Some Thoughts on the European Parliamentary Elections

Voting for the European Parliament begins this Thursday and continues through Sunday. While these elections have little direct impact on fiscal and monetary policy, they will nevertheless be a referendum on the EU itself. In turn, the results will have significant implications for domestic politics and policies.

POLITICAL OUTLOOK

The rise of populism global is undeniable. While very few populists have succeeded in winning a national election, many of the populist parties have been able to drag the traditional parties to the right by threatening to siphon voters away from them. The nexus of this resurgent populism is currently in Europe, which is why the upcoming elections for the European Parliament has taken on greater significance.

Voters in each country will vote for their own national parties. In turn, those national parties will be grouped together at the pan-European level. Members of the European Parliament (MEPs) are organized into eight parliamentary groups. The two biggest are 1) the center-right European People’s Party (EPP) and 2) the center-left Progressive Alliance of Socialists & Democrats (S&D).

In the last elections in 2014, these two main groups won 217 and 189 seats, respectively. Next in size is 3) the conservative euroskeptic group European Conservatives and Reformists (ECR) with 74 seats. Then comes 4) the center-left Alliance of Liberals and Democrats for Europe (ALDE) with 68 seats followed by 5) the far-left and communist European United Left-Nordic Green Left (GUE-NGL) with 52 seats. Then comes 6) the Greens/European Free Alliance with 51 seats.

We need to focus on how the far-right populist groups fare. These consist of 7) the pure euroskeptic group now called the Europe of Freedom and Direct Democracy (EFDD), led by UKIP’s Farage and M5S’ Borrelli with 45 seats and 8) the far-right nationalist group now called Europe of Nations and Freedoms (ENF), led by Marie Le Pen with 37 seats. There are 18 unaffiliated seats (so-called non-inscrits) in the European Parliament.

The number of populists and euroskeptics has risen steadily in recent years. In the 2009 European Parliamentary elections, these groups held 11% of the seats. In 2014, this figure rose to 20%. Polls suggest this could rise to around 23% this year. If any borderline parties such as Hungary’s Fidesz switch allegiances, then the populists could hold a commanding 25% of total seats in the 2019 European Parliament.

The UK presents an unusual problem. It was not planning to take part in these elections due to Brexit, but delays have complicated matters. 73 seats will be contested, and polls currently show Nigel Farage’s Brexit party leading with 30% of the vote. This comes at the expense of the Tories, who are in third place with 13% and behind Labor with 21%. While the planned Brexit on October 31 theoretically renders this vote moot, it will nevertheless have implications for potential early elections in the UK.

The other major issue that needs to be discussed is the government collapse in Austria. Vice Chancellor Strache has resigned after a tape was released of him offering lucrative government contracts to a person with alleged ties to a Russian oligarch in return for illegal contributions. This allowed Chancellor Kurz to call for new elections this fall, in the hopes of jettisoning Strache and his problematic Freedom Party from the government.

The Austrian affair serves as a stark reminder of the ties between many far-right European parties and Russia. Putin has long cultivated these ties as part of his efforts to destabilize the West. Italian Deputy Prime Minister Salvini is a big Putin supporter. So too is France’s Le Pen and the UK’s Farage. To quote one UK Tory, “What’s strange is how many of these nationalist movements seem to be in favor of Russia, not their own country.”

 

A BRIEF HISTORY LESSON

The European Parliament dates to 1952 but it started under a different guise. It began life as the Common Assembly of the European Coal and Steel Community (ECSC). The ECSC was itself a precursor of the European Union, created after WWII with member states Belgium, France, Italy, Luxembourg, and West Germany. Ostensibly, the organization sought to create a common market for coal and steel amongst its members to minimize the competition for natural resources.

The ECSC was the first step to regional integration. This integration was meant primarily to prevent further wars in Europe by increasing economic interdependence. The ECSC morphed into the European Economic Community (EEC) in 1957 with the passage of the Treaty of Rome. The Common Assembly was renamed then as the European Parliamentary Assembly, and again renamed as the current European Parliament in 1962.

The first phase of EEC expansion was attempted in 1961, when Denmark, Ireland, Norway, and the UK applied for membership. Due to resistance to UK membership from French President Charles de Gaulle, all four were all initially rejected but then resubmitted in 1967. By that time, Georges Pompidou had succeeded de Gaulle and so the French veto was dropped. After a protracted period of negotiations, Denmark, Ireland, and the UK joined the EEC on January 1, 1973. Direct elections to the European Parliament did not begin until 1979.

Expansion continued apace. Greece joined the EEC in 1981, followed by Spain and Portugal in 1986. In 1993, the EU was created by the Maastricht Treaty. The next expansion was 1995, when Austria, Finland, and Sweden joined the EU. 2004 saw the biggest enlargement, as the Eastern European nations of Czech Republic, Estonia, Cyprus Latvia, Lithuania, Hungary, Malta, Poland, Slovakia, and Slovenia were admitted. Now numbering 28, no member has ever left the EU. Until now.

 

INVESTMENT OUTLOOK

The makeup of the European Parliament itself has no direct implications for either fiscal or monetary policies. The former is determined by the national governments, while the latter is set by the ECB. Yes, the EU itself has a budget. However, at around $140 bln, the EU budget is smaller than the budgets of Austria or Belgium and makes up only 2% of the combined national budgets of all 28 members.

Instead, this week’s elections should give some insight into the next major elections across Western Europe. From that, we can infer some potential investment themes. Belgium holds general elections May 26, followed by Denmark June 17. Austria will likely hold snap elections in September, though no date has been set yet. While elections are not due in the UK until 2022, the current muddle cannot continue. Similarly, there are rumblings that the League’s Salvini may try to trigger fresh elections if the European Parliamentary results show his support rising.

We will discuss these national themes next week after the results of the European Parliamentary elections are known.