New Political Developments in Sweden and France Speak to Old Reality: Gridlock

Editors’ Note: Our political commentary is intentionally non-partisan. We favour no political party nor any politician and assess political developments for their potential financial market or economic impact only.

One week after the big upset at Chesham and Amersham’s by-election, several financial commentators we follow are still dissecting the results and their potential implications for the UK government and its plans for housing policy, pensions and more. But this is just one of the big political stories in Europe over the past two, all of which we think point to continued political gridlock on both sides of the English Channel. In our view, this is a positive development for equity markets. When governments are less active, it reduces the likelihood of sweeping legislation creating winners and losers, which we think reduces the uncertainty facing equities. In the UK, this already appears to be playing out in the Conservative Party’s internal debate over whether to adjust its housing development proposals following the loss in Buckinghamshire. Read on for the latest across the Channel.

France’s Regional Elections Drain President Macron’s Political Capital

France held regional elections on Sunday, and President Emmanuel Macron’s party, La Republique en Marche (LREM), got trounced. But the day’s big winner wasn’t the far-right National Rally (NR) and its leader, Marine Le Pen, as many commentators we follow, predicted. NR won in Provence, but in most other races, the Republicans took first prize, vaulting leader Xavier Bertrand into the national spotlight. Several commentators we follow argued this was a bellwether for next year’s presidential election, predicting that race might not be a showdown between Macron and Le Pen after all—defying many recent polls.

We think that viewpoint is likely too hasty. For one, regional elections aren’t necessarily predictive. For example, 2015’s regional elections correctly presaged a shift away from the Socialist Party under then-President François Hollande, but they showed momentum shifting to the Republicans. Yet their general election campaign floundered, and Macron, whose movement didn’t even exist during those regional elections, won the presidency in 2017.

In our view, it is questionable whether this year’s results will be more predictive. Two, a lot can change in a year. That is true partly because three, regional elections often end up being protest votes with low turnout, lending themselves to more extreme results. Sunday’s turnout was just 33%.^[i] Compare that to France’s 2017 presidential vote, when over two-thirds of voters hit the polls.^[ii] So all this shows, in our view, is that a small number of voters felt strongly enough about a change in direction to take the time to vote. That might serve as a wakeup call to Macron’s administration, prompting them to shift course in an attempt to woo voters over the next year.

That path would likely lead to more gridlock, if recent actions are a reliable guide. Earlier in the spring, Macron announced his planned pension reforms would be on hold indefinitely, pending the presidential election’s outcome. Those reforms were one of his flagship campaign pledges in 2017, but they ran aground as first the Gilets Jaunes protests, then the pandemic, raged. Popular opposition ran high all throughout, and we think it is reasonable to assume Macron probably stood down in order to avoid upsetting the apple cart and risk his re-election chances. If that is indeed the case, we think it is likely that the regional election results strengthened that incentive, sapping the likelihood of big legislative change before next year’s contest.

Sweden’s Government Gets the Boot

Monday brought the collapse of Sweden’s minority coalition government, which lost a no-confidence vote in Parliament, giving Prime Minister Stefan Löfven a week to form a new coalition, resign and let other leaders try to form a new government—or call a snap election. The fallen coalition was a minority grouping of Löfven’s Social Democrats and the Green Party, and its survival depended on support from several smaller parties. Key to this was the Left Party’s agreement to abstain rather than vote against the government, but that fell apart over a disagreement on rent control policy, leading to Monday’s confidence vote.  

In the days since, Löfven has been negotiating with other party leaders in hopes of reassembling the coalition. But those hopes took a beating Thursday, when Liberal Party leader Nyamko Sabuni said her party would refuse to back a new coalition led by the Social Democrats, called for Löfven to step aside and stated her party’s preference to serve in a centre-right government.^[iii] That doesn’t fully torpedo Löfven’s chances of staying in power, but it does make the math more complicated. Together, the Social Democrats and Greens hold only about one-third of the legislature’s seats, and prior support from the Liberals and Centre Party was already tenuous. Cobbling a new coalition would likely require support from parties that would align ideologically with a centre-right grouping and might prefer new elections. Accordingly, most observers Thursday anticipated a snap election.

However the story evolves from here, we don’t expect big change. Sweden’s parliament is one of the most fractured in Europe, with eight parties and a couple of independents seated. No party has anywhere close to a majority, and polls indicate that probably won’t change with a snap election. Regardless of which party leads the next government, it will likely be a hodgepodge of small parties with competing priorities and ideologies, which points to very little getting done. That has been the political backdrop for Swedish shares since the last election in 2018, and they have outperformed global markets since then.^[iv] Whilst we aren’t forecasting relative returns from here, we think an extension of the political status quo is highly unlikely to upset Swedish markets.