A (Non-Brexit) Look at European Politics

Nowadays, the words “European politics” seemingly mean “the latest in Brexit talks.” But other things are happening! In Greece, Italy and Sweden, recent developments again show widely feared European populism isn’t threatening. Whilst financial media often discuss the risk radicals upending the status quo, in our view, these developments show political gridlock reigns.

Greece’s Lesson in Moderation

Whilst Greek government theatrics perked recently, they resolved just as fast—and to little fanfare—likely ensuring Prime Minister Alexis Tsipras (a leftist firebrand turned economic liberaliser) and his Syriza Party’s government stay in power at least a few more months. Last June, Tsipras negotiated an agreement with Macedonia—Greece’s northern neighbour—to change its name to North Macedonia, but his government splintered over 25 January’s parliamentary vote. Since Yugoslavia broke up, Greece has called Macedonia the Former Yugoslav Republic of Macedonia, or FYROM, and the naming dispute has prevented it from joining NATO and the EU. Part of Greece’s objection rests on historical grounds, but Greek leaders have also long pointed out that using “Macedonia” implies a claim on northern Greek territory that was also part of ancient Macedonia and retains the name. Perhaps supporting this claim, (now-North) Macedonian leaders once gave a presentation with a map of their country in the background—with the southern border enveloping Greek territory. Greece, for obvious reasons, didn’t enjoy the symbolism. But both sides accepted renaming Macedonia/FYROM as North Macedonia, which implicitly recognises there is a southern portion of ancient Macedonia outside of its control. However, Syriza’s coalition partner, the nationalist Independent Greeks party, quit the government 13 January in protest. Tsipras survived the ensuing no-confidence vote 16 January, but if Parliament didn’t approve the deal, most political observers thought it likely would have triggered snap elections. In the end, Parliament approved it with a margin of 153 – 146 with 1 abstention, avoiding a snap election before October’s regularly scheduled contest.

We think this saga underscores how much Tsipras has confounded expectations since taking office in 2015. Syriza’s campaign platform rejected austerity and Greece’s EU/IMF/ECB bailout terms, and Tsipras held a referendum to reject them—which would likely have led to “Grexit,” or a Greek exit from the eurozone. Yet when voters did, Tsipras flipped, an extreme example of sitting politicians moderating. Since then, he has quietly led a quicker privatisation effort and hewed closely to his creditors’ terms whilst emerging as an international statesman in the Macedonian talks. Ironically, these populist radicals so many in financial media feared four years ago appear to be a source of stability—a lesson we think investors should heed elsewhere.

Italy Follows Suit

We think Tsipras and Syriza’s evolution has echoes in Italy, where the resolution to a long-running bank saga shows its populist government (again) moderating. On 2 January, the ECB took over Italian regional lender Banca Carige after it was unsuccessful raising capital late last year, leaving it out of options for addressing its pile of bad loans. Whilst an Italian bank’s implosion may seem problematic, we think this is a special case. Banca Carige has struggled for years, likely making markets well aware of its problems. Its share price has plunged since 2011—hitting cents on the euro after a 2016 accounting scandal—as investors seemed to anticipate its bankruptcy.[i] In our view, it would have been more surprising if regulators hadn’t taken over Banca Carige.

But we think it was likely surprising for many when Italy’s populist coalition acceded to Banca Carige’s request (under ECB supervision) to issue state-backed debt. On the campaign trail, both members—The League and Five-Star Movement—issued rhetoric implying they were staunchly anti-bailout (bailouts involve government funds being used to save private firms). In our view, their U-turn shows how political expediency can temper populist parties once in power. This follows their climb-down from an EU budget fight, reaching a modest compromise. In observing international politics, we have observed that politicians seeking to remain in power usually seem to want to avoid upsetting the electorate, which we find typically inspires them to take actions that are much milder than their campaign rhetoric implied once they are in office—underscoring the need for investors to watch what populists do, not what they say, in our view. We think Italy’s government was already unlikely to do much, given coalition members’ opposing ideologies. But moderation shows that even what they do agree on isn’t exactly assured to happen.

Gridlock Also Reigns (and Reins) in Sweden’s Government

In our view, Sweden is another case-in-point showing populism’s supposed threat is a tad overrated throughout financial media. Nearly five months ago, Sweden held inconclusive elections. The populist and anti-immigration Sweden Democrats made huge gains, seizing 17.5% of the vote.[ii] However, echoing the populist Freedom Party’s predicament after 2017’s Dutch election, no other political party would govern with them, prompting on-again, off-again coalition talks amongst mainstream parties. In the end, these groups kept the Sweden Democrats out of government.

Stefan Löfven, leader of the centre-left Social Democratic Party—which garnered 31.1% of the vote—returned as prime minister after cobbling together a hodge-podge coalition January 21.[iii] It includes centre-right parties—the Centre Party and Liberals(who are participating in a confidence and supply arrangement, similar to the Democratic Unionist Party’s arrangement with the Conservative Party in UK Prime Minister Theresa May’s minority government)—along with the Social Democrats and Green Party. Even this didn’t give the coalition enough parliamentary support—only 167 of 349 seats (48%).[iv] But Sweden’s constitution allows a minority government to take power if enough MPs abstain from voting against it. Hence, Löfven sought—and got—the quasi-communist Left Party to abstain. Like Germany and Italy, the coalition is at ideological odds. Add in the Left Party’s threat to revoke its abstention—and reject any policy it deems too far right—and you have deeply entrenched political gridlock, defying the widely discussed populist threat, likely bringing relief to equity markets.