Between May 26th and May 29th this year, the 27 member states of the European Union – assuming the UK has left by this time – will hold elections for the appointment of over 700 MEP’s - that’s Members of the European Parliament. Each elected representative serves a five year term and between them create the body that arguably steers the future direction of the European Union.
At a member-state level, enthusiasm amongst the electorate for this layer of government varies, but it is typically seen as being far less important than domestic politics. As a result, the participation of voters tends to be lower and as the 2019 polls loom large, this could take on added significance.
Brexit may be the stand out point for many looking at the European Union right now, with one nation so badly disenfranchised over the current state of affairs that a majority felt it was better to find another way, but right across the continent, change appears to be afoot. In the wake of the financial crisis and subsequent recession of a decade ago, many are turning their back against the benefits of globalisation or a Federal Europe, and nationalist interests are instead winning out.
There have been recent high profile divisions between Rome and Brussels after the new Italian government proposed an austerity-busting budget which would breach Eurozone deficit rules. Violent protests in France have also highlighted the dissatisfaction of many with rising taxes and falling benefits – another reaction to the austerity policies which continue to bite.
The reality is that the political landscape right across Europe is changing. The European Parliament has historically been dominated by two broad grouping of politicians, the European People’s Party and the Progressive Alliance of Socialists and Democrats. Back in the 2004 elections, these two groups controlled over 65% of the seats in parliament. Projections for the 2019 election by POLITICO suggest that after the next elections, these two groups will struggle to garner 45% of the vote.
This all points towards the potential for a highly disruptive change in the political landscape after the May elections take place. A European Commission commissioned ‘Eurobarometer’ survey conducted towards the end of 2018 interviewed 28,000 EU residents on a number of factors, including what they wanted to see harmonised across the trading bloc. Of the 12 categories analysed in that category, equalisation of taxation scored the lowest, again emphasising the fact that there appears to be limited desire to move towards fiscal union.
It has been said that Germany has repeatedly found itself the winner from the European project so far. It remains the economic powerhouse of the continent, its nationals are amongst the wealthiest and now we have a situation where two thirds of its businesses are actively favouring a hike to interest rates. But has it come at an insurmountable cost and have the fortunes of the Eurozone now passed their proverbial apogee?
The 2019 European elections have the potential to paint a picture of dramatic change as to where the European Union goes next. The key metric to watch in the first instance will be respective Eurozone bond yields – any signs of fracture will typically be flagged by a widening spread between the respective member state’s bond pricing and that of Germany.
If there’s a belief that the situation will deteriorate further, then this could precipitate capital flight by overseas investors from select domestic equity markets. The UK’s FTSE-100 has done surprisingly well out of Brexit uncertainty as global diversification and the fact it is denominated in the depreciating Pound have seen equity prices inflated, but if investors decide to withdraw funds from – say – Italy or Spain, then the corresponding indices will simply lose ground to the likes of Germany or France.
Beyond this, questions abound as to what might happen next. Would somewhere like Italy or Greece prefer to abandon the Euro and adopt the Lira or Drachma once again? It may seem like a regressive step, but the ability to control their own monetary policy to stimulate the economy certainly has its benefits. One point that has however been tested is that Eurozone members can’t be forced to leave, regardless of austerity busting budget proposals – this decision has to come from the sovereign nation itself.
A further alternative would be a move towards a two-tier Euro. This was mooted in the depths of the financial crisis a decade ago, with the more robust (read Northern European) countries having one version of the Euro, whilst the remaining currency bloc members migrate to a different currency. However this has the potential to be an imperfect compromise and one which would lead to a dramatically imbalanced Europe in the longer term.
Much of this might read like a far reaching set of black swan events for the markets in the year ahead, but ultimately the point to watch for could be a cohesive result in the European elections in May. If the status quo of the European People’s Party and the Progressive Alliance of Socialists and Democrats holding court can be maintained, that in itself may be sufficient to deliver a resounding ‘buy’ signal for the Euro.
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