A Busy Two Days in European Politics

Fresh off the Platinum Jubilee bank holiday, summer is in full bloom—traditionally the start of a relatively quiet stretch in world politics. But not so this year: Global politics’ start to the season seems far busier than the norm, giving us plenty of market-related tidbits to consider. As always, we don’t prefer any politician or party in any country, and look at these developments through a purely market-orientated lens. So what are the potential market implications of several Conservative members of parliament (MPs) moving against UK Prime Minister (PM) Boris Johnson, the latest warnings over this month’s French legislative elections and the Swedish government’s brush with a collapse? Let us explain.

Boris Johnson Keeps His Job … for Now

When the scandal known as Partygate flared back up last week, several Conservative MPs renewed their calls for Johnson to resign over the revelations contained in senior civil servant Sue Grey’s report on the gatherings that occurred whilst the country was under lockdown. Within days, 54 had submitted formal letters of no confidence to the party’s 1922 Committee of backbench MPs, triggering a party no-confidence vote Monday.

That vote, technically, was a win for Johnson. He argued his case to Tory MPs, and a majority voted to continue with him as leader. Per the party’s rules, there can be no further no-confidence votes for a year. But most commentators we follow agreed this was not a commanding victory. About 40% of Tory MPs voted against him, a much higher share than many observers initially deemed likely.^[i] Several of these MPs reiterated their calls for his resignation after the vote. And as several commentators pointed out, when his predecessor, Theresa May, won a party no-confidence vote with fewer Tory MPs against her, most observers called it a disaster, and she was gone within a year.^[ii] Ditto Margaret Thatcher, who also resigned not long after winning in the initial attempt to oust her in 1990.^[iii] In our view, all of this explains why most commentators agreed this is the beginning of the end of Johnson’s run.

In his speech to the 1922 Committee, Johnson tried to win over his party by basically pledging to govern like, well, a Tory. He pledged big tax cuts, signalling a break with the big spending and tax hikes that have marked his government thus far.^[iv] Perhaps following through with this, in hopes of raising living standards in the traditionally Labour supporting areas that delivered his big election win in 2019, will be enough. Then again, the by-elections in Wakefield (a so-called Red Wall seat) and Tiverton and Honiton (traditionally Tory heartland) on 23 June are a rapidly approaching test. Losing either would likely be a severe political blow. If he survives that, another report on Partygate, due this autumn, will reveal whether he broke Parliamentary standards by misleading MPs when reports of illegal gatherings during lockdown emerged. Johnson rejects allegations of lying, but if the report finds otherwise, he will likely face much more pressure to leave office.

Our guess is that inflation and energy prices will have a large influence on his job security from here. If the inflation rate decelerates and October’s energy price cap increase isn’t gigantic, perhaps the backlash could subside. But if household energy continues breaking the bank and more political embarrassments arrive, well, we have seen PMs deposed for less.

We don’t think any of this is predictable. But however this saga unfolds, we think Johnson’s political capital is likely gone. Maybe he can push through some feel-good tax cuts and/or other giveaways, presuming Chancellor of the Exchequer Rishi Sunak—a long-rumoured potential leadership challenger—enables this to fit with the Budget maths. But we think anything more sweeping or contentious than that probably dies on the vine, extending gridlock.

For stocks, this seems a bit mixed to us. We have long found gridlock to be beneficial for markets, as it tends to reduce legislative uncertainty. When governments don’t pass much, the likelihood of policy changes creating winners and losers falls, which we think helps encourage risk-taking and investment. But we also find that stocks dislike high and rising uncertainty. So it won’t shock us if sentiment bounces around in the near term as concerns of a leadership change ebb and flow. But as these fade and stocks more clearly see the reduced legislative uncertainty at hand, we think it is likely to help gridlock deliver what our research shows are its usual tailwinds.

About Those French Election Polls

France holds the first round of its legislative elections on Sunday, and the latest polls seem to have set several commentators we follow on edge. The polls show President Emmanuel Macron’s coalition potentially losing several seats and the leftist bloc controlled by Jean-Luc Mélenchon making big gains. Unsurprisingly, many commentators now warn France is on the verge of having an anti-euro leftist prime minister calling the shots, potentially setting up a confrontation with Brussels that will call the euro’s survival into question.

In our view, this is rather hasty. The National Assembly has 577 seats, with 289 needed for a majority. The polls triggering these warnings show Macron’s bloc winning between 275 and 315 seats, with Mélenchon’s group taking 170 – 205 (and the traditional centre-right Republicans and Marine Le Pen’s National Rally mopping up most of the rest).^[v] So even if the polls are correct, it points to Macron’s centrists holding either a tiny majority or a large plurality, with the leftists consigned to being a noisy opposition. That doesn’t augur well for Macron passing much of significance, in our view, but it also likely dooms Mélenchon’s agenda of big spending and tax hikes and scrapping trade agreements.

Perhaps the polls are wrong, though. In France, the first round features all candidates in a given constituency, and round two is a run-off between the top finishers if no one wins more than 50% of the vote in round one. That makes extrapolating seat projections from opinion polls a bit tricky. So maybe the leftist coalition does emerge as the largest bloc. Even then—and even if Mélenchon wins a slight majority—gridlock seems likely to us. You see, the left in France isn’t a uniform bloc. Mélenchon’s alliance includes the traditional centre-left Socialist Party as well as the communists, greens and smaller leftist parties and candidates. They poll well together on paper, but there are disparate policy aims in that group. We suspect the Socialists, in particular, will remember their former leader, François Hollande, getting shellacked in his presidential re-election battle after pushing through a series of unpopular tax hikes. The party still hasn’t recovered from this electorally, and political instincts suggest those still hanging on may not want to risk a repeat.

Then too, Macron isn’t powerless in this scenario. Granted, unlike the American president, France’s head of state doesn’t have a strong veto. All he can do is request that the assembly read a bill one more time and reconsider it. But the French president does appoint the PM. And he has the power to dissolve the National Assembly and call new elections, theoretically giving Macron some hefty leverage over a potential leftist government.

We will see how the vote goes, but for now, France looks to us to be primed and ready to benefit from falling political uncertainty. Whether this comes through pro-euro groups finishing well in the elections or markets gradually fathoming gridlock, we think it is likely to add modest tailwinds to global stocks as this year rolls on.

Sweden’s Government Avoids Collapse. Barely.

After just over six months in office, Swedish PM Magdalena Andersson is just barely holding on to her job. Earlier Tuesday, Parliament held a no-confidence vote in her justice minister, Morgan Johansson, with his record on tackling crime the central issue. If he lost, Andersson said she would resign, which would have left Sweden without a government three months before the next general election (scheduled for 11 September).

This vote was the very definition of a toss-up. In the end, 174 MPs supported Johansson and 174 voted against, with one MP abstaining.^[vi] That MP is Amineh Kakabaveh, an independent who cast the deciding vote for Andersson’s new government last year. Her abstention meant the no-confidence side failed to win a majority, keeping Johansson—and, by extension, Andersson and her government—in office.

We don’t find any of this surprising. Sweden’s legislature has been fractured for years, and Andersson’s coalition—which includes several parties—looked unstable to us from the start. In reductive terms, we think it was a fragile hodge-podge that replaced a fragile hodge-podge. Thus gridlock has reigned for years and probably persists through the current theatrics and beyond the next election. Therefore, in our view, whilst the government’s potential collapse stirred headlines globally, we doubt the outcome is terribly consequential for stocks. Swedish markets are very used to shaky coalitions, and we think the status quo is likely to remain just fine.