Leviathan Awoken: European Elections 2017

The political reality at the time of writing is more sanguine, but European political risk could well be the financial markets’ biggest test yet, says Richard Champion, Deputy CIO with Canaccord Genuity Wealth Management.

How will European political outcomes affect financial markets in 2017?

With the  ECB  having announced a slight tapering of its bond-purchasing program and future asset purchases,  outcomes  “should validate the shift towards higher global bond yields, should growth remain resilient and if higher oil prices lift Eurozone inflation,” says Larry Hatheway, group chief economist and head of GAM investment solutions. Deutsche Asset Management expects real gross domestic product in the Eurozone to be 1.3% (down from 1.6% in 2016), with consumption likely to be the main driver. “We consider the higher oil price and political uncertainty to be the main reasons for somewhat slower growth in 2017,” says Phil Poole, Global Head of Research with Deutsche AM. Following 2016, when the Brexit referendum and the election of Donald Trump provoked significant moves in currencies, fixed income and equities, there is potential for further market dislocation with the political uncertainty of 2017.

Starting with a general election in the Netherlands in March, through to the presidential election in France in May and the parliamentary election in Germany  in  September  (and  a  likely Italian election to be held by the end of the year), over 40% of Europe’s collective GDP will be voting in 2017. If the Trump-Brexit trend is set to continue, it could come at great cost to the European project. As the European Union itself kicks off the year with considerable internal difficulties Brexit top of the agenda and Russian interference lurking in the background, would a victory for Marine Le Pen in France or the shock removal of Angela Merkel as chancellor of Germany potentially spell the end of the European project?

Comparisons to Mr. Trump and Brexit should not be drawn in too much haste, however. As Salman Ahmed, Chief Investment Strategist  with  Lombard Odier explains, “the main

mitigating factor is the electoral design of European countries, which adhere to a more proportional representation structure, thereby reducing the likelihood of a populist government coming into power without mainstream support. This stands in marked contrast to the “first past the post” systems in the UK and the U.S.” There is reason, then, for a measure of calm, which is not to say the political risk for Europe in 2017 is not inordinately high. The following considers central challenges represented by the major European elections this year.