In early February, Italian Co-Deputy Prime Minister Luigi Di Maio met with France’s Gilets Jaunes (Yellow Vest) protestors. The leader of the populist Five Star Movement (M5S) thus triggered a diplomatic row, with French Prime Minister Emmanuel Macron recalling his ambassador from Italy. In our regular review of financial media, we noted this event added to fears of populist movements—in and out of government—destabilising European politics, economies and markets. However, populists’ actual policies (or lack thereof) suggest otherwise, in our view. Recent developments in Italy, Sweden and Greece hint at populists either embracing moderation or lacking power to do much. We think gridlocked governments reduce the likelihood of extreme legislation negatively affecting European equities.
Take Italy’s populist coalition between the anti-establishment M5S and the right-wing nationalist The League. When they formed a government last year, their extreme campaign promises had pundits warning of sweeping radicalism potentially destabilising Italy’s and the eurozone’s economies and markets. Today, headlines still hype those campaign pledges, despite the fact the coalition’s accomplishments seem tame. Indeed, it appears Italy’s coalition has mostly plotted a moderate course.
After a months-long budget standoff with the EU, Rome and Brussels quietly compromised in December, with the EU bending its budget rules whilst Italy lowered its initially proposed deficit target. Italian 10-year government debt yields spiked to 3.6% on 19 October from 2.8% on 19 September as the budget battle heated up—temporarily deterring borrowing and, in turn, business investment (which is often funded by long-term borrowing).i We think this contributed to Italy’s recession in 2018’s second half, but with rates since subsiding, delayed 2018 activity should resume in 2019.
The Italian government’s decision to help shore up a failing bank is another recent example of moderation. Banca Carige—a long-troubled Italian regional lender—failed to raise capital late last year to deal with its large backlog of non-performing loans (loans where borrowers aren’t making scheduled interest and principal payments). The ECB subsequently took control over Banca Carige in early January. As part of the resolution, Italy’s government granted permission for the Genoan bank to issue state-backed debt under ECB administration. Though not explicitly a bailout, it does extend a state guarantee to a troubled lender. Not only did this occur rather swiftly and quietly, but it happened under the purview of a government that lambasted official bank rescues on the campaign circuit. It seems to us Italy’s populists are conceding to economic reality, working within institutional structures they once derided in order to maintain stability—not unlike their predecessors from more traditional political parties.
Meanwhile, in Sweden, a populist party gained ground in September 2018’s national elections, but like the Netherlands’ populist party in 2017, they can’t get a foothold in government. After the vote, many financial publications we monitored warned a populist government could roil equity markets after the populist and anti-immigration Sweden Democrats took 17.5% of the vote. However, after almost five months of political wrangling to form a government, Stefan Löfven, leader of the Social Democratic Party—Sweden’s oldest and largest political party—returned as prime minister on 21 January.
The coalition he built is unwieldy, though. It consists of Löfven’s party governing with the Green Party (both centre-left). But it also requires the support of the Centre Party and Liberals (centre-right groups)—needing their approval to pass legislation. Furthermore, the quasi-communist Left Party holds a veto. Löfven’s coalition commands only 167 of 349 parliamentary seats—a minority government. In order to secure his premiership, Löfven convinced the Left Party to abstain from voting against his proposed government. The Left agreed to do so, but party leaders noted they would reject any legislation they deemed too extreme.
This situation is similar to Germany’s, in our view. In both nations, a government consisting of ideologically opposed parties—with a tenuous grip on power—even if centrist, probably doesn’t possess a bold mandate to pass sweeping legislation. Rather, gridlock likely prevails, which is how we see most of European politics for the foreseeable future. That is why whether in power or waiting in the wings, populists likely aren’t as threatening as the media often depicts, which we think is bullish for European markets.
These aren’t isolated examples of populism losing its thunder due to gridlock and moderation—which may be worth remembering as we see pundits now warning of market disruptions if populists do well in April’s Spanish snap election and/or May’s European Parliament election. The same happened after Greece elected a populist government led by Prime Minister Alexis Tsipras’s Syriza party in 2015. Syriza campaigned on an anti-euro and anti-austerity platform, and we think its evolution since provides an instructive example. Ahead of 2015’s Greek elections, Syriza was diametrically opposed to bailout terms pushed by the EU, IMF and ECB—the so-called “Troika.” Soon after taking power, Tsipras called for a referendum to reject them—Grexit. Voters agreed. But when push came to shove, Tsipras backed down, not only accepting the Troika’s austerity measures, but also its privatisation schemes, which Syriza campaigned strongly against. Although Tsipras in Greece is an extreme example, we think it shows why fears of populists taking over are often overblown.
Since then, Tsipras has gained notice internationally as a pragmatist and statesman—a far cry from the firebrand leftist who took office. His new reputation was cemented earlier this year, when Greece resolved its long-running naming dispute with its northern neighbour, now known as Northern Macedonia. The resolution of this long-simmering dispute paves the way for North Macedonia to join the EU and NATO. The foreign policy win also bolsters Greece’s political capital within those institutions.
Interestingly, Tsipras pushed through the name change at great political cost. Syriza’s junior coalition partner—the Independent Greeks—quit the government on 13 January opposing Tsipras’s deal ahead of a Greece’s parliamentary vote to ratify it. This led to a no-confidence vote a few days later, which Tsipras narrowly survived. The Greek parliament’s vote on 25th January was more crucial, though—rejection would have probably forced snap elections. But the measure passed 153 – 146, with 1 abstention. This avoided a snap election, but polls suggest Tsipras’s move wasn’t popular with Greek voters, and the next general election is due this October. Whilst we think it is too early to assign probabilities to that contest, in our view, this whole saga illustrates populists’ recent history of moderating when in office. This runs counter to widespread fears we see regularly in financial media, suggesting to us such moderation could be a large positive surprise to European investors.
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iSource: FactSet, as of 5/2/2019. 10-year Buoni del Tesoro Poliannuali (BTP) yield, 18/9/2018 and 19/10/2018.