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European Parliament elections: More noise but some signals

Key points

  • Populists look set to make strong gains at the European elections but our expectation is that centrists will continue to dominate
  • Political fragmentation will likely make the European Parliament less predictable, allowing strategic/temporary alignment of diverse political forces on some specific topics, increasing uncertainty
  • However, we expect the implications of these elections on European integration outlook to be limited. Policy inertia should prevail as long as there is no consensus within the European Council
  • Why should we care about these elections, then? First, because European elections open the round of top European job appointments, including European Commission and ECB Presidencies.
  • And second, because they can influence national politics i.e. test the balance of power in Italy, contribute to the thought process on the transition from Merkel’s era in Germany and also stand as the first electoral test for French President Macron

Stronger populist influence but still centrist dominance

Between 23 and 26 May, European citizens will vote to renew the 751 Members of the European Parliament (EP). Historically European elections have failed to attract much attention and turnout has slipped over the years from 62% in 1979 to 43% in 2014. But this year, they have been in focus for several reasons, including the rise of anti-establishment parties and the potential threat its represents to future European policy, the potential consequences it could have on the top four European jobs that have to be filled in 2019 (presidents of the Council, Commission, European Central Bank and High Representative for Foreign Affairs and Security Policy), and potential national implications.

Polls suggest that despite populists’ gains, the European Parliament will still be controlled by pro-European Union (EU) mainstream parties. The centre-right European People’s Party (EPP) and the centre-left Socialists and Democrats (S&D) look set to lose the majority they have enjoyed since the European Parliament’s first direct elections in 1979 (except in 1999, Exhibit 1). These two parties look likely to be the biggest losers in the upcoming EP elections, reflecting the increasing political fragmentation and the loss of support for centre-right and centre-left parties across the region. But the broader European centre-ground looks set to be bolstered by the Alliance of Liberals and Democrats for Europe (ALDE) and French President Emmanuel Macron’s En Marche party - where combined they are expected to gain 37 seats. Although these elections may mark the end of bipartisan control, the European centre should maintain influence on a more shared basis.

Beyond that however, momentum remains with the radical and Eurosceptic right, with Salvini’s European Alliance of People and Nations (old Europe of Nations and Freedom, ENF) set to win 35 seats (Exhibit 2). However, a major change to these parties since 2014 is that they no longer seek an exit from the EU, reflecting a public recoil following the UK’s attempts to leave the bloc. Instead they are seeking to increase the space for national policies within the EU, generally sharing an aversion to immigration.

When adding up left and right side, populist parties would form the largest single parliamentary grouping, gathering around 30% of the votes - or 257 seats. Yet, beyond being short of the majority, such a group would be highly heterogenous, as populists have large ideological and geographical differences. As such, we do not believe the Italian experiment should be viewed as a blueprint. In our view it is hard to see how the French Rally party could set a similar political agenda than the Spanish Podemos. Still we acknowledge that they could tactically align on specific topics to potentially disrupt the legislative process. Therefore, we see the main impact of a stronger populist presence as increasing obstacles to getting things done at a European level, rather than setting out an alternative cohesive political programme.

Our baseline is for a three-party centrist coalition, with the EPP and the S&D relying on the support of ALDE and En Marche (and possibly the Greens as well, Exhibit 3), while populists sit in opposition. A risk scenario where the EPP and far-right parties form a ruling coalition appears to have a low probability based on current polls (circa 80 seats short of a majority) and little appetite from key EPP members, including Chancellor Merkel. Another risk scenario would be a left-wing coalition, with an alliance spreading from the far-left GUE (Europe United Left and Nordic Green Left) to En Marche. This group could be close to majority, but we see it as a low probability scenario given parties such as Spain’s Ciudadanos are closer to centre-right than Podemos or La France Insoumise.

Decision-making: Higher uncertainty

The European Parliament has gained increasing powers over the years, particularly after changes introduced by the Lisbon Treaty (2009). Its decision-making role can be seen through two of its missions: its legislative role and the approval of the European Commission (EC). The latter has a side-effect of influencing the broader appointment of top EU jobs.

Parliament’s main function is to co-legislate with the European Council on laws proposed by the European Commission, and while it can ask the European Commission to put forward legislative proposals, it cannot itself directly propose legislation. Following the adoption of the Lisbon Treaty, the European Parliament gained a veto power over almost all trade and other international agreements and has a decisive vote on most EU laws and its annual budget. As per our baseline, to block the work of the EC, the anti-establishment parties would need to work alongside conventional parties. But this cannot be ruled out on some specific topics. In our view, a more fragmented Parliament will likely increase uncertainty and could substantially slow down or even paralyse EU legislation at a time when important decisions will have to be made. Indeed, given the likely need to rule on EU/US trade talks and ultimately to rule over Brexit trade policy, this could add an additional layer of complexity to discussions.

The European Commission is the EU’s executive arm - it takes decisions on the EU’s political and strategic direction, initiates and implements laws and is the “guardian” of the fiscal rulebook. In 2014, the EP introduced the “Spitzenkandidat” system, under which the lead candidate of the European group that wins the most seats in Parliament becomes the next EC President. This system is not enshrined in European treaties and it is not yet clear whether it will remain in place. In our view, the larger the political fragmentation, the lower the credibility of a “Spitzenkandidat”, thus reducing the direct influence of Parliament on the appointment of the European Commission.

Should the “Spitzenkandidat” process be abandoned, then it would be up to the European Council (heads of states) to nominate a candidate (reflecting the balance of power there). Parliament would still have to approve this candidate and later the Commissioners, but it would require significant divergence within mainstream parties and solid unity of populists’ parties to derail this process. Overall, we believe that the influence of the European Parliament on the European Commission nomination has likely declined with political fragmentation, while uncertainty has increased.

One important side-effect of the European elections is that they will open the round of key EU-level appointments. In summer/autumn 2019, the four most important jobs in Europe will become vacant: the presidencies of the Council, the Commission, the ECB and the High Representative for Foreign Affairs and Security Policy[1]. These jobs are not chosen independently from one another and given the appointment of the Commission will happen first, it will automatically impact the other ones.

Three factors will be considered - nationality, politics and gender, complicating this political game of thrones. For example, based on latest polls and assuming the “Spitzenkandidat” process is respected, then the German centre-right EPP candidate Manfred Weber would become the next president of the Commission. This would increase the chances of a French or French-aligned candidate at the ECB presidency. Conversely, if the “Spitzenkandidat” process is abandoned, because of a bad performance of the traditional parties, or a strong performance by the centre or new parties, including populists, then we believe the chances of compromise ECB President candidates, such as the Finnish Rehn or Liikanen, are higher.

At this stage there appears to be no consensus on top EU job appointments, with a wide range of scenarios possible. We should get more clarity by the 20-21 June summit, when heads of states are expected to nominate candidate for the European Commission presidency (Exhibit 4).

Low prospects for further EU reform

Political fragmentation and populism will not help progress on the EU’s reform agenda. However, we believe it would be a mistake to blame the European Parliament.

For us the lack of drive for further reform has its source in the European Council, where there seems to be no majority on the path and pace for such reforms. The lack of coordination of the German-French couple is blatant, with differences in vision openly mentioned by Chancellor Merkel[2]. More precisely, Annegret Kramp-Karrenbauer, the leader of Germany’s centre-right CDU, rejected key aspects of Macron’s plan for Europe, such as debt mutualisation, European social security and European minimum wages. This lack of consensus at the European Council level considerably limits the prospects of reforms in our view. It is not Parliament which is in the driving seat, so the outcome of the European elections should not have a significant effect on the European integration process.

Significant implications at the national level

We believe the main reason why the European elections matter this time is that they will likely have political ramifications at a national level, especially in Italy, Germany, France and the UK.

In Italy, the European elections could change the balance of power between the two parties of the coalition, 5SM (5 Star movement) and Lega, potentially leading to a change of government. Latest voting intentions indicate Lega as the strongest political formation with almost 31%, followed by 5SM (23%) and Democratic Party (PD, 22%) tied in for second place. Forza Italia (9%) and Brothers of Italy (5%) put the centre right very close to 45%, i.e. marginally above the threshold for a majority in Parliament. We continue to believe that Salvini will have little interest in disrupting the coalition, especially as he would likely prefer to share the responsibilities of the tricky 2020 budget negotiations with 5SM, rather than being the sole accountable. Yet we think Lega could push for an internal government reshuffle.

If Lega were to outperform in the polls and win more than 35% of the votes, then Salvini might decide to end the coalition government. In this case, everything falls back into President Mattarella’s hands, who will decide on the back of the March 2018 result. Most likely, he would ask Luigi Di Maio to try to form a new government. His only option would be to look left, but it is difficult to see PD and 5SM together at his stage, despite ideological similarities. Moreover, it’s not clear they would have the necessary number of votes. If Di Maio fails, then the President might either schedule new elections or (like his predecessor Napolitano) think about a technical government. Overall, we expect Italian politics to re-take centre stage after the EU elections.

In Germany, the European elections take place in the broader context of a transition period from the Merkel era. They could accelerate Merkel’s departure and the end of the Grand Coalition. Polls suggest that the CDU/CSU party will gain 30% of the votes, down five percentage points (pp) compared to 2014, while the Social Democrats (SPD) would be the biggest losers with only 16% of the votes (vs. 27% in 2014). This would likely add pressure on the SPD to terminate the coalition at the end of 2019, following its Party conference. A weaker performance-and the regional elections in Bremen, a SPD stronghold on the same day of the European elections are also to watch- could lead the SPD to pull the plug earlier. Our baseline is for a continuation of the Grand Coalition until end of 2019, but we do not rule out snap elections in 2020.
In France, European elections will be the first electoral test for Macron, potentially influencing the pace of reforms. Polls signal that Macron’s En Marche and Le Pen’s Rassemblement National are neck-and-neck, with around 22% of the votes. For President Macron, weakened by the “Gilets Jaunes” movement, coming first would be necessary to regain positive momentum and start the second half of his mandate on a better footing. Coming second would potentially limit Macron’s willingness and ability to pursue reforms, while affecting his credibility on the European scene.

In the UK, the EU elections come against the broader background of political uncertainty created by the Brexit process. Polls suggest that the new Brexit Party will make a strong entrance. However, at the same time the UK Independence Party (UKIP), which was heavily represented in 2014, look set to lose most of its seats. Meanwhile centrist and pro-EU parties including the Liberal Democrats, the new Change UK and Green party could add a number of seats. The main impact is likely to be a significant loss of seats for the ruling Conservative Party, which will increase pressure on Prime Minister May to resign – something we see as likely over the coming month – increasing the chances of broader general elections. More generally polls in the UK suggest the electorate is broadly evenly split between hard Brexiters, compromisers and remainers. A split that underpins the UK’s current political impasse.

[1] Executive Board Member Coeuré’s term will also expire on December 31, 2019.

[2] Please refer to SZ interview der Kanzlerin, 15 May 2019.

 

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