UBS House View Weekly
Has European populism had its day?
At the start of 2017 it looked possible that countries representing 70% of Eurozone GDP could change leaders by year end. Elections were scheduled for the Netherlands, France, Germany and potentially Italy. The main worry for investors was that Europe’s voters would veer toward populism, threatening the euro and the EU.
That risk now seems less urgent after Dutch voters refused to give a big electoral boost to the anti-EU Freedom Party of Geert Wilders. So does the Dutch result suggest that Europe as a whole, and France in particular, will avoid a populist uprising that could disrupt global markets?
Overall the outcome is reassuring. Opinion polls understated support for populism ahead of the US presidential election and UK referendum. Had the Freedom Party significantly outperformed the polls, this could have intensified fears that populists elsewhere in Europe were gaining ground. The resulting anxiety could have dragged on Eurozone consumer and business confidence, as well as raised borrowing costs in many parts of the continent to reflect higher country risk. The euro could also have come under pressure amid heightened worries that National Front leader Marine Le Pen could win the French presidency and try to lead the country out of the Eurozone.
But investors shouldn’t become complacent for several reasons:
1) Populism hasn’t subsided. While the Freedom Party didn’t become the largest group in the Dutch parliament, as polls earlier this year suggested it might, it did gain ground from the liberal VVD party of Prime Minister Mark Rutte. In addition, the VVD and Christian Democrats did shift to the right to capture voters attracted to Wilders. It could take many months for the VVD to form a coalition, so it is still possible – though unlikely – that the Freedom Party could become part of a new government.
2) The nationalist disappointment in The Netherlands could cause anti-Le Pen voters to stay at home on election day. The real threat of a Freedom Party win in The Netherlands appears to have contributed to the highest voter turnout in almost 40 years, at 82%. If this populist fear factor declines, the turnout in France may be less impressive and a lower turnout could favor Le Pen. (Radical voters are usually more certain of their choice and typically have greater influence when turnout is lower.)
3) Wilders is not Le Pen. The Dutch populist was a reluctant campaigner, giving relatively few speeches or televised appearances. Wilders also faced an experienced rival, who has been prime minister for seven years. In addition, the recent strength of the Dutch economy may have benefited the incumbent administration. By contrast, Le Pen has been a canny electioneer who has made the National Front less radical and more palatable to mainstream voters. The high rate of unemployment in France encourages voters to back novel solutions. And her rivals are more vulnerable; François Fillon is fighting a corruption scandal and Emmanuel Macron, though leading in the polls, is still a political newcomer.
After a period of tension leading up to the Dutch vote, investors are entitled to a sigh of relief. The outcome appeared to contribute to a gain of 0.7% in the Euro Stoxx 50 index on 16 March. And the 10-year Franco-German bond spread is well below its February highs of around 80 basis points. UBS Chief Investment Office believes that politics will not derail the Eurozone economic recovery or markets this year. But risks still lie ahead and investors should not drop their guard.
Head, European Macroeconomics
Global Investment Office
The Dutch election set an encouraging precedent for global markets, boosting confidence that anti-euro and anti-EU sentiment can be held at bay for the time being. The UBS Chief Investment Office (CIO) is overweight the euro versus the US dollar, and
believes that the European Central Bank will signal a gradual withdrawal of monetary easing once this year’s main elections are out of the way. But populist threats persist and investors should remain vigilant.