European Elections: Centrists Struggle but No Breakthrough for the Far Right
The European Parliament elections on May 23 produced damaging results in varying degrees for both the European Parliament and the main parties in the UK. Bethany Payne, a Global Bond Portfolio Manager, explains the main points and provides a brief assessment of the impact on markets.
- Both pro-EU center-left and center-right parties in the European Parliament lost ground and are no longer able to jointly form a “grand coalition.”
- Protest votes in the UK led to a catastrophic result for both the Labour and Conservative parties, which lost seats to Nigel Farage’s Brexit Party and the Liberal Democrats.
- While it may be a quiet week ahead on the data front, risk markets may become spooked by emboldened Brexiteer candidates starting their internal campaign for Conservative leadership in the UK, as well as by the potential for renewed tensions between the EU and Italy.
Voters typically punish the ruling party at the European Parliament elections, and this year proved no different. Both center-left and center-right parties lost ground and are no longer able to jointly form a “grand coalition.” Most of the main parties were perhaps relieved that the outcome was not as bad as some predicted, and the euro was stable as the overall result was close to forecasts. Protest votes in the UK, however, led to a catastrophic result for the Labour and Conservative parties. Both lost seats to Nigel Farage’s Brexit Party and the Liberal Democrats, who had concentrated their campaigns on whether the UK should leave or remain in the European Union (EU).
This change in voter attitude – away from the ambiguous Brexit policies of the Labour Party and the failure to deliver Brexit by the Conservative Party – indicates a desire for leaders who will guarantee results. The Conservative leadership contest demonstrates this with candidates who – despite understanding the risk of bringing down their party – are running on hard Brexit campaigns. The Labour Party has also moved toward supporting a second referendum in a bid to gain back supporters, albeit at the cost of their leave-supporting voters. The British pound extended losses as the risk of a messier “no-deal” Brexit increased.
What Are the Implications?
A more fragmented European Parliament will likely make agenda and policy setting harder and Brexit negotiations less clear. It would also make the appointment of the Commission President a lengthier and less straightforward process. While Manfred Weber, the lead candidate of the center-right European People’s Party,1 is favored to become Commission President, the appointment process has been denounced by French President Emmanuel Macron.
Thus, at a time when there is need for a greater coalition of parties to form a majority, and a stronger need to coalesce around a leader who can piece together institutions and be a unifying figure, the choice of Commission President will be highly divisive. For now, markets will wait for groups to form ahead of the leaders’ summit on June 20-21 and see to whom Europe’s top jobs fall.
The next few days should be relatively calm for financial markets, given a quiet week on the data front in the UK. However, risk markets may become spooked by emboldened Brexiteer candidates as they start their internal campaigns for Conservative Party leadership. In addition, markets will be focusing on the tension between the European Commission and Italy; according to Bloomberg headlines, the Commission is considering fining Italy $4 billion (approximately €3.5 billion) over ongoing debt issues.
1Founded in 1976, the European People’s Party (EPP) is a European political party with conservative and liberal conservative member parties. A transnational organization, it is composed of other political parties, not individuals.