This Week in Gridlock: Europe Edition

Editors’ Note: MarketMinder prefers no political party nor any politician. We assess developments for their potential economic and market implications only.

When it comes to European stocks, one thing is dominating sentiment right now: energy prices. But when investors focus on just one thing, they risk missing more meaningful longer-term drivers elsewhere. In Europe, one of those other drivers is political gridlock, which some votes this week extended. Voters hate gridlock, but stocks like it. When parliaments can’t pass big bills creating winners and losers, stocks don’t have to sweat legislative uncertainty—clearing the way for risk-taking and investment. Here is a quick roundup of the latest.

Denmark’s Parliament Gets More Fragmented

Last month, Danish Prime Minister Mette Frederiksen rolled the dice on an early election, banking on a popularity surge from her handling of the Greenland standoff to bolster her Social Democrats. Now it appears the decision backfired a bit: Tuesday’s vote hinged more on domestic issues than foreign policy, and the Social Democrats and their centrist coalition lost seats. They remain the biggest party in the Folketing, but Frederiksen now faces lengthy coalition talks.

The Folketing has 179 seats, requiring 90 for a majority. The Social Democrats lost 12 seats, leaving them with 38 and the centrist bloc (with the Moderates and Venstre) at 70. The entire left-leaning bloc has only 84, yet the right-leaning bloc also fell short of a majority—leaving the centrist Moderates, headed by former Prime Minister Lars Løkke Rasmussen, as kingmaker.

However this goes, this election likely further pancakes Denmark into gridlock. To see this (and the benefits), consider one of the likely sticking points in coalition talks: the potential resurrection of Denmark’s wealth tax. Danes scrapped it in 1997, but Frederiksen proposed bringing it back to fund a reduction in school class sizes. While this helped curry favor with left-leaning parties and voters, Rasmussen and the more centrist parties are opposed, citing the wealth exodus Norway suffered after raising its wealth tax in 2022. To opponents, the risk of eroding the tax base and losing entrepreneurs is a nonstarter. It is hard to envision a coalition including the Moderates having a wealth tax on its official to-do list.

While legislative risk aversion should stay low in Denmark, it probably isn’t a big cyclical driver. In small countries where one or two sectors or companies dominate the stock index, sector- and company-specific drivers tend to have more influence than the general political and economic environment. So for Denmark, gridlock strikes us mostly as a sign politics won’t get in the way much.

Italy’s Prime Minister Takes an L

Italian Prime Minister Giorgia Meloni has famously bucked the trend and expectations since taking office in 2022, ending Italy’s infamous “revolving door” of prime ministers and governing mainly as a traditional center-right leader despite leading a party often described as “hard right.” While her government has disappointed investors’ hopes for pro-market reforms, Italy’s debt is down, GDP is growing and its stocks have outperformed Europe in recent years. Headlines said Meloni had an “aura of invincibility.”

That aura got pierced in a weekend referendum on judicial reform, which morphed into a referendum on Meloni herself after she staked her political capital on the outcome. While Meloni argued the complicated reforms were necessary to de-politicize and streamline Italy’s judicial system, the opposition argued it removed checks and balances. In the end, 54% of voters rejected it, with turnout high for a referendum at 60%—showing Meloni is vulnerable at the ballot box. This doesn’t change the balance of power now, but it likely gives the opposition more momentum for the next general election, due by December 2027.

Ahead of that, gridlock looks likely. While Meloni’s right-leaning coalition has a comfortable majority, coalition unity tends to fracture as elections near—especially if the junior parties see an opening to gain seats. With her political capital eroded, Meloni likely has less clout to push things through. She also has an incentive not to rock the boat as she seeks to rebuild her popularity. For Italian stocks, this status quo should remain fine.

Don’t Read Into France’s Local Elections

France held local elections over the weekend, tempting many to seek clues for how 2027’s presidential election will go. The populist National Rally, whose former leader Marine Le Pen polls well for the presidency, took several mayoralties but didn’t win any major cities, leaving observers arguing over whether the party succeeded or hit a glass ceiling. The leftist France Unbowed had a similar result, making some gains but losing in the larger cities it targeted. Meanwhile, the flagging center-left Socialists won in Paris, and a popular centrist presidential contender, former Prime Minister Edouard Philippe, kept his post in Le Havre.

We suggest not reading into any of it. Not only are local elections often protest votes, but turnout was just 20%, the lowest in two decades outside COVID-affected 2020. Nothing about this looks telling to us, especially with the presidential election over a year away.

For now, focus on gridlock, which French stocks have already proven they can deal with. With 2026’s Budget standoff in the rearview and parties starting to look to 2027’s contest, the legislative docket looks quiet. For the time being, there isn’t much to spike uncertainty. Stocks should welcome the calm.