The largest risk these upcoming elections pose are a country, particularly Italy, leaving the euro.
There are four important leadership elections across the EU: France, Germany, Italy, and the snap election just announced in the UK. We look at what outcomes could lead to a structural change that could negatively impact the growth potential for companies we either hold or could consider as new investments?
Source: Polls-France: Bloomberg poll composite April 2017, Germany: Forsa March 2017, Italy: Ipsos. UK:FT poll-of-polls April 2017
It is too early to call any likely surprise in the UK election. Furthermore, the UK does not use the euro and having exercised Article 50 to leave the EU, our concern is more on the outcomes of the other elections in terms of structural risks. The risks of a disruptive new party winning an election are highest in France and Italy. We see the areas of greatest risk being departure from the euro and more damagingly, the EU. We feel a leadership win by an anti-euro/EU party would likely result in a minority government, which would struggle to get the constitutional changes passed to exit the EU through parliamentary votes.
We believe the largest risk these upcoming elections pose are a country, particularly Italy, leaving the euro. Across Europe, voter polls have consistently highlighted that the leading areas of concern are:
3. economic stability and
Germany is unlikely to see a swing in political direction given the popularity of the centralist parties led by the CDU/CSU union1 (led by Angela Merkel) and the SPD2 (Martin Schultz), which between them are polling around 65%.
The leading euro skeptic party in Germany is the right wing AfD3, which is polling around 8% – so a win seems highly unlikely.
The leadership has done a good job on the economy and unemployment is low. So, we do not see much risk here.
As the National Front (FN) appears unlikely to form an alliance with any of the major ‘central’ parties, our question is: what a President LePen could achieve without controlling both houses to leave the EU, as France would need to change the Constitution.
The answer is technical and lies in whether the French president would be able to call a referendum to change the Constitution without having to go through parliament.
According to Article 89, to change the Constitution requires both houses to vote it through, followed by either a referendum or a three fifths majority of both houses sitting combined.
Beyond the technical issues of getting a referendum – the outcome of a referendum looks unlikely to end up with a ‘Frexit’. Ifop held a poll in July 2016 that indicated 67% of (the sampled) voters would vote to stay within the EU.
LePen has also stated that she intends to drop the euro and go back to the franc. From recent LePen statements, this would likely only be done following any EU negotiation – in other words negotiating leverage.
Another Ifop poll, held in March 2016 for the Le Figaro newspaper, showed 72% of French voters polled opposed leaving the euro.
The M5S rose as a protest party unhappy with corrupt politicians, lack of the public’s voice in politics, and a number of environmental areas. One of the core aims is to improve direct democracy through the use of the Internet and referendums – not far from the Swiss model. The party is not allied with any of the established Italian political parties.
While the EU is popular in Italy, the euro has been blamed as an important contributor to falling living standards. The October 2016 Eurobarometer survey results to the question: “Having the euro is a good or bad for your country” showed an 8% fall over the past 12 months in the answer ‘Good’ in Italy falling to just 41% vs. 47% responding ‘Bad’. A euro referendum could be close in Italy.
If the M5S won, chances are high that it would look to hold referendums on both the euro and the EU. Beppe Grillo has said he would want a referendum on EU membership and hopes Italians would vote to exit.
It is hard to comment on whether the M5S would run Italy well if they won. Grillo will likely rule himself out from the Prime Minister’s job if they won and, to date, the young party has a very limited track record of governance, with the difficult job of Mayor of Rome as their flagship seat for now.
Currently we have little direct exposure to Italy in any of our portfolios. However, a member leaving the euro or the EU would create considerable cross border challenges, and myriad top down questions such as the stability of the greater structures on other countries, as well as bottom up issues such as the value of euro denominated contracts with foreign counterparties.
Comment by Sudhir Roc-Sennett, Senior Portfolio Advisor – Vontobel AM