European Politicians Are Having a Busy Week

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

When it comes to European politics right now, most of investors’ attention is centered on Ukraine and the prospect of a Russian invasion. Yet there are also some fresh developments on the traditional political front, which we think are contributing to elevated early-2022 uncertainty. Italian lawmakers have now gone through three rounds of presidential voting and are no closer to selecting a (somewhat ceremonial) head of state. Portugal holds a snap election Sunday. France’s late-April presidential contest is heating up. All three, in our view—along with Australia’s upcoming general election—probably contribute to jitters in the near term, but they also create opportunities for falling uncertainty to be a tailwind for markets in much of the developed world later this year.

Inside Italy’s Stalemate

Italy’s presidential voting process, which began Monday, is significant not because the presidency is powerful (it isn’t), but because one of the candidates is Prime Minister Mario Draghi, appointed as a technocratic leader last year. Having largely finished his job of shepherding through legislation earmarking where COVID relief funds will go, he has started angling for the ceremonial head of state position. But if he gets it, it leaves Italy without a prime minister, collapsing the broad coalition government he led—and likely bringing old divisions between the anti-establishment Five Star Movement, nationalist League and the traditional center left and center right to the fore. At the moment, this appears to be an anathema to lawmakers, as the biggest vote getter in Wednesday’s third round of voting was a blank ballot. The human winning the most votes was outgoing President Sergio Mattarella, who has said repeatedly he doesn’t want a second term.

We wouldn’t read too much into this, as parties appear to be treating the first few rounds as a mere formality, running out the clock while party leaders negotiate on a consensus candidate to get behind. The first three rounds also require a two-thirds majority for the winner, but the threshold drops to a simple majority from Thursday onward. Hence, most observers expect the real fun is only about to start.

However this shakes out, we don’t think it is hugely consequential for Italian stocks. With or without Draghi at the helm, Italy’s parliament is gridlocked. No party has anything close to a majority, and government formation requires parties with big ideological divergences to join forces. The League and Five Star Movement’s coalition got very little done. Five Star’s subsequent coalition with left-leaning parties was similarly inactive, with the pandemic preoccupying its brief reign. A new election might be more decisive, as it would be the first under the reformed electoral laws that were designed to slim parliament and make it easier to win a majority. But there doesn’t appear to be much appetite for this among the major parties, as the far-right Brothers of Italy party has soared in polling over the last year—and many politicians likely don’t want to trigger an election that sheds seats and jeopardizes their jobs. In our view, all evidence points to a squabbling, do-little government, which has been just fine for Italian stocks in recent years—and which should eventually bring some relief to the present political jitters.

The Political Plot Twist in Portugal

Portugal’s legislature is similarly fragmented, with Sunday’s snap election likely to return another hung parliament. The outgoing government—in which two far-left parties propped up the center-left Socialist Party’s (PS) minority government—collapsed in November when it couldn’t pass a budget. Support for the far left has dwindled, while a new hard-right populist party called Chega has gained traction—a shift from recent years when Portugal cut against the trend of rising populism across Europe. Chega’s founder and leader, André Ventura, is a former soccer pundit turned politician who broke from the center-right Social Democratic Party (PSD) a few years back. Now that the PSD has narrowed much of its polling gap with the PS, Ventura is positioning himself as kingmaker and potential deputy prime minister in a right-leaning coalition. Naturally, this is sparking fears of right-wing populism destabilizing Portuguese politics.

We doubt it. For one, while polls are flawed, given the PSD and Chega combine for only 39% of the vote, it appears highly unlikely that a right-leaning coalition could win an outright majority. More likely, they would win a plurality and form a very weak minority government—basically a right-leaning version of the left-leaning administration that served since 2019. When that government took power, investors feared it would undo hard-won reforms passed during the debt crisis, wreaking havoc on Portugal’s economic competitiveness. But those fears proved false, with 2021’s labor market reforms focused on setting boundaries for remote workers. On the economic front, Portugal’s post-pandemic rebound has largely echoed its neighbors, with GDP finishing Q3 just -3.2% below the pre-pandemic high.^[i]

Overall, gridlock blocked radical change under the left-wing administration, and we think it would likely do the same under a right-wing minority administration if that indeed came to pass. If you are a fan of flat taxes, you might find this disappointing, as that was one of Ventura’s key economic pledges. But for the many who shudder at the word populism, it should bring a sigh of relief.

Rumblings Grow Ahead of April’s French Presidential Election

France doesn’t vote until mid-April, but sparks are already flying among the candidates—particularly on the right. Incumbent Emmanuel Macron, of the new(ish) centrist La Republique En Marche (LREM) party, is presently leading in polls at 24%, potentially positioning him to be the first French president in eons to win re-election.^[ii] But he is in pole position largely because the right is fragmented. Valérie Pécresse, the candidate for the center-right Les Republicains (LR), is tied with Marine Le Pen of the right-wing National Rally (RN) at 16% each, followed by an independent right-wing commentator named Eric Zemmour at 13%.^[iii]

This is where it gets interesting. Once upon a time, people saw Le Pen as the right-wing agitator and populist threat. When she faced Macron in 2017’s presidential runoff, her platform included leaving the euro. But when that proved unpopular, she started tacking more toward the traditional center-right, continuing her long-running efforts to reform and soften her party (initially founded by her father as a fascist movement). That created the opening for Zemmour, who has assumed many of Le Pen’s prior positions. Now the two, who one would think are ideological allies, are at each other’s throats, with each urging the other to drop out.

In France, if no candidate wins an outright majority in April 10’s first-round vote, the top two finishers face off in an April 24 runoff. That contest seems like a foregone conclusion, but it is anyone’s guess which of the right-leaning challengers Macron will face. Handicapping the outcome also seems like a tall order, especially since a contentious first round could affect whether the right can unite behind a single candidate two weeks later. Pollsters think Pécresse has the best shot against Macron in a runoff, but if Le Pen erodes enough of her support, she may not get the chance.

Expect a lot of chatter about this for the next few months, with the rhetoric getting increasingly hot. That will likely stir uncertainty, much like US elections do. But come late April, we will get clarity, and just knowing the victor should let markets move on. June’s Parliamentary election will add further clarity, letting markets handicap the likelihood of the eventual presidential winner pushing through their agenda. In our view, this likely contributes to falling political uncertainty globally later this year—a tailwind few seem to appreciate today.