Eurozone Power Plays

Story Highlights:

• Center-right setbacks in French and German local elections may portend a left lean in those countries’ 2012 and 2013 presidential elections.
• Portugal and Spain’s governments are under fire, with center-right opposition resurging.
• It’s too soon to tell whether the region will see any significant ideological shifts.
• Some countries may change direction, but overall gridlock should increase, limiting legislative risk.

On Saturday, a great international contest was settled: India won cricket’s World Cup. Less certain, however, are ongoing European political contests. Last decade, the center-right scored victories in France, Germany, and Italy, but resurgent opposition suggests this may change. Yet a sweeping loss for free market ideals seems unlikely—a Continental survey suggests a political tie is the safer bet. But whether left to right or right to left, the net result is more gridlock in 2011.

Major legislation is, at its roots, typically redistribution of money, rights, etc. The losers’ pain is often stronger than the winners’ enjoyment, so when risk of major legislation rises, gloominess increases, potentially impacting stocks negatively. Abating major legislative risk can drive shares up—and political gridlock is rising globally.

Take Germany. The general election isn’t until 2013, but last week’s local elections underscored Chancellor Angela Merkel’s weakening foothold as she lost a key state and a coalition partner to a Green Party breakout. No shock there—last week’s vote (which occurred in the wake of Japan’s devastating earthquake, tsunami, and damaged nuclear plant) hinged on swelling anti-nuclear sentiment, and the Greens out-pandered Merkel. Yet 2013 likely won’t be a referendum on nuclear, making buzz over a Social Democrat/Green coalition premature. Besides, given the fractured vote, any ideological unity seems unlikely. For now, local results increase the likelihood of German gridlock.

Meanwhile in France, Socialists took several council seats from Nicolas Sarkozy’s United Popular Movement (UMP). The far right’s support also increased, potentially splitting the conservative vote next year, further enabling the left. Though 2012’s presidential election is still a long way off and won’t impact stocks this year, Sarkozy’s party’s slipping national grasp is impactful today.

Italy’s Silvio Berlusconi doesn’t face elections until 2013. Amazingly, even Teflon Silvio is finally losing popularity and, hence, power. Yet his cult of personality and the lack of a strong opposition may keep him in office—assuming court challenges fail. Either way, courtroom drama over unseemly allegations of philandering won’t help him pass major legislation.

Spain’s Socialist Party Prime Minister José Zapatero also garnered headlines Monday, announcing he won’t seek reelection in 2012. Hardly surprising given his low approval ratings—and Spain’s 20.5% unemployment made a loss almost certain. Like Berlusconi, falling poll numbers make passing anything material tough.

Europe’s most timely political drama is in Portugal. After Prime Minister José Sócrates’ resignation following a failed attempt at austerity measures, Portugal called a snap election for June 5^th. Though the center-right polls highest in Portugal, disparate coalition partners render gridlock likely there too. One issue gridlock won’t change: To get bailout money, whichever hodge-podge coalition coalesces must agree to austerity cuts. Beyond that, our guess is most major legislation dies in committee.

With two major parties and set election schedules, US politics can seem more predictable (in some ways) than European politics. But politics are the same globally—increased blustering leads to less actual doing. Political bodies on both sides of the Atlantic have gridlock in common, a powerful driver that can help buoy stocks in 2011.