Over the next six months, voters in Europe head to the polls in three crucial votes, each providing a powerful platform for the anti-establishment mood sweeping the world. In the wake of Brexit, one vote in particular, the French presidential election, has the potential to spell the end of the European Union (EU). The first of these votes, scheduled for December 4th, is an Italian referendum on constitutional reform where the centrist government of Matteo Renzi has staked much of its political capital on reforming the way Italy is governed. Of all of the members of the Eurozone, arguably none is in more desperate need of substantial structural reform than Italy. The country has been in recession for five of the past eight years while real GDP per person today is lower than it was in 1999. Against this backdrop, the country is suffering from an unemployment crisis, with nearly one in two young people unable to find work (see exhibit below).
Despite Mr Renzi’s campaigning efforts, current polling suggests the reforms will be voted down, an outcome that is hard to rationalise given Italy’s dire need for structural reform. In the event of a no vote, expect renewed market focus on Italy’s debt problems, as any further attempts at economic reform will almost certainly be shelved until after the general elections in 2018.
The second vote investors should have in their calendar is the Dutch general election, scheduled for March 15th, 2017. Here, the right-wing Party for Freedom (PVV), led by Geert Wilders and running on an anti-immigration anti-EU platform, is ahead in the national polls. While the current consensus belief is that the Dutch centre-right and centre-left parties would form a coalition to keep the PVV out of government, a surprise is certainly possible. Even if the PVV is kept from power, they will likely gain the largest share of the national vote, meaning that their calls for a British-style referendum on EU membership will be both a key part of the election debate and an issue that hangs over the future government well after the polling booths close.
The third vote is the French Presidential elections, held in two rounds on April 23rd and May 7th. It is no exaggeration to say that this has the potential to unleash a shock of the same scale as Brexit and Donald Trump represented. Polls show that Marine Le Pen, the leader of the far right National Front has consistently drawn support equal to or greater than her likely Republican party challengers throughout much of the past year. In Australia, the equivalent would be Pauline Hanson consistently polling as preferred Prime Minister in the run up to a federal election. While, similar to Brexit and Trump, the consensus view is that the French will vote in a less radical leader, it is certainly within the realms of possibility that she is elected President. As with Geert Wilders, Marine Le Pen has promised a referendum on EU membership and therein lies a significant market risk event that investors should keep in mind. While the EU can likely lose the UK and continue on, it seems implausible that the institution as it is could survive both the UK and France voting to leave.
What was unique about the British vote to leave the Union was not so much the apathy that many in the UK have towards what the EU has become, but that the British population was given a chance to vote on it. Before the British referendum on EU membership was held, a Pew Research Center survey of Europe found that 61% of French voters had an “unfavourable” view of the EU, significantly higher than that in the UK. Thus, given an opportunity to vote on the matter, “Frexit” certainly seems like a real possibility.
More than anything, the surprise results of Brexit and Trump represented protest votes against the direction that globalisation has taken. Lacking the articulate arguments of the media and the political class, a “silent majority” used the discretion of a private voting booth to express their frustration at a changing global framework - one that seems to benefit the well-off and the well-educated while leaving many ordinary people behind. To understand the depths of this frustration from a European perspective, the chart below shows the changes in unemployment rates over the past ten years across a number of European countries. In many countries an entire generation of young people are effectively being shut out of basic participation in society. It is against this backdrop that ordinary voters are voting for anything but more of the status quo.
From a market point of view, there is no reason to believe that the voter frustration that led to Brexit and Trump is about to end, or for that matter, that the pollsters have become any better in predicting outcomes.
The bookies currently put the odds of Marine Le Pen winning the French presidency at around 25% - roughly the same odds Donald Trump faced in the run up to the US Presidential election. Given the populist mood sweeping the world, it would seem prudent for investors to be placing a higher likelihood on such an outcome taking place, and to be preparing themselves for the considerable market disruption this would entail.
Fantastic piece here and the graph especially is quite remarkable in the story it tells. Thank you Miles.
Great summary, thanks Miles.
Prepare for the worst and hope for the best...
Thanks Miles. A nudge for us investors and a startling graph for our parliamentary leaders of all persuasions.
Great summary, Miles. Interesting times ahead.