Politics always has the potential to unsettle and unnerve markets, even if it’s just temporarily. 2016 saw ‘Brexit’ and Trump, and into 2017 populist and nationalist political forces are seemingly on the rise everywhere.
Three large European Union/Eurozone economies hold elections in 2017: the Netherlands, France and Germany. Key interest in these elections will be how well the Euro-sceptic, anti-economic integration, anti-immigration, anti-establishment parties fare. Over the next few weeks and months market sentiment will wax and wane with the performance of these parties in the polls. However, our view is the probability of an exit of the European Union (EU) by either the Netherlands or France is low, and the risk is even lower in Germany.
First cab off the rank is the Netherlands where a lower house election of the Dutch Parliament will take place on March 15. The lower house is elected on a proportional basis with the parliament highly fragmented; eleven parties are currently represented. The current Government is a coalition of People’s Party for Freedom and Democracy (centre-right) and the Labour Party (centre-left), which together hold 79 seats in the 150 seat parliament.
Market nervousness is centred on the recent strong polling of the populist Euro-sceptic, anti-immigration Party for Freedom (Partij voor de Vrijheid or PVV). PVV is currently leading the polls, but given the fragmented nature of the political landscape, they only have 20% support. So while PVV may achieve plurality in the next parliament, they would be unlikely to form the Government as most parties of the centre have ruled out working with them.
In France, Marine Le Pen the leader of the anti-EU National Front (FN) is leading in polls with around 25% support. The leader of the centre-right Republicans Francois Fillon and En Marche! leader Emmanuel Macron are both polling around 20%. Le Pen is therefore the current favourite to take out the first round (April 23rd) and, assuming no clear winner emerges, go up against either Fillon or Macron in the second round (May 7th). Current polls have both as clear favourites over Le Pen in a head-to-head contest.
Both Fillon and Macron support continued membership of the EU. Should market fears be realised and Le Pen assume the Presidency, she cannot unilaterally decide to take France out of the EU. That would require an amendment to the French constitution, and that requires a majority in both the lower house (National Assembly) and the upper house (Senate). This would then be followed by a public referendum. However, if the amendment achieves 60% support in both houses, the public referendum is not required.
That being the case, it is not only the Presidential elections that matters if you’re worried about ‘Frexit’ but also National Assembly elections in June. While FN seems likely to pick up more than its current two seats in the 577 seat legislature, it is expected to fall well short of a majority. Half of the Senate comes up for election in September with FN also unlikely to secure a majority in the upper house. In fact, they would have to win all the seats on offer for that to happen.
In Germany, lower house (Bundestag) elections are scheduled for September 24th. Germany is currently led in a ‘grand coalition’ between the Christian Democrats (CDU) and the Social Democrats (SPD). Current Chancellor Angela Merkel is the CDU leader.
The Euro-sceptic Alternative for Germany (Alternative fur Deutschland or AfD) is polling better than the 5% of the vote it achieved in 2013, though still only around 10-15%. CDU and SPD are both polling around 30% each and seem likely to form the nexus of the next government in a continuation of the current coalition.
The risk for the EU and markets in that scenario is the CDU does not achieve plurality and that SPD becomes the bigger party. In that case, Merkel, arguably the person who has single-handedly held the Eurozone together, may no longer be the German Chancellor. That job could fall to Martin Schulz. Schulz is equally capable and a former EU President, though a Merkel exit would still be of concern for markets.
Other coalition scenarios are possible, including CDU, the Greens and the Free Democrats with Merkel as leader, or alternatively SPD, the Greens and the Left party with the SPD’s Schulz as leader. Both arrangements would see Germany remain in the EU.
Europe has not been immune from the rising tide of nationalistic populism, and these elections will be a critical test of the strength of that sentiment. Right here, right now the risks of ‘Nexit’, ‘Frexit’ and ‘Gexit’ appear low. But as we said all of last year, a week is a long time in politics and anything can happen. Watch this space.
By Bevan Graham, Chief Economist, AMP Capital NZ
As Chief Economist Bevan undertakes global economic research as an input into our Dynamic Asset Allocation process.
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