Europe Has a Parliament—and Gridlock

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The results are in, and we now know the winners from last week’s European Parliamentary elections: everyone and no one! Ok, perhaps that is juuuuuuuust a bit oversimplified. But pro-European parties combined for more than 50% of available seats—a victory of sorts.^[i] Then again, the two biggest centrist groupings lost their combined majority for the first time since the European Parliament launched in 1979. Populist and euroskeptic parties combined for a largest-ever total of 25% of seats. But those populists aren’t unified, and no faction is anywhere big enough to get a meaningful seat at the table. Meanwhile, both pro- and anti-Brexit parties in the UK are claiming victory, while one of Italy’s ruling populist parties seemingly has a newfound mandate. For investors, the outcome is much simpler: entrenched gridlock, which should relieve European stocks.

Exhibit 1 shows the latest tally. The two traditional groups—the center-right European People’s Party (EPP) and center-left Progressive Alliance of Socialists and Democrats (S&D)—took first and second place, respectively, but combined for only 44.1% of seats.^[ii] But a third centrist group, the Alliance of Liberals and Democrats for Europe (ALDE), took third place with 14% of seats, giving a three-way centrist coalition an easy majority if that is the road party leaders decide to take. Political analysts worldwide seem to think this is the likeliest outcome, perhaps with the Green Party joining. We guess a left-leaning coalition of S&D, ALDE, Greens, leftists and the populist Europe of Freedom and Direct Democracy (EFDD) is also possible, as is some other fractured hodgepodge. But whatever coalition ultimately emerges, it will have at least three main parties—a recipe for internal disagreements and next to nothing happening. Populist parties will probably spend most of their time making rousing speeches from the back benches, not writing radical legislation.

Exhibit 1: European Parliamentary Election Results

Source: European Parliament, as of 5/28/2019. https://www.election-results.eu/

This hasn’t stopped individual populist leaders from claiming victory. In Italy, The League took 34.3% of the vote, more than doubling its national coalition partner, Five Star Movement (M5S).^[iii] To say these parties didn’t get along before last week’s vote is an understatement—despite being “populists,” they agree on little, with Matteo Salvini’s League skewing far-right and M5S leaning quite to the left. Salvini and M5S leader Luigi DiMaio are also rival deputy prime ministers, perpetually battling for influence and the spotlight. As Salvini worked the press after the results hit, he argued he now has a mandate from Italian voters to ram through policies like a two-tier flat tax and greater autonomy for the northern regions—policies M5S is less keen on. That raises speculation over a potential snap election, but for now Salvini says he wants to keep the current administration in place. This could be because the center-left Democratic Party (PD) surprised everyone by taking second place with 22.7% of the vote. It and M5S combined for 39.8% of the vote, not far behind The League and center-right Forza Italia’s totaled 43.1%. Considering European Parliamentary elections tend to have lower turnout than national contests and serve as more of a protest vote, Salvini may not want to risk overplaying his hand and ending up out of government if PD beats expectations again.

As for the UK, if we had to use one word to describe the results, it would be “messy.” The Brexit Party, whose platform is probably self-evident, took first place with 31.7% of the vote.^[iv] The Liberal Democrats, which seem to be one step away from renaming themselves The Remain Party, came in second at 18.5%. Labour came next, with 14.1%, followed by the Greens with 11.1% and the Conservatives with just 8.7%. Brexiteers are of course calling it a victory. Yet so are Remainers, arguing the Lib Dems, Greens and Welsh and Scottish Nationalists combined for an anti-Brexit win. Some Labour Members of Parliament are now arguing their party should endorse the so-called “People’s Vote,” aka a second Brexit referendum. However, the fact the Brexit Party nearly swept Wales—a traditional Labour stronghold—and England likely makes other Labour leaders queasy about going full-fledged Remain. Meanwhile, despite both sides’ shouting about renewed momentum, turnout was only 36.9%. Yes, that is the second-highest since 1979, but also, it is only 36.9%.^[v] Turnout in 2017’s general election was nearly double that, 68.8%.^[vi] We find it difficult to draw sweeping conclusions from what looks like a clear protest vote. However, it also seems realistic to expect pro-Brexit candidates for Conservative Party leadership to gain an edge, as well as sitting MPs to do whatever it takes to avoid a snap election, just in case. Other than that, though, the status quo of gridlock and Brexit uncertainty (more like chaos) probably persists.

On the whole, though, this weekend’s results look bullish for Continental European stocks. Pre-vote uncertainty is gone. Populists, though loud, didn’t make the sweeping gains some feared. Pro-EU forces still hold sway and, almost certainly, the power. That sets the stage for relief in the coming months as the victors gel, a coalition emerges and the reality of gridlock sets in. For markets, the combination of reduced uncertainty and low legislative risk should be a nice tonic.