In the spotlight: European Parliament election

When market participants were asked at the end of last year to enumerate the main risks investors would face in 2024, the vast majority of those surveyed counted politics and elections amongst the top factors to consider for the unrewarding task of forecasting total returns for major asset classes over the following twelve months.

Around the globe in 2024, close to half of the population will or have already had some sort of election in their home countries. The first one of global relevance took place in Taiwan this January, which delivered a victory for the incumbent Democratic Progressive Party (DPP), dealing a blow to Beijing, these results were in line with expectations. Other countries that have had elections so far this year include; Finland, Pakistan, Portugal, and for completeness, Russia, amongst others. South Africans went to the polls on Wednesday this week and preliminary results point towards the fact that the African National Congress (ANC) party might lose the majority they have held for a long time. Over the next few weeks there will be general elections in the UK and in Mexico, none of which are currently expected to bring about a photo finish, with opposition and incumbent well ahead in the polls, respectively.

Starting on June 6, the European Parliament (EP) will have their tenth election with all 705 seats up for grabs and an additional 15 seats being created - a total of 720 members of EP (MEP). Since its creation in 1952, the EP has gradually gained more importance and today they have the power to approve, reject or propose amendments to legislative proposals put forward by the European Commission (EC) - the only institution empowered to initiate legislation. Although the EP cannot initiate legislation, the members of the EC that actually have the powers to do so including the president, have to be approved by the EP. Compared to national parliamentary elections, the turnout for EP elections has historically been lower, and there is also a more visible trend towards the extremes which some commentators attribute to a “protest vote”.

Protest vote or not, the reality is that for the first time the EP might be heavily influenced by far-right parties. As shown in the graph below, at the moment, three groups dominate the seats, with close to 60% of MEPs combined. These groups are perceived as centrist in the context of the makeup of parliament and do not currently need to engage with more extreme parties either side.

The majority comprises the following; 

• The European People’s Party (EPP) with 177 MEPs – centre right, including Spain’s Partido Popular (PP) and Germany’s Christian Democratic Union (CDU),
• The Progressive Alliance of Socialists and Democrats (S&D) with 140 seats – centre left, including Spain’s Socialist Workers’ Party (PSOE) and Italy’s Partito Democratico (PD); and 
• Renew Europe (RE) with 102 seats – centre left and centre right liberals, including Emmanuel Macron’s Renaissance (RE) and The Netherland’s People’s Party for Freedom and Democracy (VDD)

The European Conservatives and Reformists Party (ECR) – right wing, including Giorgia Meloni’s Brothers of Italy - and Identity and Democracy (ID) – right wing, including Marine Le Pen’s Rassemblement National (RN) and, until recently, Alternative for Germany (AfD)]) - have 127 seats and represent a significant minority but a minority nevertheless.

Source: europeelects.eu

According to most forecasts, the ECR and ID (including AfD) are likely to achieve substantial gains. It could therefore, at least in theory, be the case that the EPP, ECR and ID vote together in at least some pieces of legislation and appointments for the EC and are able to get their way without the need for any other party. Ursula von der Leyen’s position as the president of the EC might be at risk. We should underline that this is far from a done deal. We first need to see the actual MEPs that are elected, but there is also a lot of fragmentation in the far right. Regarding Ukraine for example, Giorgia Meloni’s ECR have been clear in their support against Russia, while the AfD has most definitely not. The latter and Marine le Pen’s RN are also very vocal about their Euroscepticism, whereas ECR are lot softer on the topic.

The most contentious issues in the next five-year period could be climate policy and migration. Voters seem to be less convinced about climate goals than some years ago, although we highlight that Europe is likely to remain at the forefront from a global point of view. Regarding migration, the topic is higher up on voters’ priorities in many geographies, Europe included. A shift right might have consequences in these areas going forward.

In our opinion, the macro-economic consequences are not likely to be as large as some of the headlines might be in the aftermath of the election. Although it is highly likely that the average MEP moves to the right, that does not mean that macro policy will change dramatically. Without a doubt there will be micro-economic consequences for sectors that have been affected heavily by climate policy for example, should some policies be reversed. But we tend to think that most macro variables and aggregated corporate data such as leverage or default rates will not change too much as a result of the election. The most disruptive theoretical macro impact would be a scenario where European integration is called into question. Even if the far right score a massive victory next week, they will not have anywhere near the number of seats to seriously threaten the aforementioned. There might be incendiary headlines post elections but we think from a fixed income portfolio management and macro point of view the headlines will not translate into action.