How will European Elections affect the markets?
6 JUN, 2024
By Jose Luis Palmer from RankiaPro Europe
The European elections will be held on Sunday 9 June. Citizens of all European Union countries will cast their votes to elect representatives to the European Parliament for the next 5 years. A total of 720 MEPs will be elected to represent the nearly 450 million inhabitants of the EU.
The outcome of these elections will determine the political, economic and social route of the EU for the next lustrum. In the face of an extremely volatile macroeconomic environment, geopolitical tensions and a changing trend regarding supply chains and trade globalisation, the outcome of these elections will have a direct impact on markets.
As we eagerly await the election results, we bring you the perspectives handled by professionals in the asset management industry.
Division within the far right parties
Hugo Le Damany, AXA Investment Managers Economist
In a few words, we do not think European elections, scheduled for 8-9 June, are a major event for financial markets. We continue to believe that economic direction and priorities are set by the Commission or the European Council. By contrast, the Parliament enacts laws and can influence the agenda.
The European People’s Party is currently leading the polls (23.6%) ahead of the Socialist and Democrats (20%). At this stage, a pro-EU majority could be formed with Renew (10.6%) and possibly the Greens for key policies. However, this would not be a smooth process as these parties are opposed on certain topics, while the frontier between centre-right and far right is now more porous. Currently, Identity and Democracy and the European Conservatives and Reformists stand at 9.6% and 10.4% respectively but this takes into accounts the ID decision to suspend German AfD which make a potential loss of 15 seats.
That also highlights the division within the far right parties. In that vein, despite not being far from one-third of total votes, it seems complicated to see a united far right that could collectively block some EU procedures (blocking minority rule).
But beyond the difficulty in passing legislation, we should admit they should have more leeway and support to influence the strategic agenda and/or delay implementation of ongoing policies (i.e., climate).
Whatever the results, key policy priorities are likely to be regaining competitiveness, particularly in energy prices and counter Chinese/US subsidies and green deal implementation. The next mandate may also extend the deadline for NGEU spending (2026) and could seek to finalise capital market and banking union at the EU level.
Winds of change: EU elections could result in its first center-right coalition
John Polinski, Vice President, Portfolio Manager, International Fixed Income Group, Federated Hermes
The 2024 European Parliament elections taking place June 6-9 likely will be a continuation of the shift to the right seen in recent domestic elections in the Netherlands and Italy. For the past five years, the EU has been governed by a majority formed by a coalition of three groups: the center-right European People's Party (EPP), the center-left Socialists & Democrats, and the liberal Renew Europe. It looks increasingly probable that Christian democrats, conservatives and populists from the European Conservatives & Reformists (ECR) and the Identity & Democracy (ID) parties could partner with the EPP to create the first center-right coalition in EU history.
A shift to the right would have significant policy implications, particularly on environmental and energy issues. A euro-skeptic coalition likely would oppose ambitious actions to address climate change and undermine the EU’s Green Deal framework. The government is scheduled to set targets and measures through 2030 on how the bloc reaches climate neutrality by 2050. The right is proposing far less stringent environmental rules, especially as they pertain to agricultural policy and the combustion-engine moratorium in 2035. Migration and asylum also are likely to adopt a more restrictive tone and provide member states with leeway to limit refugee allocations. The shift could dampen the left’s call for debt pooling and increase support for spending cuts—if not austerity measures—to reduce debt levels reached during the pandemic.
While there is consensus on boosting defense spending, questions remain on how to raise the funds and the degree of integration. As it stands, the right is divided on this issue. Members of the ID are solidly against integration, while the ECR favors a broader approach, including the creation of an EU army.
While the almost-certain increase of the center-right’s power—even an eclipse of the Socialists and Democrats party—would have concrete policy ramifications, the European Council is likely to constrain it. This body is comprised of national leaders and officially sets the political direction of the European Commission, the executive branch. Three of the most influential countries in the EU—France, Germany, and Spain—have socialist or left-wing leaders, so in theory will check the right, ensuring complex dealmaking.
We believe a political shift to the right will have a muted effect on European fixed-income markets in the near term. But in the longer term, a shift could affect the markets significantly, especially for cross-border M&A and industrial, ESG and fiscal policy.
European elections: changing priorities
Nicolas Wylenzek, Macro Strategist. Wellington Management
The upcoming European elections could accelerate a shift in European Union (EU) policy priorities. Policymakers in the region are clearly refocusing their attention from energy transition to defence. Some key factors that need to be taken into account include:
- An easing of the energy crisis — While Europe is still pushing for energy independence, the acute stage of the energy availability and affordability crisis is over. This reduction in pressure makes the transition to renewables less urgent in the near term.
- The ongoing Ukraine conflict — A broadening of the war in Ukraine remains a distinct possibility. After years of underspending, Europe is significantly underprepared to defend itself or meaningfully support Ukraine without US assistance.
- A potential Trump 2.0 — A second Trump presidency would significantly increase pressure on European countries to increase military expenditure.
Areas where EU member states want to work more closely include better coordination and cooperation on large-scale development projects such as next-generation battle tanks and fighter jets, greater alignment of procurement efforts and strengthening Europe’s defence industry to reduce reliance on imports.
Given that defence spending remains a national issue, it remains to be seen whether ideas such as an EU defence commissioner or the common defence fund promoted by EU Commission President Ursula von der Leyen will become a reality. However, in my conversations with policymakers, I have noted a clear willingness to spend more. While the 2% NATO spending target was for a long time considered a ceiling, many EU countries are now treating it as a floor, with Germany and Eastern European countries in particular ramping up their defence budgets.
