Europe’s Protest Politics Take Center Stage—for Now

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European Parliament election results are rolling in, and so are the worries about the rise of “right-wing” parties—especially in France, which prompted President Emmanuel Macron to call a snap legislative election, with the first round commencing June 30. Yet fears of a sharp shift miss a simple point: Gridlock likely continues in Brussels, reducing legislative risk, while France’s election is one more opportunity for uncertainty to fall. This outcome is just fine for stocks, in our view.

From the tone of most coverage, you would think the European Parliamentary election was a centrist bloodbath. Yet their losses were actually rather small. The next Parliament will have 720 seats, which go to broad parties of national parties, aligned by their general political thrust. The latest preliminary results grant 400 of those to the main three centrist parties: the center-right European People’s Party (EPP), the center-left Socialists and Democrats (S&D) and the centrist Renew Europe (RE), which includes Macron’s group. This is still more than enough for a solid majority. It just happens to be down from their 417 (of 705) seats at the prior election.

Exhibit 1: Preliminary European Parliament Results

Source: European Commission, as of 6/10/2024.

Nor were the losses uniform. The EPP actually gained 10 seats, while S&D lost only 4. RE bore the brunt, losing 23. So the story seems less about angst across Europe than dissatisfaction in France.

European Parliamentary elections have historically been a protest vote. Turnout is usually low, and those who turn up often do so to vote their feelings about their current government. It is the only direct opportunity to vote on an EU governmental body! And a way of sticking it to the proverbial man without having to think about who will govern and what they will do.

A decade ago, during the eurozone debt crisis, a lot of those protest votes went to the left. With centrists mandating austerity, the populist left easily captured the zeitgeist. But the last several years have seen leftist groups moderate in the name of taming public finances and attracting investment, making the populist right a more attractive protest destination to many. People also voted their frustration over mounting costs of the “green transition,” taking protest votes away from Green parties.

Hence, the traditionally conservative European Conservatives and Reformists (ECR) gained 4 seats, the more right-wing Identity and Democracy Group (IDG) gained 9, and the Greens lost 18. And 55 candidates with no pan-European party grouping won seats, including Germany’s Alternative for Deutschland (AfD), which was kicked out of the IDG after a series of scandals and controversies.

Some analysts speculate that ECR and IDG will try to form a right-wing coalition with the EPP. Perhaps, but the math isn’t there presently. Getting a working majority would require sealing alliances with other small parties, which seems like a tall order. While ideologically in the same neighborhood on some things, a lot of these parties disagree on key items. Plus, coalitions are where populist movements go to die. It is probably in a lot of these parties’ political interests to sit in opposition, make noise, and let the centrist parties take the heat as they aim for even bigger gains in 2029.

As for national implications, headlines pounced on AfD’s gains as a tough blow against German Chancellor Olaf Scholz. But we think this misses some key points. For one, Scholz’s center-left Social Democrats (which sit with S&D in Europe) polled similarly to 2019 (14% now, 15.8% then). Two, they came second not to AfD, but to the center-right Christian Democrats, which took around 30%. AfD won just 16%, compared to 11% in 2019.^[i] So it seems to us that Germany’s results are typical: Centrists winning the most, with protest votes going to a noisy fringe.

Scholz announced he won’t call a snap election in response. But Macron did—which French markets didn’t take happily. Stocks stumbled, while long-term bond yields jumped. Why? While Scholz lost to the main center-right opposition, Macron’s En Marche! party lost to the National Rally (NR), widely described as “far right.” We get why that is: It began as the National Front, a quasi-fascist movement spearheaded by Jean-Marie Le Pen. But under his daughter, Marine Le Pen, the rebranded movement softened on several fronts and pushed traditionally leftist economic policy coupled with nationalist rhetoric.

Hence, markets’ fear: If NR wins the legislative election and has enough clout to override a Presidential veto, its agenda of higher public spending, taxes and borrowing could become reality, along with barriers to foreign acquisitions and restrictions on stock buybacks.

In our view, this is a stretch. Macron, like all politicians, is self-interested and shrewd. He has faced gridlock in Parliament since 2022’s election, and he has looked since then for an opportunity to snatch a majority. He will remain in office no matter what the outcome of this vote is, but he also knows the EP election was very likely a protest vote. Macron seems to be banking on voters making a different choice when faced with living with the implications. Olympic cheer could also boost the feel-good factor.

Most likely, no party wins a majority in France. NR has historically flopped in legislative elections, even at times of high popularity. While its leaders are visible (Marine Le Pen made it to the final round of the prior two presidential elections), its nationwide ground game isn’t great. Supporting candidates for the European Parliament is one thing. That contest awards votes proportionally, making local canvassing less of a factor. In legislative elections, all 577 National Assembly seats are awarded by constituency. Fielding 577 candidates in 577 constituencies—with all the door-knocking and stumping this requires—is a very tall order, especially when the first-round vote is 20 days out. Even in 2022, when Le Pen ran a strong presidential campaign, NR won just 89 seats.

Therefore, a coalition government seems the likeliest outcome—more gridlock. For stocks, this is a fine scenario. One, it is the status quo investors are used to. Two, gridlocked governments get little done, keeping legislative risk low. When governments are busy, investors get preoccupied with potential changes to property rights, taxes and other key areas. This spikes uncertainty, as all legislation creating winners and losers does. It discourages risk-taking and investment. When governments don’t do much, these risks fade. Markets have less to worry about. Politics is only one market driver, but gridlock eases uncertainty—a powerful tailwind.

This is an unsung theme. We wrote about it in Emerging Markets last week. In Europe, major 2024 elections will be over by early July. Belgium just voted, likely kicking off another ultra-long coalition building process. Britain votes on July 4. Now France will vote on June 30 and July 7. The only other item on this year’s calendar, at present, is Austria’s general election on September 29. Uncertainty, elevated now, is about to fall fast.

Stocks move most on the gap between reality and expectations. Right now, people see Europe as a collection of struggling economies and contentious politics. But in reality, economies are recovering, and noisy populism masks gridlock. The gap here looks bullish and wide.