Northern Europe’s Persistent Political Fog

Political uncertainty has been a bit of a headwind for eurozone stocks lately, as we noted yesterday. From government collapses in France and Germany to a corruption scandal that continues threatening to bring down Spain’s government, investors have had plenty to digest. Yet, gradually, stocks are getting some clarity on a couple of fronts. Here is the latest.

Is the Fourth Time the Charm?

France got a new prime minister Friday, its fourth in a year, a dizzyingly fast-spinning leadership “revolving door.” Replacing the deposed Michel Barnier is François Bayrou, a centrist former mayor. In selecting him, President Emmanuel Macron appears to be repeating the gambit he took with Barnier, selecting someone from the center right in hope of finding enough common ground with the populist National Rally (NR) to push through key legislation—most notably, 2025’s budget.

Whether it works better this time remains to be seen. First up, he must form a government, which the leftist alliance New Popular Front says it won’t join. Therefore, winning a confidence vote will require the NR’s support. Now, many say NR has a rosier view of Bayrou, as he helped get its leader, Marine Le Pen, on presidential ballots some years ago against opposition. However, getting their support now probably still requires offering more flexibility on the 2025 budget than Barnier did. If the olive branch works and Bayrou gets confirmed, he will then have to come up with a budget that both satisfies the eurozone’s deficit police^[i] and has the NR’s support. Technically, this needs to happen by yearend to avoid a government shutdown. But Parliament is reportedly drafting a bill to roll 2024’s budget into next year, which would buy him more time to negotiate.

So while we at least know who will head France’s next government, uncertainty lingers. Crucially, however, stocks don’t need perfect clarity. That never really exists. Generally, stocks just need to price the uncertainty and potential outcomes and move on. Note, French stocks have mounted a comeback this month despite the government’s collapse. Then, too, it would be a mistake to presume politics is the sole driver affecting returns, especially when French markets have such a heavy weighting in Luxury Goods, which has faced challenges this year. But at least on the political front, gradual fog clearing should suffice.

Germany’s Outgoing Coalition Sings a Harmonious Swansong

Budget bickering also felled Germany’s governing coalition, and a confidence vote next week looks set to officially pave the way for a February 23 snap election—seven months ahead of schedule. This raised uncertainty a bit, especially with fiscal policy still in limbo.

But a display of comity among the now-divorced coalition partners has now chipped away at this a bit. The former “traffic light” coalition party leaders (Chancellor Olaf Scholz of the Socialist Party, Christian Lindner of the pro-business Free Democratic Party and Economy Minister Robert Habeck of the Green Party) agreed on a small income tax relief package and child benefit increase. Households will get approximately €11 billion of help in 2025 and 2026 to offset inflation’s effect on take-home pay, while the monthly child benefit will rise from €250 to €255. It isn’t a lot, but it perhaps eases a bit of fiscal uncertainty heading into the election, which should be no bad thing.

Meanwhile, in Belgium

One place where investors have decidedly not received clarity: Belgium, which crossed six months without a government on Monday. Yes, the coalition formation process that started after early June’s vote left Belgium with the mother of all hung Parliaments still hasn’t concluded. Negotiations are ongoing, and the potential coalitions have narrowed to one group known as Arizona and another dubbed Vivaldi. But talks keep stalling, leaving Alexander DeCroo in place as caretaker prime minister.

For Belgium, this is basically par for the course. In 2010 and 2011, its government formation process took 541 days, which was the record until 2018’s election led to a 652-day wait. Six months, relative, to this history, is child’s play.

As for the effect on stocks, we hesitate to draw big conclusions. Belgian stocks are up since the election, but their 4.4% return trails the eurozone and global stocks over that span.^[ii] Perhaps political uncertainty plays a role, but this is a narrow market with big stock and sector concentrations. Logic and math dictate that sector and company-specific factors probably have a larger responsibility for returns, especially when there is so much dispersion among the MSCI Belgium constituents’ trailing six-month returns. Here, too, political drivers aren’t irrelevant, but they aren’t the be all, end all.