An unsettling amalgam of political developments will occur across Europe in the days, weeks and months to come. They could unsettle, and possibly even destroy, the EU, along with the Euro.
The French Elections
Francois Fillon upset the entire French political establishment by defeating former president Nicolas Sarkozy the Sunday before last. Then, this past Sunday, he defeated former prime minister Alain Juppė in a runoff. Fillon got over 66% of the vote.
He will face the rightist National Front party headed by Marine LePen in elections commencing in Round One on April 23rd; then, in a final run-off on May 7th.
Investors should be very concerned.
Fillon was behind both Sarkozy and Juppe until his debate performance the Thursday before the Round One Republican Party primary on November 21st; his performance there apparently made the difference and put him - not Sarkozy - into this past Sunday's run-off.
As many American politicians have learned to their regret, though, positions one takes to win a primary race can sometimes doom hopes for victory in a general election.
Fillon's relatively new-found hard line against immigration from outside the EU, and his strident opposition to the Islamist State will certainly appeal to French nationalists.
But his suggestion for a 500,000 person reduction in the French government workforce, a longer work week, and radical free market reforms that have led him to be called "The French Thatcher" may not appeal to the broader, more liberal-leaning, French electorate.
While Fillon is predicted to win the race as of this writing, Europe and the world may wake up to surprise when the general elections are concluded in May.
Fillon's leading opponent, Marine Le Pen of the French National Front has said that she would like to leave the EU and the Eurozone and would hold a referendum to that effect. But she is more inclined to maintain more left-of-center social welfare policies and the larger government Fillon opposes. (France's Socialist President Francois Hollande is so unpopular now, with just a 4% approval, that it is expected he and his party will not have a major material impact on the outcome of the race.)
The Italy Referendum
Sunday's French Republican party run-off is separated by just a week from Italian Prime Minister Matteo Renzi's referendum on Italian government constitutional reforms on December 4th.
Renzi has said he will step down if the referendum fails. The latest polling says the referendum will fail and, like former British PM David Cameron, it's likely Renzi will not be in office by spring; perhaps sooner, if he abides his promise.
Thus Italy, too, could be opened to the possibility of further-right leadership from its Eurosceptic Five Star Party, which holds 17 of Italy's 73 seats in the European Parliament. Five Star also holds significant minority seats in the Italian Chamber of Deputies and the Senate. Finally, former PM Silvio Berlusconi has said that he opposes the Renzi referendum. His People of Freedom coalition party holds the most seats in the Senate and the second largest number of seats among the Deputies.
While any withdrawal from the EU by Italy would have significant challenges (Article 75 of the Italian Constitution, for example, prohibits popular referendums with respect to treaties), nearly 50% of Italians have said they would leave the EU if given the opportunity.
Notwithstanding the difficulties associated with leaving the EU, Italy's unstable and increasingly Eurosceptic political environment will likely affect investment. For example, there are severe strains on at least eight Italian banks and fears that contagion could spill over to prevent a planned €13 billion capital increase at UniCredit, Italy's largest and most internationally influential bank.
The Greece Basket Case
Greece is looking for a "deal" on its debt woes, hoping to launch a recovery from its abysmal seven-year stretch of economic despair in 2017. But such a deal is highly unlikely; Wolfgang Schäuble, the German finance minister who has managed to have a disproportionate say in European Central Bank policy, has called for even more austerity for Greece and has said Greece can manage its existing debt for another decade.
But the Greek political leadership - and much of its population - is at odds with Schäuble, and has some leverage.
Greece, like Portugal, Spain, Italy, France, Malta and Cyprus, have all been reeling under austerity budgets imposed by the EU (and, more specifically, by Germany.) The countries of the southern European "Arc of Crisis" across the northern basin of the Mediterranean, have taken small steps to unify to resist the austerity imposed by Brussels and Berlin.
Alex Tsipras, the Greek Prime Minister, hosted a conference in September with the implied threat of forming a Mediterranean Basin Alliance that would break from the Eurozone. Greece itself has an unsustainable debt burden and the IMF has still not determined whether it will participate in its debt relief, a prerequisite for wealthier Northern European countries like Germany and Holland to even consider Greek debt relief. The IMF decision will supposedly be settled in a meeting on December 5th.
While the EU Economy Commissioner Pierre Moscovici thinks that a deal at the December 5th meeting is "doable", so that Greece can participate in the ECB's sovereign debt QE (which would allow Greece to return to the debt market in 2018), Germany is almost certain to object to any hint of actual debt relief, at least until the German elections are concluded in October at the latest.
Other European Developments
- On December 4th, Austrians will go to the polls to elect a president. While the Austrian president is a ceremonial head-of-state role, the leading candidate is a hard-right nationalist, Norbert Hofer of the Freedom Party. Austrians have shown some desire to leave the EU, but it is currently a minority opinion. That could change.
- Britain will trigger Article 50 of the EU treaty in March. That will commence a two year period of negotiations that should cause the ultimate secession from the treaty (if the popular will of this summer's vote is followed.)
- The Dutch elections on March 15th will likely be a battle between the ruling VVD party and Geert Wilders' ultra-right nationalist PVV. The latest reliable poll of polls, from early November, gives the PVV 23 to 27 seats in the Dutch Parliament, while the ruling and more moderate VVD leads by 26 to 30 seats. (That polling, however, was before Wilders' trial for alleged hate speech, which he has turned into a platform for his arguments against immigration. Unreliable on-line polling shows PVV ahead right now.)
The Investment Perspective
Investors should avoid Euro-denominated debt, securities, and ETFs as the aforementioned developments produce market shudders for the next several months.
The German elections are scheduled for October, at the latest. At that point, Germany, the IMF and the ECB will be more likely to discuss debt relief and to pressure Brussels to harden free movement within EU borders and to soften the stance on southern European debt.
Liberal movement within the EU has been one of the leading causes for Europe's right-ward political turn. On the other hand, Germany has enjoyed a huge trade surplus (the largest relative to GDP of any member of the OECD) from being in the Eurozone and will likely do almost anything to preserve its privilege.
As I wrote several months ago, the proper reply to Brexit and the rest of the European rightward turn is for Brussels and Berlin to be chastened on liberal immigration policies and to resolve the debt crises in the countries around the northern Mediterranean Basin with something other than more austerity.
I'm confident Europe's leaders will see that, eventually, but the next several months will be harrowing for investors.
Stay away for now.
- (NYSEARCA:HEDJ) - WisdomTree Europe Hedged Equity Fund.
- (NYSEARCA:VGK) - FTSE Europe ETF.
- (BATS:EZU) - iShares MSCI EMU ETF.
- (NYSEARCA:EWG) - iShares MSCI Germany ETF.
- (NYSEARCA:DBEU) - MSCI Europe Hedged Equity Fund.
- (NYSEARCA:FEZ) - SPDR Euro STOXX 50 ETF
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