Checking In on Europe’s Noisy Gridlock

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Europe may not have any major elections until March (Portugal), but the political scene is anything but quiet right now. This week alone, the UK has modified post-Brexit trade rules (again!), Spain’s government has flirted with collapse, and French leaders are scrambling to water down EU rules in response to a national farmers’ protest. The latter is still unfolding, with French President Emmanuel Macron due to raise the issues at Thursday’s EU summit. But in the meantime, the latest developments in the UK and Spain highlight the bullish political gridlock that should benefit stocks on both sides of the Atlantic this year, even as uncertainty flares today. Let us take a look at each.

Yet Another Brexit Deal

You might think Brexit would be well and truly over considering it took effect four years ago. But if so, you would be wrong, because one big issue remained unresolved: trade between Great Britain and Northern Ireland. The UK’s unwritten constitution requires Northern Ireland to be on equal footing with the other three constituent countries (England, Wales and Scotland), which means full and unfettered trade access. But the Good Friday Accords, which sealed peace with Irish nationalist paramilitaries, required the absence of a land border between Northern Ireland and the Republic of Ireland. That means no customs or other border checks on people and goods crossing from one to the other.

Maintaining the absence of a land and sea border worked fine while the UK was in the EU. But Brexit required leaving the EU’s customs union, which created a pickle: How could Northern Ireland maintain customs-free trade with Ireland, which would require checks on non-EU goods, if it also maintained free access to British foods and wares? The first attempt to solve this, former UK Prime Minister (PM) Theresa May’s Northern Irish backstop, was a nonstarter to pretty much everyone. The second, successor PM Boris Johnson’s Northern Irish Protocol, was enough to get Brexit through Parliament but deemed unworkable by the vast majority of analysts. And by Northern Ireland’s Democratic Unionist Party (DUP), which has boycotted that country’s government since 2022 over the issue, leaving Northern Ireland in political limbo. A third attempt, current PM Rishi Sunak’s Windsor Framework, tried to fix things by removing most customs checks on goods traveling between Great Britain and Northern Ireland. But it didn’t get the DUP on board, as its leadership didn’t see the necessary legal protections to its constitutional status in the text.

So Sunak tried again and now seems to have arrived at a solution that pleases enough people to end the boycott. The new system, outlined in a policy paper called “Safeguarding the Union,” replaces the Windsor Framework’s complicated customs system, which resulted in several British goods intended for sale in Northern Ireland being subject to checks and kept several perishable products off the market. The new system instead codifies a UK “internal market,” removing checks and implementing a simple certification process. Additionally, it gives Northern Ireland’s devolved parliament veto power over new EU laws.

That was enough for the DUP, which has now ended its boycott and will form a power-sharing government headed by Irish nationalist party, Sinn Féin. Irish leaders also say they are satisfied, and EU authorities seem receptive. But reception in the UK is a mite more mixed. Labour has agreed to support the legislation needed to codify the changes, making them almost certain to pass. But the new deal seems to have reopened some old Brexit wounds in Sunak’s Conservative Party. Several question whether the deal will let the UK scrap EU laws and take full advantage of its post-Brexit freedoms, which is a long-running sore spot. Others note that Northern Ireland’s veto applies to new EU laws but not existing ones. Considering cutting Brussels-born red tape was a key Brexit selling point, this extends perceptions of a Brexit in name only.

We see this as a stark reminder of the Conservatives’ deep internal divide, making major partisan legislation unlikely to pass in the run-up to the next election, which Sunak says will happen later this year. Crucially, intraparty divisions aren’t unique to the Conservatives. Labour has them as well, over a range of sociological and economic issues. So even though some high-profile polls point to Labour winning a landslide, should that come to fruition, it isn’t necessarily the end of gridlock. The Conservatives were quite gridlocked after 2019’s landslide as intraparty fault lines deepened. The same could easily happen to Labour.

Spain’s Coalition Frays

Spain’s gridlock is of the more obvious kind: the deadlock that ensues when a multiparty coalition tries to pass anything contentious. And it has come to a head this week, leaving the government hanging by a thread only weeks after it formed.

Late last year, months after coming in second in a general election, Socialist Prime Minister Pedro Sánchez managed to stay in power by cobbling together a coalition with several parties including the hardline Catalan separatist group, Junts. This was controversial because Junts’ leaders were involved with an unsanctioned independence referendum a few years back. Spain’s Constitutional Court declared the vote illegal, and key figures have lived as exiled fugitives since. So to get Junts’ support, Sánchez agreed to back a bill giving amnesty to those involved with the referendum—triggering widespread unrest throughout the country.

This bill is now written and came up for a Parliamentary vote Tuesday. It failed. Why? Because Junts blocked it, arguing the text was insufficient to protect their members from prosecution for all alleged crimes.

So now they are back to the drawing board. Technically, the bill goes back to committee for debate. But it seems unlikely to get Junts’ support without some rewrites, and it isn’t clear a rewritten version with more ironclad protections will win the support of all others involved. Amnesty is deeply unpopular with a majority of Spanish people.

However this develops, gridlock likely reigns. This standoff shows quite plainly how difficult it is for the current coalition to pass anything. A snap election, should it occur, would probably return another hung parliament and therefore another coalition or minority government, which, more gridlock. It makes for noisy politics but gives businesses more clarity to plan and invest, knowing radical rule changes creating winners and losers are unlikely.