Falling uncertainty gave stocks a tailwind in 2016 as investors moved past the Brexit referendum and US presidential election. By year end, persistent skepticism gave way to budding optimism, and the proverbial “animal spirits” stirred. This year, it should be continental Europe’s turn. France, Germany and the Netherlands all hold national elections, while Italy is expected to call snap elections as well. Many fear populist, non-traditional, anti-EU parties on both the far right and left are on the rise and will grab national power. Though these parties are gaining in polls and winning local elections, they still lack the political infrastructure to meaningfully impact policy or make the market’s most-feared scenarios—like another country’s exit from the EU or even the eurozone—a reality. Thus, when the “worst-case” scenario doesn’t come to pass, the likely result is relief.
European politics are factionalized and scattered. In the US, the two-party system dominates, with minor third party movements cropping up occasionally. But in the parliamentary system—used often in Europe and elsewhere around the globe—there is room for more parties and more platforms. Lately, parties with minority support have popped up across Europe, forcing fragile coalitions and muddying the legislature’s ability to take decisive policy action. This feature alone screams more gridlock than widely imagined, reducing legislative risks for stocks.
Italian Prime Minister Matteo Renzi resigned in December after his referendum on Senate reforms failed. His former Foreign Minister, Paolo Gentiloni, became caretaker prime minister, heading a technocratic government with a narrow mandate to reform the electoral process and address a handful of struggling banks. Renzi (who remains his party’s leader) has mooted calling snap elections in the spring or summer, and many fear the anti-euro Five Star Movement Party (M5S) could win and decide to take Italy out of the eurozone. Recent polls show M5S polling neck and neck with Renzi’s Democratic Party at ~28%. Both parties would struggle to form a stable government, let alone push through significant legislation. Furthermore, a recent poll indicates only ~15% of Italians would favor an exit from the eurozone. The worst-case and most-feared scenario remains a low-probability event.
French presidential elections will be held in April (with a likely second round in May), and little has changed in the race to replace François Hollande. Recent polls still favor the anti-EU Front National’s Marine Le Pen and center-right Republican candidate François Fillon emerging from the first round of votes, with Fillon winning the presidency in the second round by a substantial margin (64% to 36%). Even if an enormous scandal were to derail Fillon—he is currently doing damage control over questions surrounding his employment of his wife when he was a lawmaker—centrist candidate Emmanuel Macron would likely make it to the second round in his place. Macron is polling with a similarly wide lead versus Le Pen (65% to 35%). Le Pen likes to point to Brexit and Trump’s victory as a sign of hope for her candidacy, but both polled much better than she ever has so far.
Similar to France, there are scant new developments for German elections: Angela Merkel will run for a fourth term as Chancellor, with voters going to the polls on September 24. Merkel’s center-right coalition continues to lead in the polls (33%), with the center-left Social Democratic Party trailing (21%). The far-right anti-EU Alternative for Germany (AfD) remains well behind at 15%. Merkel’s popularity has taken a hit tied to terrorist attacks and the immigration crisis, yet she still remains by far the most popular politician in Germany.
Dutch voters head to the polls March 15 in parliamentary elections. Not unlike the larger countries in the eurozone, the Netherlands also has a far-right anti-EU party: The Party for Freedom, led by Geert Wilders, which currently leads polls. While that may sound alarming, his party is expected to win only 33 of parliament’s 150 seats, making coalition-building quite challenging. Forming a government strong enough to pull the Netherlands out of the EU is even more improbable, as several parties have already indicated a lack of willingness to partner with Wilders. Switzerland provides a good example of what the next Dutch government might look like. Their largest party in parliament, the far-right Swiss People’s Party, is currently not a part of the government, instead sitting in opposition to a cobbled-together coalition of centrist parties. The Dutch economy isn’t in dire need of reforms, so a gridlocked government would be fine for markets.
Much like we saw last year with Brexit and the US presidential election, European elections will likely fail to deliver the wallop market participants dread. Fear of a false factor is bullish for markets, and European politics will provide us with several of those this year.