A Busy Summer Monday in European Politics

Summer Mondays are always a bit hard. You know the feeling—the kiddos are home for the summer enjoying lazy sunny days. The weather is warm and enticing. Vacation season is nearing full swing. Everything seems to move a bit slower. 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 we look at these developments through a purely market-oriented lens. So what are the potential market implications of the Conservative Party’s move against UK Prime Minister (PM) Boris Johnson, the latest handwringing over this month’s French legislative elections and a potential Swedish government collapse? Let us explain.

Boris Johnson Keeps His Job … for Now

When last we left Johnson—last Thursday, to be specific—the PM was refusing renewed calls to resign over the latest revelations in the “Partygate” scandal. But that was before he got booed entering the service of thanksgiving for Queen Elizabeth II at St. Paul’s Cathedral on Friday, part of the Platinum Jubilee celebration. And before a memo arguing he was a surefire election loser went viral among Conservative members of Parliament (MPs) over the weekend. And before enough MPs submitted no-confidence letters to the party’s 1922 Committee, triggering a no-confidence vote Monday.

That vote, technically, was a win for Johnson. He argued his case to MPs, and a majority voted to continue with him as leader. Per the party’s rules, there can be no further no-confidence vote for a year. But this was not a commanding victory. About 40% of Tory MPs voted against him, a much higher share than expected. Several reiterated their calls for his resignation after the vote. And as several observers pointed out, when his predecessor, Theresa May, won a party no-confidence vote with only 30% of Tory MPs against her, all involved considered it a disaster and she was gone within a year. Ditto Margaret Thatcher, who also resigned after winning in the initial attempt to oust her in 1990. 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, signaling a break with the big spending and tax hikes that have marked his government thus far. 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 party faces twin by-elections later this month—one in a seat Labour had held for eons before 2019, and one in the traditional Tory heartland. Losing either would be a severe political blow, albeit for different reasons. 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 ginormous, 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.

None of that is predictable, of course. But however it goes, we think Johnson’s political capital is gone. Maybe he can push through some feel-good tax cuts and/or other giveaways, presuming Chancellor of the Exchequer Rishi Sunak—a long-rumored potential leadership challenger—is inclined to let it work with the budget math. But anything more sweeping or contentious than that probably dies on the vine, extending gridlock.

For stocks, this seems a bit mixed. Stocks love gridlock, but they also 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, it should help gridlock deliver its usual tailwinds.

About Those French Election Polls

France holds the first round of its legislative elections on Sunday, and the latest polls have set pundits on edge. They show President Emmanuel Macron’s coalition losing several seats and the leftist bloc controlled by Jean-Luc Mélenchon making big gains. Unsurprisingly, many now warn France is on the verge of having an anti-euro leftist prime minister calling the shots, 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 generating all of this fear show Macron’s bloc winning between 275 and 315 seats, with Mélenchon’s group taking 170 – 205 (and the traditional center-right Republicans and Marine Le Pen’s National Rally mopping up most of the rest).^[i] So even if the polls are right, 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, but it also renders Mélenchon’s agenda of big spending and tax hikes and scrapping trade agreements effectively DOA.

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 none wins more than 50% of the vote. 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. You see, the left in France isn’t a uniform bloc. Mélenchon’s alliance includes the traditional center-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. 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, and those still hanging on may not want to risk a repeat.

Then too, Macron isn’t powerless in this scenario. 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, giving Macron some hefty leverage over a potential leftist government.

We will see how the vote goes, but for now, France looks primed and ready to benefit from falling political uncertainty. Whether this comes through pro-euro groups finishing well 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 Faces Collapse. Again.

After just over six months in office, Swedish PM Magdalena Andersson could be out of a job as soon as Tuesday. At noon Swedish time, Parliament will hold a no-confidence vote in her justice minister, Morgan Johansson, with his record on tackling crime the central issue. If he loses, Andersson has said she will resign, leaving Sweden without a government three months before the next general election (scheduled for September 11).

This vote is the very definition of a toss-up. So far, 174 MPs have said they will support Andersson and 174 are against, leaving one undecided MP as kingmaker. That MP is Amineh Kakabaveh, an independent who cast the deciding vote for Andersson’s new government last year. Kakabaveh says she is undecided, leaving everyone on tenterhooks.

There are a few ways this could go. Andersson could win Kakabaveh’s support with a few key concessions tied chiefly to Sweden’s NATO bid, preserving stability in the run-up to the election.^[ii] Johansson could resign if she looks likely to vote against, giving Andersson and her remaining cabinet an out. Or he could lose, the government could step down, and Sweden could be back to tough coalition talks and, potentially, facing an early election.

We don’t find any of this surprising. Sweden’s legislature has been fractured for years, and Andersson’s coalition looked unstable from the start. 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.

So whether Andersson’s administration stays or goes, we doubt it is terribly consequential for Swedish stocks. They are very used to shaky coalitions, and the status quo should remain just fine.