Coming into 2017, there was considerable concern about potential political outcomes this year. The concern was that the rise of populist thinking which was instrumental in delivering Brexit, Trump and the Italian referendum result last year, could permeate into a number of significant electoral battles across Europe this year and next. First up was the Dutch election on March 15th, which ended up rejecting the populist anti-EU policies represented by the far right. Then we had the two rounds of the French presidential election in late April and early May. In the event the populist, nationalistic and anti-EU approach adopted by Marine Le Pen was also rejected by the French electorate. So far so good, but there are still considerable political challenges ahead.
On September 24th, Angela Merkel faces into federal elections. She and her CDU party are in a reasonable position based on recent polls, but even if she were to be defeated, an SPD government led by Martin Schulz (a left-leaning politician who has spent much of his career in the EU) would not fundamentally alter very much in Germany, particularly its commitment to the EU.
Finally, a general election must be held in Italy before May 2018. There are obvious risks associated with that election. The former Prime Minister, Matteo Renzi, is a reform-oriented leader of his party, who is very supportive of the EU and the euro. He could well be the next Prime Minister. However, late last year he was on the wrong side of a very sensible referendum and subsequently stepped down from his role as Prime Minister. Hence, he has certain vulnerabilities. At the moment, polls are suggesting that the anti-EU populist party, the 5 Star Movement (M5S), is in pole position. This party has pledged to hold a referendum on Italy’s membership of the euro, and given that recent Eurobarometer surveys show that Italy has the second lowest level of popular support for the euro, the risks are pretty obvious. The Italian situation has many parallels with the French situation this time last year, but it is still way too early to jump to any firm conclusions about the likely electoral outcome. If France and Germany are any guide, the Italians could also reject the populist anti-EU approach, but the Italian political and party structure is and always has been much more fragmented than France. However, markets are certainly not in the least concerned about Italy for the moment.
Following Macron’s victory on Sunday, a major source of uncertainty for France and the rest of the EU has been removed. Macron occupies the centre of the political spectrum, with perhaps a mild left-leaning bias. Fundamentally, he is an economic liberal who believes in free markets, but also fully recognises the role that government needs to play in a free-market economy. He is pro-business and has pledged to cut the corporation tax rate, and liberalise labour markets in an effort to get France’s unemployment rate of 10.1% down. He is very pro-EU also and is passionate about protecting and strengthening the EU edifice.
It is hard to tell at this stage what his influence on the Brexit negotiations might be. At one level, he is very positively disposed towards the UK and recognises how important that country is to the EU. On the other hand, he will be reluctant to give too many concessions to the UK that might undermine the four central pillars of the EU, namely the freedom of movement of people, goods, services and capital. However, he is likely to exert a more diplomatic and conciliatory influence on the EU-27’s approach, in marked contrast to the ignorant and divisive approach adopted by the President of the EU Commission, Jean-Claude Juncker as demonstrated by some totally unacceptable leaks last week. The arrival of Macron might just give some limited comfort to the UK side, but the Brexit negotiations will still be incredibly difficult regardless.
The task ahead for Macron is still very difficult. In the first round of the presidential election, close to 50% of those who voted, voted in anti-EU manner. So, while the anti-EU proponents may have been defeated, they have not gone away and will inevitably exert a significant influence over French politics in the years ahead. Furthermore, in order to implement his economic reform agenda, his party, En Marche!, will need to get a majority of the seats in the June National Assembly elections. Given that his party is new and currently has no members in the National Assembly, the challenge in getting the 289 seats he will require for a majority, will be immense, but not impossible.
Meanwhile markets have breathed a sigh of relief and for the moment at least, tranquillity will reign.
Jim Power,
Chief Economist,
Friends First
The views and opinions expressed in this article are those of the author.
Originally published on www.friendsfirst.ie May 10th 2017.
