christian Democratic Union (CDU), and the old but revitalised Centre-left party of Martin Schultz, the Social Democratic Party. It is very close:
Merkel is vulnerable given she occupies the very territory that has become political anathema. Without making any value judgement, it is also the case that her policies are driving the rise of radicalism at home via high immigration and security concerns, and abroad via the fiscal straight-jacket and reform agenda she has imposed on the EU periphery. Nonetheless, if she is re-elected markets will clearly sigh with relief.
Yet the Shultz agenda is a threat to Merkel. As a former President of the European Parliament and card-carrying integrationist he is no radical. But the closer fiscal ties across the union that he would bring – including via eurobonds driving a big shift to fiscal spending – are an antidote to rising radicalism right across the union as economic growth, employment and incomes would be materially stronger.
The most favourable outcome for markets would be a Macron/Schultz victory which would set up conditions for a major Franco/German detente and push for fiscal loosening. That scenario would see MB seriously consider going long Europe given its favourbale valuations and low currency.
Such an outcome would also help stabilise Italy which is the election wild card this year. The next general election is not scheduled until May next year but recent events could trigger an early poll:
Italy could become yet another European country to test the power of populists by holding a vote this year, joining Germany, France and the Netherlands. Though Italy’s next elections aren’t due until early 2018, several parties including the anti-establishment Five Star Movement are clamoring for an early contest. The resignation of Matteo Renzi as leader of the ruling Democratic Party (PD) on Feb. 19 added a further layer of instability to the government currently led by Paolo Gentiloni, a PD member and Renzi loyalist. If voted into power, a Five Star government might call a referendumto pull Italy out of the shared euro currency, putting the country’s fragile banking system and the European project at risk. The other parties are wrangling over election rules to make it harder for Five Star to get in.
Five Star is within striking distance of a majority but not 40%:
Still, if it were to win or form a coalition then again markets would tank as it threatened a referendum to withdraw from the currency.
There is no way of knowing yet whether Europe is going to swing Left or Right. Polls have done poorly in indicating big swings because of the embarrassment factor in voting for unorthodox parties. Then there are security issues to consider with possible further terrorism a factor, not to mention the impact of Donald Trump and Brexit on populist leanings and the European recovery. All we can say for sure is that change is likely!
There is one final election worth canvassing. The Netherlands goes to the polls on March 15. Geert Wilders’ far-Right PVV is leading but cannot form government because no other party will join him in coalition. In recent times his popularity has waned tough the trend is still up:
Does that tell you that the Right has peaked in Europe? I don’t know. I wouldn’t bet on it. Either way, markets are likely to read the Dutch result as a bellwether. If PVV polls strongly then the euro will be pressured and it may be enough to derail global stocks too.
Huge stakes across the Continent all year.