A Pre-Debate Roundup of Politics Outside America’s Borders

Editors’ Note: MarketMinder favors no political party nor any candidate. We assess developments for their potential economic and market impact only.

As the US presidential candidates tune up for Tuesday’s debate, what better time to look at … international politics? Things have simmered down after 2024’s first half international election flurry, but there are some comings and goings this week. Here is your investing guide to it all.

Is This the End for Canada’s Government?

Of all the politicians we don’t envy these days, Canadian Prime Minister Justin Trudeau is near the top of the list. His popularity continues eroding, and now his government is following suit.

Since winning a plurality in 2021’s election, Trudeau’s Liberal Party has headed a minority government with the formal help of the left-wing New Democratic Party (NDP). It wasn’t a formal coalition, with NDP bigwigs in cabinet posts. Rather, it was a confidence-and-supply deal, where Trudeau could count on the NDP supporting key votes. The NDP got to influence legislation and accomplish some of its agenda, and Trudeau got to govern.

On Thursday, NDP leader Jagmeet Singh pulled the plug, seemingly reacting to the Trudeau government’s intervention in the country’s railroad labor dispute. The NDP backed the unions’ right to strike while Trudeau, believing the interruption to commerce too damaging, forced them back on the job.

This leaves Trudeau with a traditional minority government, and the next election—due by October 2025—looms large. Ending the confidence-and-supply agreement doesn’t guarantee a snap election, and Singh said the NDP could still support bills and confidence votes on a case-by-case basis. But it raises the likelihood of an early vote.

How early isn’t clear. Some political watchers noted Singh’s announcement had the look, tone and feel of a campaign launch. However, Singh could have some incentive to wait a while before forcing the issue. Trudeau’s government is deeply unpopular, and junior coalition parties—whether official or unofficial—tend to wear the stench of whomever they joined forces with. Splitting from the Liberal Party now could be a way for the NDP to distance itself from the unpopular prime minister and rebuild support, especially with the Conservative Party—and its rather popular leader, Pierre Poilievre—targeting several of its seats.

Either way, expect a bit of a political slugfest in Canada for the foreseeable future, with a lot of talking … and a lot of gridlock, as is typical for minority governments. This keeps legislative risk low, which should help Canadian stocks (though global sector trends and economic drivers are probably a greater influence). Uncertainty may be a bit elevated for now, but soon enough investors will get clarity on the next election’s timing and probable outcomes. Stocks usually enjoy this even if the political theatrics give people a headache. 

France Gets a New Prime Minister. Maybe.

When last we peeked at France, the country was settling down after June and July’s snap legislative election returned another hung parliament. People were a bit on edge, as the left-wing New Popular Front (NPF) won the most seats, but a chasm was already forming between it and the populist National Rally, reducing the risk of the world’s weirdest left-right coalition uniting to blow a hole in public finances. But with government formation moving at a snail’s pace, uncertainty lingered.

Now it is starting to fall. On Wednesday, President Emmanuel Macron tapped the EU’s erstwhile Brexit negotiator, Michel Barnier, as prime minister. This is an interesting pick: Barnier is a member of the Republicans, France’s traditional center-right party. Macron heads the centrist Renaissance party and its broader Ensemble coalition, comprised primarily of defectors from the Republicans and the center-left Socialist Party. Given the Republicans hold only 47 seats in the 577-seat National Assembly, Barnier’s ascension has raised speculation that Macron has a deal with the National Rally, though co-leader Marine Le Pen’s reaction was cryptically lukewarm at best.

From here, Barnier’s first challenge is to form a government, likely filling it with cabinet picks from enough parties to win a confidence vote. That is the easy part. It is largely math. The hard part is his next task: passing a 2025 budget. To say the various parties are divided on what this should look like is an understatement. The National Rally champions windfall profits taxes. Ensemble wants to preserve pension reforms the National Rally campaigned on repealing. Ensemble and the Republicans have their eyes on France’s deficit, while the National Rally wants to dial up social spending. Passing anything will require a heckuva lot of horse trading, and the fruit will probably leave no one happy.

The upshot: gridlock. People may not like gridlock, but it keeps legislative risk low, which keeps uncertainty low for stocks—a relief, for markets, after the election spurred fears of big change. Now these fears are proving false, which should help propel French stocks up the wall of worry.

A Lesson From Italy

We leave you with a brief story from Italy, which shows what political reality beating expectations looks like. When Giorgia Meloni of the Brothers of Italy became prime minister in 2022, headlines warned this right-wing populist government would shatter market confidence in Italy with a Liz Truss-style agenda of tax cuts and public investment.^[i]

Since then, Meloni has governed like your average center-right politician and struggled to get much done. This week, some Finance Ministry leaks revealed its main focus for the next two years will be—wait for it—deficit reduction. EU fiscal rules limit budget deficits to 3% of GDP, and while they have proven toothless time and again, Meloni’s government is targeting 2.9% by 2026.

Time will tell if getting there requires Meloni to shelve the tax cuts she campaigned on. Maybe economic growth and inflation—which grow the tax base—combined with administrative cost cuts throughout the civil service and public sector retirement changes will be enough to get Italy’s projected deficits under the limit. Critics claim it is less a plan and more a hope.

It doesn’t really matter much, as projections aren’t reality and the EU’s rules are mostly for show. But even focusing on deficit reduction is a far cry from the spendthrift fears that reigned two years ago. Those fears have quietly proven false, and Italian stocks have enjoyed it even if investors haven’t consciously realized it: Since the election, the MSCI Italy is up 101.3%, trouncing the MSCI World Index’s 51.4%.^[ii] False fears are bullish.