Where European Populism Will Be Strongest In 2018

While the establishment may breathe a sigh of relief looking back at political developments and events in Europe - which was spared some of the supposedly "worst-case scenarios" including a Marine le Pen presidency, a Merkel loss and a Geert Wilders victory - in 2017, any victory laps will have to be indefinitely postponed because as Goldman writes in its "Top of Mind" peek at 2018, Europe"s nationalist and populist tide was just resting, and as Pascal Lamy, the former Chief of Staff to the President of the European Commission admitted earlier this year, "Euroskeptic politicians are largely following the pulse of domestic sentiment. The fact is that the public is less enthusiastic about Europe than it once was."

Echoing the sentiment by the europhile, Goldman"s Allison Nathan writes that while the Euro area’s most immediate political risks—i.e., populist or euroskeptic parties winning key elections this year— did not materialize, these movements have continued to gain traction.

• In the Dutch elections in March, the far-right Party for Freedom performed worse than polls had once predicted, but still increased its share of the vote relative to the 2012 elections. It remains the second-largest party in parliament.


• In France, concerns about the prospect of Marine Le Pen winning the presidency gave way to optimism over Emmanuel Macron’s reform agenda; nonetheless, Le Pen posted the best-ever showing for her party in a presidential race.


• In Germany, Chancellor Angela Merkel’s CDU-CSU retained the largest number of seats in the Bundestag, but the far-right Alternative für Deutschland (AfD) entered it for the first time with 13% of the vote.


• And elsewhere in Europe, populist parties on various parts of the political spectrum performed well enough to participate in government coalitions; indeed, an anti-establishment candidate in the Czech Republic recently became prime minister

Some other observations and lessons from recent European events in the twilight days of 2017:

• The transition from campaigning to governing has proved difficult. Europe’s increasingly fragmented political landscape has made coalition-building challenging. In the Netherlands, it took over 200 days to form a government with only a single-seat majority. Similarly, German coalition talks with the Green party and the Liberal (FDP) party collapsed in November. But, after having planned to move into the opposition, the SPD—Merkel’s former coalition partner—decided at its congress last week to open talks with the CDU-CSU. Talks were set to begin this week.


• Other sources of uncertainty remain unresolved. Spain continues to grapple with the standoff between Madrid and Catalonia; regional elections in Catalonia on December 21 will influence the trajectory of the situation. Meanwhile, the UK and EU-27 seem likely to agree to move past the first phase of the Brexit talks (covering separation issues). But in a setback for UK Prime Minister Theresa May, UK lawmakers recently voted for an amendment to the Brexit bill that will guarantee Parliament a vote on the final deal agreed with the EU.


• The decline in political risk bolstered European assets, though fundamentals likely played a decisive role. The market-friendly outcome of the French elections dovetailed with a pick-up in European growth, supporting European equity markets. US inflows into European equities rose significantly but have since stabilized with the acceleration in growth and the decline in the risk premium likely behind us. Receding political risks also contributed to a stronger euro, which is up 12.5% against the dollar this year. Given the currency move, the SXXP is up roughly 7.5% in local terms and 20.6% in USD terms year-to-date.

Next, here"s what Goldman expects and will look for in 2018 and beyond:

• A continuation of the populist pull. The socioeconomic and cultural factors driving public opinion are unlikely to dissipate. Indeed, they may come into greater focus if growth moderates on a sequential basis starting in mid-2018.


• Constraints to further fiscal integration. Opposition to fiscal transfers within the Euro area makes incremental revisions to existing EU programs more likely than transformational change. Key to watch will be Macron’s credibility as a champion of integration, which will hinge on his ability to push through reforms in the face of political and economic constraints.


• Risks around Italian elections set to take place in March. Polls show the largest populist party, the 5 Star Movement (M5S), leading with roughly 27% of the vote. However, the new electoral law and M5S’s unwillingness to join a coalition suggest a centrist coalition is most likely. Such a government, while pro-EU/euro, would likely struggle to implement reforms.


• An eventual resolution of political issues in Germany and Spain. We believe Germany’s major parties will work to avoid new elections, given limited public appetite for a new vote and the risk of AfD gaining more seats in parliament. In Spain, economic and policy uncertainty could persist, but in our view, it is not likely to have lasting or systemic implications. Eventually, we expect a compromise that grants Catalonia greater autonomy within Spain.


• A bumpy road to Brexit. Expect the UK and EU to eventually agree to a two-year “status quo” transition plan.

And finally, here is a map showing where the forces of populism are expected to remain strong - and grow - across the continent.

German Establishment Routed: AfD Second In Former East Germany; Result "Less Market Friendly Than Expected"

The first sellside comments on today"s German elections - which as a reminder was a disaster for the German establishment, following the worst showing for the CDU/CSU since 1949 and the worst result for the SPD since 1945 with support for both parties tumbling since the 2013 elections...

... have started to trickle, in and according to SEB, the result is ‘less market-friendly’ than expected.

Quoted by Bloomberg, SEB cross-asset strategist Thomas Thygesen said that the result is a victory for Angela Merkel as expected, but her mandate going into negotiations about deeper euro integration does not look quite as strong.

"It looks like marginally less market-friendly than expected,” Thygesen said adding that “I’d say this is in line with our expectation that the euro would pause around $1.20 vs dollar and then maybe retrace a couple of percent over the autumn.”

“The AFD above 10% suggests that even here the stakes are high: if the European project doesn’t fly this time in a way that voters like, Germany could look less politically stable in a few years.”

A note from Pantheon"s Claus Vistesen is similarly concerned about the election outcome and the viability of the upcoming coalition:

At a first glance, it seems that building a coalition government will be a little trickier than markets had expected. If the exit polls prove accurate, the major parties—CDU and SPD—have suffered a drastic setback compared to the elections in 2013. CDU is projected to come out top with 32.5, of the votes, but this is far-, from the 42% in 2013. Similarly, the social democratic SPD have been pegged back to 20%, compared to just under 309, in 2013. The voter-flight from the two main parties appears to have gone in two opposite directions. The populist—and nominally EU sceptic—AFD is set to become the third-biggest party in the Bundestag with 13.5% of the votes, significantly better than the polls were predicting heading into today"s vote. But the liberal FDP also is expected to have had a good day, securing 10.5% of the votes.

Assuming the exit polls are accurate, Angela Merkel—who almost surely will remain as chancellor—has two options, assuming that a government with AFD is out of the question. She can form a two-party grand coalition with SPD or she can go for a coalition with the greens—set to gain 9.4%—and FDP. Our bet is on the latter—we doubt the SPD will go into a grand coalition given its after all scathing defeat—but this will be a slender coalition. Mrs. Merkel is a battle-hardened builder of coalitions, but she will need to draw on all her experience to form one, which can actually get things done.

On balance then, we see the exit polls are slightly negative from the point of view of risk assets in the Eurozone and the euro exchange rate.

The result also increases the risk of re-elections, but we would put the probability of this at under 15%.

* * *

Finally, in yet another shock for Germany"s establishment, according to Europe Elects, the nationalist AfD was the second strongest party in former East Germany, the more economically backward segment of Germany.

We now await other analyst observations which we expect will be equally dour on today"s election result, and as a result the EURUSD is set to tumble once it opens for early trading.

AfD In 3rd Place In German Election Polls: Unhappy Political Marriages Loom

Authored by Mike Shedlock via MishTalk.com,

German federal elections are Sunday, September 24. The most likely outcome of the election is another “Grand Coalition” but it will be a much-weakened coalition.  And If that coalition forms again, the rightwing AfD party is poised to become the largest opposition party.

Rightwing Turning Point

The Wall Street Journal reports Nationalist AfD Party Moves Into Third Place in German Election Polls

A last-minute surge in the polls has put a far-right party that wants to dial down German remembrance of the Holocaust within striking distance of becoming the country’s biggest opposition force.

The four-year-old Alternative for Germany, or AfD, has moved into third place and double digits in recent polls. If those numbers hold up until the Sept. 24 election and German Chancellor Angela Merkel repeats her current governing coalition with the center-left Social Democrats, the AfD would become the biggest opposition party in parliament.

No matter how exactly the results shake out, Sunday’s election seems assured to represent a turning point in postwar German history. Ms. Merkel’s center-right Christian Democrats are set to finish first, and she is expected to remain chancellor. But the AfD, polls show, is very likely to become the first far-right party in more than half a century to win seats in parliament.

“If the AfD in fact gets into the Bundestag, Nazis will be speaking in the Reichstag [building] for the first time in more than 70 years,” Foreign Minister Sigmar Gabriel recently told German magazine, Der Spiegel.

Political scientists say while the AfD isn’t a neo-Nazi party, it includes a right-wing-radical wing that appears to be strengthening. And without question, the anti-immigrant party breaks taboos in a country that has resisted right-wing populism for decades in the shadow of the Nazi era.

In parliament, AfD lawmakers would receive state financing to hire new staff and to set up offices in their districts, increasing the party’s nationwide reach. They would hold key seats on legislative committees, make nationally televised speeches, and be able to send official inquiries to the government, which ministries are required to answer.

Polls suggest the AfD draws voters from across the political spectrum who are unhappy with mainstream politics, particularly on immigration. A strong showing by the AfD could complicate things for Ms. Merkel by preventing her from being able to form a governing coalition with just one of two smaller parties, the pro-business Free Democrats or the environmentalist Greens. Instead, she may well need to form an unwieldy three-way coalition including them both—despite their ideological differences—and her conservative bloc. Repeating her current “grand coalition” with the Social Democrats would require her to overcome misgivings in both parties.

Eurointelligence View

For many international observers Germany is the exception: In times of Donald Trump, Brexit and Emmanuel Macron, Germans seem to live on another continent of social peace and political harmony. There is nothing of the desire for renewal witnessed during the French elections, or the desire to distinguish themselves shown by the Brexit vote. There is no major populist insurgency. Controversial subjects of our times like terrorism, refugees, immigration, military engagement, or nationalism, are avoided, observes Jean-Dominique Giuliani, president of the Robert Schuman Foundation.

But this peace is superficial, notes Philippe Rocard in Le Monde. There are about 20-30% frustrated voters in Germany, angry about Angela Merkel and her motto “Wir schaffen das” (we can make it) in immigration policy, or her handouts to bailout countries during the eurozone crisis. The three parties that capture the rising protest are the AFD, Die Linke and even the FDP with its radicalised discourse against Greece.

The rise of the AfD, which looks like it could become the third strongest party only four years after its foundation, would be a turning point in postwar German history, notes the WSJ. Never since the 1950s has a far-right party cleared the 5% hurdle. According to the recent polls, the AfD could get as many as 89 out of 703 seats. With its xenophobic and nationalistic rhetoric, the party breaks taboos in a country that has resisted right-wing populism for decades. To be fair, these numbers are still small compared to Austria where the Freedom party is polling 25%, or France where Marine Le Pen received 34% in the presidential run-off. But for Germany it is a major shift.

Unhappy Marriages

CDU (36) + FDP (22) would have a total percentage of about 58%. But many in SPD would prefer the SPD to be in opposition. Should that develop, SPD would be the largest opposition party.

If SDP chooses opposition, Merkel could form a majority government via an alliance of CDU (36), the Greens (7), and FDP (9). Currently, that alliance would have a bare majority with 52% of the vote.

Regardless of what happens, Merkel will be in a much-weakened position compared to now.

And other than a miracle CDU/FDP finish that achieves more than 50%, it may take quite some time after the election for the next government to form.