May 21, 2019 – On May 23-26, elections will be held across the 28-nation European Union (EU) for the 751-seat European Parliament (EP). Campaigning has been vigorous in recent weeks, particularly by right-wing Eurosceptic nationalist candidates. Nevertheless, we expect pro-EU centrist candidates to prevail and that the outcome will be favorable for Europe’s long-term investment climate.
Pro-EU Centrists will Likely Gain Majority of Seats
In EP elections, ideologically aligned parties across the 28 EU nations combine to form pan-EU parties. For example, center-right parties collectively form the European People’s Party.
Opinion polling (see table) suggests that the EP elections will produce a pro-EU centrist majority controlling 421 seats, 56% of the total. This majority would comprise members of three parties: the center-right European People’s Party (EPP), the centrist Alliance for Liberals and Democrats in Europe (ALDE), and the center-left Progressive Alliance of Socialists and Democrats (S&D).
Eurosceptic parties are likely to win 175 seats, about 23% of the total. There has been some concern that Eurosceptics might draw an even larger vote, given the rising popularity of the Italian anti-immigrant nationalist Matteo Salvini, the strong polling in the UK of Nigel Farage’s new Brexit Party, and pro-nationalist external influences such as Russia and Steve Bannon. Green/Left parties are likely to win 106 seats, about 14%.
Source: Politico.eu based on polling as of May 17, 2019.
EP Will Approve a New European Commission
The EP will approve a new slate of commissioners for the European Commission, including a new president to succeed Jean-Claude Juncker. Commissioners are the EU-level equivalent of government ministers, and the Commission President is the equivalent of a prime minister.
- The Commission drafts proposed laws and regulations (“directives”) which are then submitted to the EP for debate, approval, amendment, or rejection. For example, the Commission was instrumental in designing new institutions and tools to help resolve the 2011-2013 Eurozone sovereign debt crisis and to strengthen the EU’s firewalls against a future financial crisis. More recently, the Commission has coordinated the development of EU policy toward Brexit.
- The Commission is also responsible for managing EU trade policy, including trade relations with the United States.
Since the EPP is expected to win the most EP seats, it seems probable that its leader, Manfred Weber, of Germany’s Christian Social Union, will be approved as Commission President. However, Weber lacks experience in running a large bureaucracy, so it is possible that another candidate will be selected. There is speculation that IMF Managing Director Christine Lagarde or German Chancellor Angela Merkel might be nominated.
EP will Replace Many Members of the ECB Governing Council
The EP must also approve replacements for a majority of the members of the European Central Bank (ECB) Governing Council, including President Mario Draghi.
- Draghi is a hard act to follow. Appointed ECB President during the Eurozone debt crisis, “Super-Mario” was able to secure political support for expanding the ECB’s inflation-fighting mission to encompass quantitative easing (QE) and various financial backstop measures. In 2012, he famously proclaimed that “he would do whatever it takes,” a statement that did a lot to improve market sentiment. More recently, he has been carefully modulating the Euro Area’s exit from extraordinary accommodation.
- Draghi’s successor will likely be another Governing Council member, or someone from the bank’s advisory Executive Board. This would suggest continuity in ECB policymaking. One prominent candidate is Jens Weidmann, a Bundesbank representative on the Governing Council. There is some concern that Weidmann might too quickly roll back monetary accommodation.
- As discussions progress on new ECB candidates, we will keep you informed.
EP Election Results Can Influence National-level Politics
Sometimes, voters’ policy and candidate choices in the EP elections can influence national-level politics, any of which could also produce investment consequences:
- In Italy, should Matteo Salvini’s right-wing League register particularly strong performance in the EP elections, he may be tempted to end his fragile coalition with the leftist Five-Star party, and call for new general elections.
- In the UK, Prime Minister Theresa May might be able to cite a victory by the Brexit Party to leverage Conservative back-bencher support for her Withdrawal Agreement, which she is putting before Parliament for a fourth time on June 3.
- In France, politicians will look to the EP election results for signs of popular sympathy with the anti-austerity and protectionist aims of the “Yellow Vest” street protestors.
- In Germany, politicians will be looking to the EP election results to assess the strength of the right-wing anti-immigrant AFD party, as well as popular support for new leadership within the two leading establishment parties.
The European Parliament elections are expected to produce a stable, pro-EU, centrist majority likely to make rational selections for the president and commissioners of the European Commission, and for the president and governing council members of the European Central Bank. The EP should remain broadly supportive of the “federalist” EU project, which has produced long-term positive benefits for European and global investors. The EU-level results may produce some consequences for politics at the national level, particularly in the U.K. and Italy, which could prolong some existing uncertainty. While we have concerns about escalating tariffs and overall global growth, we have begun to see stabilization in European economic data, and we expect a positive outcome from the EP elections to help at the margin. At this time, portfolios are neutral equities, including the International Developed region, versus our strategic asset allocation.
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