The European Parliament elections on 23 May produced damaging results in varying degrees for both the European Parliament and the main parties in the UK. Bethany Payne, Portfolio Manager, Global Bonds, explains the main points and provides a brief assessment of the impact on the markets.
Voters typically punish the ruling party at the European Parliament elections and this year proved no different with both centre-left and centre-right parties losing ground and no longer able to jointly form a ‘grand coalition’. While most of the main parties were perhaps relieved that the outcome was not as bad as some predicted, the euro was stable as the overall result was close to forecasts.
Protest votes in the UK, however, led to a catastrophic result for both the Labour and Conservative parties. Both lost seats to Nigel Farage’s Brexit party and the Liberal Democrats, who had concentrated their campaigns on whether the UK should leave or remain in the European Union (EU).
This change in voter attitude, away from the ambiguous Brexit policies from Labour and a failure to deliver Brexit from the Conservative party, show a desire for leaders who will guarantee results. The Conservative leadership contest demonstrates this, with candidates who – despite understanding the risk of bringing down their party – are running on hard Brexit campaigns. Labour have also moved towards supporting a second referendum in a bid to gain back supporters, albeit at the cost of their leave supporting voters. The pound extended losses as the risk of a messier ‘no deal’ Brexit increased.
What are the implications?
A more fragmented European parliament will likely make agenda and policy setting harder, Brexit negotiations less clear and, appointment of the Commission President a lengthier and less straightforward process — while the process favours the centre right EPP* selected Spitzenkandidat**, Manfred Weber, to become Commission President, the process has been denounced by the French President, Emmanuel Macron.
Thus, at a time when there is need for a greater coalition of parties to form a majority and, a greater need to coalesce around a leader who can piece together institutions and be a unifying figure, the choice of Commission President will be closely fought. For now, markets will wait; for groups to form ahead of the leaders’ summit on 20-21 June and then to see who Europe’s top jobs will fall to.
As for the markets, the next few days should be relatively calm given a quiet week on the data front in the UK. However, risk markets may become spooked by emboldened Brexiteer candidates as they start their internal campaigns for Conservative Party leadership. In addition, focus will be on the tension between the European Commission and Italy — according to Bloomberg headlines, the Commission is considering fining Italy $4bn (c.€3.5bn) over ongoing debt issues.
* EPP: founded in 1976, the European People's Party is a European political party with conservative and liberal conservative member parties. A transnational organisation, it is composed of other political parties, not individuals.
** The German term Spitzenkandidat traditionally refers to the lead candidate of a party.