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What have we been up to


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Suprise election outcome that could upend the EU

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Pundits, market professionals and casual observers alike will probably agree that political risk is at its peak – not only because of what is happening in the White House, but also because of the various upcoming elections across EU member states this year which have the potential to end Europe as we know it.

The Netherlands come to mind, where Geert Wilders and his Freedom Party are likely to attract most votes. Will he get to govern and lead the Dutch out of the eurozone? Unlikely, as nobody seems to want to enter into a coalition with him. France, on the contrary, has alarm bells ringing all over it. When François Fillon became the candidate of the conservatives, Europhiles breathed a sigh of relief since the former French Prime Minister was considered to be in a good position to prevent a Front National victory. The emphasis lies on 'was considered' because he now finds himself in the unpleasant situation of having to explain to the public why his wife was paid a total of €830,000 in salary as a parliamentary assistant without – allegedly – having to work a lot for it. Regardless of whether it was 'legal and transparent' as Fillon claims, Marine Le Pen stands to benefit, which raises the likelihood of the French saying ‘au revoi' to the EU. And God knows what is going to happen in Italy this year.

If there is any election this year that shouldn’t make you hold your breath, it is surely Germany’s. Merkel will be re-elected once more, because who else? The only risk emanating from the German election is that it might tempt Merkel into policy inaction for as long as she is campaigning. So if push came to shove before election day in October, calling for bold measures at the European level – measures which probably wouldn’t go down too well with her core voting constituency – Merkel might decide to take a hardened stance in order to avoid being accused of acting against Germany’s interest. However, assuming that neither Wilders nor Le Pen come to power before Germans cast their votes, the question really is: who is Merkel going to govern with and how many votes are the right-winged, populist Alternative für Deutschland (AfD) going to get. In short, the German election has all the characteristics of a non-event. Nothing to see here folks, move along.

Enter Martin Schulz, former President of the European Parliament and recently crowned the Social Democrats’ candidate to contest yet another Merkel term, and all of a sudden one has to watch the German elections closely. Schulz is popular among Germans. Polls indicate that he would beat Merkel if Germans were allowed to vote directly on who ought to become Chancellor (in Germany the Chancellor is not elected by voters but instead by Parliament, which votes every four years). If that wasn’t enough, some polls even suggest that the SPD (the Social Democrats), who have in recent years been suffering from a major identity crisis and were slowly drifting towards becoming irrelevant, are ahead of Merkel’s conservative party, the CDU. Will Schulz pull it off? He may – these times appear to have a knack for political upsets after all. There are many ifs and buts as both SPD and CDU will have trouble putting a coalition together (other than another grand coalition between the two), but there are two things to consider here. First, there is now a realistic chance that Merkel might be no more, and with that, her and Finance Minister Schäuble’s eurozone doctrine will lapse as well. Second, one of the most pro-Europe politicians you could probably find out there (who also happens to be centre-left) would be governing Germany. And that means: kiss austerity goodbye!

Merkel held the view that Southern Europeans just needed to work harder and the Eurocrisis would be resolved. Schäuble thinks it is a great idea for states to run a budget surplus, and keeps wondering why the rest of Europe can’t follow the German example of fiscal discipline. Now imagine Schulz setting the tone. Debt relief for Greece? At least a non-zero probability. A Europe-wide infrastructure and development programme? Definitely on the cards. The first timid steps towards turning the eurozone into a fiscal union? The chances have never been higher (although it is still hard to imagine that this would happen even in the event of a Schulz victory). At the end of it all, we might actually see inflation and growth across all of Europe and we all know what that implies for interest rates and monetary policy. The Euribor forward curve may have steepened over recent months, but a strongly reflationary scenario in the EMU is far from priced in.

The general focus in relation to the upcoming elections has thus far been on the dangers to the EU’s and the eurozone’s very existence. What if Wilders or Le Pen came to power? What if the Five Star Movement wins a snap election in Italy? These are the questions people have rightly been asking. However, it may be about time to think about a significant change in Germany’s European policy away from austerity towards fiscal expansion and fiscal integration. One might disagree with such policies, like or dislike Schulz, or argue that even if the Social Democrats were to govern again nothing would change - but one certainly shouldn’t dismiss the scenario outright.

The race for the most powerful executive position in the country has just become interesting, and it could result in a very different European Union from the one we have today. However, looking at the elections taking place before Germany goes to the polls, the big question appears to be whether there will be any Europe left for Germany’s election to matter at all.





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