Political risk in Europe has fallenContributors Michael Bell, Vincent Juvyns, Tilmann Galler, Maria Paola Toschi
2017 was billed as a year of potential political turmoil for the eurozone. Investors feared that elections in the Netherlands, France and Germany could lead to a victory for an anti-euro party plunging the very future of the eurozone into doubt. Instead, political risk has so far proved to be all bark and no bite, with voters in both the Netherlands and France following the Austrians in rejecting populist anti-euro candidates. The risk of an anti-euro victory in Germany in September is negligible. The biggest risk to the euro remains Italy, where popular support for the euro is much lower than elsewhere in Europe. Even in Italy though, a referendum on euro membership, is not the most likely outcome following the election. In the UK, the Conservative Party look likely to increase their majority but the outcome of the Brexit negotiations remains highly uncertain although continued single market membership remains very unlikely.
Germany – federal election in September – risk to euro extremely low
What is happening?
The year started so well for Martin Schulz and the Social Democrats (SPD). After he had secured the candidacy in a surprise upset, the Social Democrats surged an unprecedented 10% in the polls transforming an apparently boring re-election bid by Angela Merkel into a tight race. Two weeks later, in mid-February, the SPD inflicted a defeat on Angela Merkels’s Christian Democrats (CDU), securing the presidency for Frank-Walter Steinmeier. The German president has only symbolic duties, but the election was significant since it marked the first time that the CDU was unable to nominate a candidate.
Since then, however, the pendulum has swung back in favour of Chancellor Angela Merkel’s CDU, with three successive disappointments for the SPD in state elections. In Saarland, Schleswig-Holstein and North Rhine-Westphalia (NRW) the CDU secured the necessary majority to appoint the next state prime minister. The recent defeat in NRW, the most populous state in Germany, was particularly painful for the Social Democrats, given that the state is traditionally viewed as SPD-heartland. The swing in electoral support from the centre-left to the centre-right since 2012 makes it once again possible to imagine a coalition between the CDU and the free market Free Democratic Party (FDP) after the federal election on September 24.
Exhibit 1: gain and loss in popular vote in % vs. 2012 state elections