European Parliamentary Elections 2019: Caution Reaffirmed

Summary

• The EU parliamentary elections held last weekend delivered few surprises.
• No doubt, the election confirms that anti-establishment sentiment has been on the rise in recent years.
• We remain cautious on investing in eurozone peripheral sovereigns and taking European credit risk broadly.

The EU parliamentary elections held last weekend delivered few surprises. Support for populist parties across the EU rose from around 22% in 2014 to around 28% currently, broadly in line with predictions from pre-election polls. The ranking of key groups in the European Parliament also looks to be in line with expectations, with the center-right EPP likely to have the highest representation in parliament (with 179 out of 751 seats), followed by the center-left S&D (153 seats) and the centrist ALDE&R (105 seats).

No doubt, the election confirms that anti-establishment sentiment has been on the rise in recent years. But, as we argued in a recent piece, this result is unlikely to be consequential for European policymaking for a few reasons. First, populist support remains well below 50%, which limits their power in parliament. Second, populist parties are not cohesive, and are unlikely to form a united front. Third, the European decision-making process remains very intergovernmental, with key decisions requiring country leaders' approval (in the context of the European Council). Fourth, populist parties have softened their Eurosceptic rhetoric recently, focusing on immigration rather than leaving the EU.

The consequences in terms of the upcoming nominations of key European positions - first and foremost the President of the European Commission (EC), the President of the European Central Bank (ECB), and the President of the European Council - also do not appear to be very significant. These positions will be the result of horse-trading across key European leaders, who are meant to take the election results into account, but retain a lot of discretion.

For the EC President specifically, the Spitzenkandidat convention stipulates that the European Council should nominate the candidate put forward by the European political party that wins the most seats in the EU elections. If the convention is followed, this would likely crown German candidate Manfred Weber as EC President. Arguably, far-right populists (including Hungarian party Fidesz, currently in the EPP) could gain a similar number of seats in parliament to the EPP if they were to join up, but an alliance between all of these parties appears unlikely. And, importantly, the Spitzenkandidat is merely a convention, which has been subject to a lot of criticism, and may well not be followed.

There are some national implications from the election results. Among the major implications, Prime Minister Tsipras in Greece called a snap election (likely to take place in late June or early July), although this would have needed to happen anyway by the fall. In Italy, a strong showing by the League (which got more than 34% of the votes) changes the balance of power within the government, although it's not clear that it is in the interest of parties in government to break the coalition at this point. In the UK, the strength of the Brexit party (which received more than 31% of the votes) at the margin puts pressure on the Conservative party to take a harder stance on Brexit. But such a harder stance seemed to be on the cards already given the likely election of a Brexiteer as the Conservative party's leader.

All in all, while the election is not a game changer in terms of EU policymaking, it confirms that populism remains strong, and a significant threat to an intrinsically fragile currency union over the medium term. The rise in anti-establishment sentiment also reduces already low hopes of achieving further integration in the region. On balance, this reaffirms our longer-term outlook for low growth, low inflation, and low interest rates in the eurozone. We remain cautious on investing in eurozone peripheral sovereigns and taking European credit risk broadly.

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