Unlike the bank holiday weekend at the beginning of this month, the past few days have seen a lot worthy of comment especially the shifts in the dynamics of the European Parliament following the past week’s elections.
It was widely forecast in the run-up to these elections that it would be parties on both the right and left of the ideological extreme that would do well in Europe such is the level of economic malaise and dissatisfaction with the current parliament. Ask any political professional and they will say that it is always the sitting government or parties of coalition that take a shellacking at mid-term elections. Wait and see what happens in November of this year in the US for further proof.
It is forecast that the three big centre parties will see their share of the overall pie slip to around 64% from 72% before the elections. It is the Eurosceptic parties and populist parties that have gained what the centrists have lost. In Britain that was UKIP, in France Marine Le Pen’s National Front won their elections. On the left, Alexis Tsipras’s Syriza party in Greece grabbed the headlines as it won its elections and called for wider general elections.
Initial fears that the European Parliament is crippled by this increase in breakaway, populism is misfounded. With more votes these populist parties will be allowed more floor time in parliament and increased funding but will still remain largely outvoted on centrist issues. That is not to say that the new body will have little responsibility; this is the first post-Lisbon Treaty parliament and will take on new responsibilities over the EU budget and Single Market rules. It will also run supervision of the EU’s new banking union
In our eyes the most important repercussion of these elections is the reverse importance back onto national legislative bodies; using gains at a supranational level to reflect back on to the electorate at home. In Greece, large gains for the Syriza party will shift the balance in an uneasily fragile political landscape. Likewise, in Italy, these elections are being seen as a barometer for the Renzi administration’s first 100 days in office. Luckily Renzi, romped to a convincing win.
The euro has reacted fairly calmly to the results overall with focus for its performance more on Frankfurt.
It is only 9 days until the European Central Bank conducts its highly anticipated policy meeting. Since May’s meeting, the market focus has remained, keenly, on just what Mario Draghi meant when saying that the ECB was ‘comfortable acting in June’. A 10-15bps cut is largely priced in while a negative deposit rate is becoming increasingly so.
Speaking in Portugal yesterday, ECB Chair Draghi said “to the extent that developments in the exchange rate, money or capital markets result in an unwarranted tightening of monetary and financial conditions, this would require adjustment of our conventional instruments.” Movements of rates into negative territory are viewed as conventional measures but “at the other end of the spectrum would be a too prolonged downward departure of inflation and/ or inflation expectations from our projected baseline scenario . . . This would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.”
We reckon the euro has more downside to come before next week’s inflation reading and ECB meeting.
