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Read any commentary on populism’s rise in Europe and you will probably find arguments claiming it is destabilizing politics from Portugal to Poland, threatening EU unity (EUnity?). However, after assessing several elections where populists did well—even won—the outcome suggests a different reality, in our view. Populists may stoke fearful narratives and headlines, but market-related policies haven’t followed suit, in our view. If anything, less is happening on the legislative front than usual. To us, rather than destabilizing Europe, populists have simply created a new form of gridlock, reducing legislative risk for markets—bullish, not bearish.
Populists Pancake Politics
Eurozone governments—and political power—used to flip between center-right and center-left parties. No matter which controlled government, political power clustered near the middle of the political spectrum, with populist parties on the far fringes garnering microscopic support. Lately, that has changed. Since about 2011, populism has risen across Europe, with many fearing formerly fringe parties’ growing prominence—and extreme rhetoric. But we think these fears largely get too caught up in personalities and hype.
In our view, the principal impact of populists’ rise is to push some political support from the center to the fringes. Now, populism isn’t a coherent ideology. Some populists are far left, some far right and some defy easy categorization. But if you think of politics like a left-to-right bell curve, rising fringe popularity flattens the center bulge—pancaking politics. This makes forming governments harder, as potential partners hold more disparate views. Take Italy, where its populist coalition government is far left and far right. They agree on little—a recipe for inaction. Hence, populism’s rise in Europe amounts to another form of bullish gridlock, in our view. The same is happening across the western developed world—on display this month in Finland and Spain.
Finland voted on April 14, and the result: pancakes. Finland’s traditional centrist parties are the aptly named Center Party,[ii] the center-left Social Democratic Party and the center-right National Coalition Party. Together, they historically hauled in over 60% of the vote.[iii] Typically, two of these three would join and add in lesser (non-populist) third parties to form coalitions leaning slightly left or right of center. But in 2011, a populist party rose: the far-right nationalist Finns Party (a.k.a., the True Finns). That year their support jumped from 4.1% to 19.1%, a gain they have mostly held onto in elections since.[iv] In April’s vote, they took 17.5%, helping drive the three traditional parties’ share down to 48.7%.[v] Pancaking at work.
Presently, coalition talks are ongoing. Early indications suggest the Social Democrats, the National Coalition and three other minor parties may join a coalition and exclude the Finns—a 2011 redux. But if that comes to pass, it would unite the center-right and center-left—a grand coalition of inactivity, designed expressly to exclude populists.
Spain has also seen populists steal significant support from mainstream centrists, compounding gridlock. Voters head to the polls Sunday, and we expect more of the same. Spain’s mainstream parties are the center-left Socialist Workers’ Party (PSOE) and the center-right People’s Party (PP). Between them, they have controlled government since Generalissimo Francisco Franco’s death, regularly garnering around 80% of the vote before 2011.[vii]
In recent years though, Podemos—a left-wing populist party—has gained ground, mainly at PSOE’s expense. In addition, Vox, a far-right populist party, split from the PP in 2013. It is presently polling well, threatening to divide the conservative vote. But that isn’t all! Ciudadanos, a relatively new centrist party some see as populist, has arisen too. Further, regional parties, particularly Catalan separatists, further fragment the electoral landscape, rendering unruly Spanish politics unrulier. The upshot: The 80% share the mainstream parties used to take is gone. In 2016’s vote, they took 55.6%—still a majority, but a huge decline. More pancaking.
As Spain’s political bell curve flattened, gridlock escalated. Spain’s 2015 and 2016 general elections were inconclusive—no party could form a majority government. Since then, both the PP and PSOE have taken turns heading minority governments that took power when populists and separatists agreed to let them. However, passing legislation is a struggle, which means internal divides. Actually, that is what brings Spaniards to the polls Sunday in the first place! After all, PSOE’s minority government fell when it prosecuted Catalan separatists for their role in October 2017’s illegal independence referendum. Hence, separatist parties withdrew their backing of the PSOE government, shooting down a proposed budget—and the government as a result.
In our view, Sunday’s election isn’t likely to look substantially different. We aren’t sure exactly how it will turn out, but the likelihood of a much more decisive outcome than the last two votes seems unlikely. That likely means more fractious coalition building and a potential—and fragile—minority government. Whichever results doesn’t seem like a recipe for radical legislation—a plus for markets, in our view.
Populist fervor creates a lot of angst, weighing on sentiment, but the reality is it mostly serves to cement gridlock, which prevents radical legislation from passing. For investors, populist pancakes are doubly bullish because they not only lower legislative risk, reducing uncertainty, but also lift sentiment as more folks realize populist pancaking should be cheered, not feared.
[i] According to Google, this is what they call pancakes in Finland.
[ii] Although they occupy Finland’s political center, the Center’s main plank is ironically for decentralized government.
[iii] Source: Ministry of Justice Finland, as of 4/25/2019. https://tulospalvelu.vaalit.fi/indexe.html
[vi] See note one, but this is the Spanish version.
[vii] Source: Ministerio del Interior, as of 4/25/2019. https://www.infoelectoral.mir.es/infoelectoral/min/
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.