A New Constellation: European Parliament Elections

The European elections will reshuffle the legislative sky, as political meteors and stars form a new parliamentary constellation.

The success of what are commonly characterized as populist and far-right parties in the founding members of the European Union - Germany, France, and Italy - is a growing concern for Brussels. Over the past week, these parties achieved significant gains, upending the traditional centrist dominance in EU politics.

However, ideological heterogeneity among right-leaning blocs and conflicting views on Russia and China could limit coalition-building initiatives. Without a clear, homogenous vision, political infighting will give centrist parties an even better chance to form a fortified bulwark.

The election stands out as a pivotal moment, reflecting deep-rooted anxieties over issues like immigration, economic stagnation, and a perceived loss of national sovereignty as external threats weigh on policymakers and voters alike. Let’s use our geopolitical telescope to analyze these new political-celestial bodies.

France

Marine Le Pen's National Rally (RN) party dominated elections, culminating in over 31% of the vote. In a dramatic move, President Emmanuel Macron dissolved the French parliament and called for snap legislative elections on June 30th.

Following the announcement, the CAC 40 - France’s benchmark equity index - fell six percent, shaving off €150bn, the worst weekly performance in over two years. Quoting the Financial Times: “Barclays scaled back its “overweight” recommendation for European stocks this week, advising “caution on the region for now given the political situation in France”.

The Euro fell 1% against the US Dollar, while the spread on French and German yields widened, signaling a heightened perception of risk in the former over the latter. The spread is now at its highest since 2017, climbing a total of 82 basis points.

Although it hasn't yet unveiled its comprehensive program, the RN has historically supported reducing the retirement age, cutting taxes, and increasing public spending.

This stance has heightened worries about fiscal sustainability in the eurozone's second-largest economy, especially in the wake of France's high deficit prompting a recent credit rating downgrade.

Germany

The Alternative for Germany (AfD) party's stunning second-place finish in the European elections caught German policymakers and investors off-guard. The anti-immigrant party outperformed Chancellor Olaf Scholz's Social Democrats, securing over 21% of the vote.

The AfD advocates for a significant reduction in public spending, particularly in areas they consider non-essential or wasteful. They emphasize cutting down on bureaucracy and streamlining government operations.

The party supports lower taxes, arguing that this would stimulate economic growth and increase disposable income for citizens. They propose reducing income tax rates and simplifying the tax code.

The AfD are also strongly opposed to financial transfers within the Eurozone, such as the European Stability Mechanism (ESM) and other bailout frameworks. They argue that German taxpayers should not be responsible for the debts of other EU countries.

As far as market reactions go, the impact appeared to be quite limited with no clear indication of investor panic over the AfD’s victory.

Italy

On the other hand, Italian Prime Minister Giorgia Meloni's Brothers of Italy party consolidated its position, emerging as a pivotal force in the new European Parliament. Meloni's Euroskeptic but pro-NATO stance could rebalance economic policies while bolstering support for Ukraine.

As far as policy goes, their approach aligns with conservative and nationalist principles, focusing on reducing taxes, supporting small and medium-sized enterprises (SMEs), and emphasizing national economic interests.

Specifically, they advocate for lowering income tax rates, reducing corporate taxes, and simplifying the tax code to make it more business-friendly. In a similar vein, the party proposed policies aimed at reducing the bureaucratic burden on SMEs, providing tax incentives, and increasing access to credit.

Meloni's believes that austerity policies have harmed Italy's economy, and she advocates for a more expansionary fiscal policy to stimulate growth and employment. However, Italy’s current debt-to-GDP ratio puts a cap on its fiscal flexibility. This macro-prudential roof, however, has caused much consternation in Italy.

The Brothers of Italy emphasize the importance of fiscal sovereignty and are critical of EU fiscal rules that they perceive as limiting Italy's economic policy flexibility. They advocate for greater national control over fiscal policy decisions.

Market Reaction: Caution and Uncertainty

Investors fretted over the potential for gridlock in EU decision-making, as well as the new electorate’s stance on issues like immigration, climate policy, and relations with Russia. However the impact may be muted if the centrist coalition can maintain and reinforce a working majority. This is still a developing story.

Domestic and Foreign Policy Implications

Domestically, the far-right's gains could embolden Euroskeptic voices, potentially complicating EU reform efforts and deepening existing East-West divides. However, historically speaking, Euroskeptic rhetoric typically is toned down once policymakers are elected.

An Italexit, Frexit, or any other awkward political portmanteau suggestive of eurozone disintegration is not a legitimate concern at this time.

Externally, a stronger nation-first emphasis may strain relationships with the United States and NATO allies over issues like Russia sanctions and defense spending commitments.

However, it's important to note that despite their gains, far-right parties remain a minority in the European Parliament. The centrist coalition, led by the European People's Party, is still expected to form the largest bloc, potentially mitigating the most extreme policy shifts.

How the centrist parties respond and whether they can address the underlying economic and social anxieties fueling their political opposition’s rise will shape the continent's trajectory for years to come. The reverberations of this election are likely to be felt well beyond Europe's borders.

Geopolitical analysts and policymakers alike would do well to clean their lenses to better understand this new legislative constellation - and the meteors it may bring.