Editors’ Note: Our political commentary is intentionally nonpartisan. We favour no party nor any politician and assess developments solely for their potential market impact.
Compared to last year’s tumultuous American election and Brexit-related trade negotiations, this year’s political scene is rather calm. But that doesn’t mean nothing is happening. Uncertainty is ticking higher in some places and lower in others, but all support the global gridlock we think is likely to benefit equity markets worldwide this year. Let us have a look.
German Players Move Into Position
Germany’s federal election, which will determine outgoing Chancellor Angela Merkel’s successor, is still five months away. But one piece of its uncertainty cleared last week, when her Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), selected CDU leader Armin Laschet as its candidate to replace Merkel. Until then, it wasn’t clear who would be the CDU/CSU ticket’s standard bearer, especially after the CDU’s drubbing in some key local elections and CSU leader Marcus Söder’s overall higher popularity.[i] But after winning over three-quarters of party insiders’ support in a vote last Monday, Laschet pulled out a win, which we think enables markets to start focusing on actual candidates and their popularity with voters.[ii]
To that end, many financial commentators we follow jumped on a new poll showing the Green party in first place, seven points ahead of the CDU/CSU as they rode high on the selection of their own candidate, party co-leader Annalena Baerbock.[iii] Even though most other recent polls put the CDU/CSU ahead or show a tight race, the outlier got the most attention as it highlighted the potential for a change in national leadership.[iv] Some commentators claim this is a political sea change atop Europe’s largest economy.
We wouldn’t put much stock in any of this chatter, though. Whether the Greens or CDU/CSU come in first in the only poll that matters—the one on election day—Germany seems set for the same deep gridlock that has reigned for years. Considering no party presently polls above 30%, none looks anywhere close to winning a majority, and a coalition of two or three (or more) parties looks to us like the most likely outcome.[v] Maybe the Greens govern with the CDU/CSU. Maybe they join with the Social Democratic Party, which is the CDU/CSU’s current coalition partner. Or maybe the extant coalition keeps going somehow. We think all these possibilities are a recipe for not much happening, keeping the risk of major change low.
Canada Won’t Have New Elections After All
Canadian Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland unveiled their government’s new budget last week, and—like most budgets these days—it is a grab bag of COVID relief and a smattering of new taxes.[vi] In other words, not anything that would rate as unique globally. But in an interesting twist, it seemed to take some inspiration from the leftist New Democratic Party (NDP), which currently polls third behind Trudeau’s Liberal Party and the centre-right Conservatives.[vii] Trudeau’s budget included big subsidies for wages and childcare, both of which the NDP has championed.
You might think this would inspire the NDP to vote against the budget out of spite. That would probably have guaranteed the bill’s death, considering Conservative support is unlikely and Trudeau heads a minority government. But if the budget didn’t pass, then the government probably would have collapsed, which could trigger new elections. Those would allow Trudeau to capitalise on the Liberals’ improved polling whilst—in an amusing turn—painting the hard-left and centre-right opposition as the parties of austerity for shooting down an expansive budget. In our view, this calculus likely goes a long way toward explaining the NDP’s decision to back the budget bill—which passed this week, ending the saga and keeping the government in place for the time being.
And with that, uncertainty over Canadian politics has ticked down a bit. A new election could have delivered a majority for Trudeau, reducing political gridlock—and perhaps increasing legislative risk for markets. Regardless of a government’s ideological bent, we think gridlock reduces the likelihood of big legislation creating winners and losers, generally giving equities one less risk to chew over.
One Roadblock Down for EU COVID Relief Funds, Many to Go
Last summer, the EU had a seemingly huge breakthrough: Member-states agreed to raise money collectively by issuing debt under the aegis of the European Commission, then spend the money across the bloc for bigtime COVID relief and, allegedly, “stimulus.” Many financial commentators we follow were enthusiastic over the prospect of €1.8 trillion worth of public spending that wouldn’t jack up Italian and Spanish debt, and sentiment seemingly surged, based on coverage we reviewed.
But the deal ran into numerous roadblocks, including a challenge in Germany’s constitutional court. This is far from the first time since the eurozone debt crisis that the EU or eurozone’s fiscal plans have been subject to German judicial veto power, so if it was on your Bingo card, congratulations. Happily for fans of the plan, that challenge partly resolved last week, when the court dismissed an urgent bid to declare the legislation unconstitutional and lifted an injunction that prevented Germany from finalizing ratification of the EU plan. It isn’t the final word on the matter, as the court will still hear the case and eventually rule, but it at least lets the EU move forward for now.
Still, as of this writing, nine other member-states have yet to officially ratify the plan. Yes, in alphabetical order, national parliaments in Austria, Estonia, Finland, Hungary, Ireland, the Netherlands, Poland and Romania still must also approve the deal. We will spare you the deep dive into why nearly one-third of EU nations haven’t completed this process yet—the word politics should suffice. Most observers presume they will, though it wouldn’t shock us if there were some theatrics along the way.
However this plays out, we don’t think it is a huge deal either way. €1.8 trillion spread across 27 nations over three years is pocket money, not stimulus, and our research indicates it mostly replaces spending that would have happened anyway, presuming national governments can even agree on how to spend it (witness the long-running debates over this in Italy and Spain). Mostly, we just see this as a shining example of Continental gridlock in action.
[i] “Markus Söder: Star Trek Fan Who Could Boldly Go and Lead Germany,” Laurence Peter, BBC, 9/4/2021.
[ii] “Germany CDU: Armin Laschet Backed by Merkel Party in Chancellor Race,” Staff, BBC, 20/4/2021.
[iii] “Germany’s Greens Edge Ahead of Merkel’s Conservative Bloc in Voter Poll, Boosting Party Confidence,” Holly Ellyatt, CNBC, 21/4/2021.
[iv] Source: Politico, as of 228/4/2021.
[vi] “From a Yacht Tax to New Levies on Vacant Homes and Vaping – Here’s What New Taxes Ottawa Just Announced,” Pete Evans, CBC, 19/4/2021.
[vii] Source: CBC News Poll Tracker, as of 28/4/2021.
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