The majority of Europeans breathed a sigh of relief following last week’s general election in the Netherlands. Prime Minister Mark Rutte’s center-right party won enough seats to form a ruling coalition. While the far-right populist, anti-immigrant and anti-European Union party of Geert Wilders gained a modest five seats, it did not score the populist breakthrough some had feared. The strident anti-Islamic views of Wilders, who called for the closing of all mosques, proved too extreme for a country that has a good record for assimilating Muslim immigrants. However, the Dutch have not seen the end of Mr. Wilders, as his party is now the second largest in the Netherlands.
Attention now has shifted to the most important elections in Europe this year, those in France. The first round of the presidential election will be held on April 23rd, and the two candidates with the most votes will advance to the second-round vote on May 7th. These votes will be followed by the legislative election, with the first round on June 11th and the second round on June 18th. Markets have been concerned about the possibility that the populist, Eurosceptic, anti-immigrant Front National party’s candidate, Marine Le Pen, could be elected as France’s president. Should that happen and should she deliver on her promises to leave the euro, redenominate and devalue the country’s debt in francs, and hold a referendum on whether France should leave the European Union (“Frexit”), the political and market shock waves would be severe. While the polls suggest that a Le Pen victory is unlikely, the risk remains. Confidence in the accuracy of polls has been weakened by the Brexit and Trump surprises.
This week saw the first TV debate in France among the five leading presidential candidates. A survey taken after the debate indicated that the political newcomer, Emmanuel Macron, who is positioned at the center of French politics, was seen as the most convincing (29%), significantly outpacing Le Pen (19%). The former leader in the polls, the conservative Republican party’s candidate, Francois Fillon, also scored only 19%. His candidacy has been crippled by legal charges. The Socialist candidate, Benoit Hamon (11%), also has little chance to make it to the second round.
Current expectations are that the two candidates most likely to advance to the second round are Macron and Le Pen and that Macron will win the second round with a substantial margin. This is also our base case, but we do think the race may turn out to be closer than the polls indicate. Should that happen, the relief rallies that might otherwise be expected could be tempered by concerns about the implications for the subsequent legislative election.
In any event, populist political trends in Europe will very likely extend well beyond these elections. The results of the election in the Netherlands, along with some indications in the most recent polls that support for far-right populists is weakening, have led to suggestions that populist movements in Europe may, in fact, have peaked. That would be welcome news indeed. Perhaps some of uptick in populist sentiment following the Trump victory in the US has since weakened since Europeans have seen the Trump administration’s proposed budget cuts in areas such as environmental protection and education and the proposed direction for healthcare “reform.” These would not be welcome actions in Europe. Similarly, the increasingly evident negative economic consequences from the UK’s Brexit decision may be having an effect on attitudes. Markets have reacted to a perceived slight easing in political risk with intra-EMU bond spreads narrowing and the euro strengthening. However, the main factors that have led to the rise of populist parties in Europe have not weakened, and some may well grow stronger in the future.
The socioeconomic factors that drive the growth of populism and eurosceptism have not dissipated. Support for the Front National in France is strongest in areas far from major cities and in economically depressed suburbs. The citizens in such areas are more likely to have suffered, rather than gained, from globalization and technology advances (e.g., automation in the manufacturing sector); their education level tends to be lower; and employment opportunities are fewer and less attractive. The importance of agriculture in the European economy has been dramatically reduced. These citizens feel they have been “left behind” and are more likely to view increased immigration as an economic threat. Citizens of the large, open cities that are geared more to services and knowledge-based activities are more likely to see the benefits of globalization, free trade, reduced barriers to travel, and European economic integration.
The migration influx into the EU in 2015–16 led to a rise in support for populist parties as anti-immigrant issues rose to the top of populist sentiment. That also the case in France, despite the fact that France received far fewer asylum seekers than Germany and some other European countries did. Concerns about terrorism added to the anti-immigrant sentiment. In both the Netherlands and France, Islamic fundamentalism became a central target of the populist parties. There has been a reduction in the volume of new asylum seekers following the deal between the EU and Turkey. Unfortunately, this deal is now threatened by the bitter political discourse between Turkey and the Netherlands and between Turkey and Germany. Should that arrangement fall apart, Europe could be faced with a new surge of migrants that would further fuel populist sentiments.
Political leaders in Europe face difficulties in countering the drivers of populism. Stronger and more broadly based economic growth certainly would help; but efforts to undertake needed economic reforms, such as liberalization of excessive regulation of labor markets, encounters opposition from the populist left, while strengthening the structure of the eurozone in ways that would be beneficial to economic growth would involve a further loss of sovereignty that would be opposed by the populist right. Nevertheless, Europe’s political leaders would be wise to take advantage of the current strengthening of their economies and to move forward with both national and EU structural reforms. Continued failure to act threatens increased political and instability in the years ahead.
Further information on the strengthening of the economic recovery in Europe became available today. The March “flash” composite Purchasing Managers Index (PMI) for the Eurozone is the highest in 71 months and new orders are the highest since April 2011. The Composite PMI for France was similarly at a 70 month high. Despite the election uncertainties, French business confidence is reported to be high, expecting pro-business policies to result from the future government.
This writer agrees with the view that populist Eurosceptic parties are not likely to win control of any government in this year’s elections. Indeed, in Germany the race looks likely to be between two pro-Europe candidates, Chancellor Merkel and the Social Democrat candidate, Martin Schulz. The political and systemic risks to the European Union and to the euro that are arising from the growth of populism pose more of a medium- to long-term concern. Nevertheless,we are maintaining our underweight Eurozone position in our International and Global Portfolios and will continue to monitor developments closely.
Bill Witherell, Ph.D., is chief global economist at Cumberland Advisors.