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Marcuard's Market update by GaveKal Dragonomics
A surprising facet of the post-2010 euro crisis period has been the degree to which the political centre in the European Union has held. Despite record unemployment in the struggling south, extremist movements have mostly been contained to the fringes. So, it is ironic that just as the long anticipated cyclical recovery arrives, the political tide looks to be turning the other way. Voters in this weekend’s Spanish regional elections gave the main two parties a thumping in favour of upstarts which oppose austerity, corruption, and to one degree or another, the authority of Brussels.
To be sure, even as Greece lurches towards a debt denouement under the radical Syriza party, anti-euro platforms are not to be found in Spain, or still struggling Portugal, yet voters have clearly rejected pro-EU parties. In the same vein, Polish voters on Sunday defied pollsters to elect a Eurosceptic president, a position which involves a say in foreign policy and the appointment of the central bank head. Such nose-thumbing follows the shock UK general election win on May 7 by the Conservative Party whose commitment to an in/out referendum from the EU was driven by the populist UK Independence Party nipping at its heels. For its part, France’s National Front continues to poll in the 25% range.
For now, the political calendar is focused on the Iberian Peninsula as both Spain and Portugal should hold national elections later this year. In Spain this weekend, the ruling Popular Party and the socialists (PSOE), who ran the last government, together got 52% of the vote—since the mid-1970s Spain has been a two party system with the big two polling at least 70%. Podemos, a loose left-wing alliance that is barely a year old scored a series of stunning wins, especially by wresting control of the Barcelona city administration, a victory that will add vim to the ongoing campaign for Catalan independence.
The repeated refrain among European voters has been to punish established parties, which in Spain have faced corruption scandals in addition to being held responsible for an austerity programme that helped drive unemployment to 25%. As a reminder that voters do not agonise over the ebb and flow of high frequency economic data, Spain’s voters handed out their drubbing just as the country became Europe’s fastest growing economy with 0.9% QoQ GDP growth in 1Q15, while 500,000 jobs have been created in the last 12 months. For Prime Minister Mariano Rajoy, it seems to have been a case of too little, too late.
Now, a period of coalition negotiations will unfold in order for regional governments to be formed. At the very least, the rise of parties such as Podemos and Ciudadanos, a new anti-corruption centre-right outfit, will impact the policy platforms of the main Spanish parties. This was the experience in Britain where UKIP polled a respectable 12% earlier this month, but arguably had more impact by forcing the big parties to harden their stance on hot button issues such as immigration. In Spain, PSOE will likely seek to co-opt some of the radical anti-austerity platform of Podemos, while the Popular Party will probably reach out to the reform-minded Ciudadanos grouping. The impact is that budgetary constraints under the EU’s fiscal compact could face severe political opposition.
The hope for centrist parties such as that run by Rajoy is that when it comes to picking a national government voters will not risk jeopardising an incipient economic recovery, and instead opt for the “devil they know”. The issue is whether such establishment figures will be able to make that argument without acceding to grass roots demands for change in the relationship between national governments and Brussels.
In theory such a loosening of the ties that bind the EU could mean a more flexible and more competitive system—but that will only be the case if a dialing back of EU powers is followed by continued structural reforms at the national level. Given the centrifugal forces which are again building up in the political arena, that is a big if. It would seem that political risk is again a factor which investors need to take seriously in their eurozone calculations.
