The headlines you didn't see...

By Eoin Fahy, Thursday, 29th May 2014 | 0 comments

The results of the European Parliament elections have received a great deal of media – and financial market – attention.  Far-left and far-right political parties made strong gains in several countries, and those parties were in many cases in favour of their country withdrawing from the European Union and/or leaving the eurozone.  However, in other countries the results were very different, and we conclude that in reality little has changed and there is little chance of significant changes to key economic policies, or of “political gridlock” at European level.

The headlines this week have been fairly stark.  Anti-European or ‘extremist’ political parties performed exceptionally well in the European elections across the continent.  The National Front, the UK Independence Party and Syriza topped the polls in France, the UK and Greece respectively.  Voters have shown their disillusionment with Europe and their resistance to “austerity” policies.  Europe is in near-crisis with eurosceptics forming a powerful bloc in the European Parliament. And so on.

But here are some alternative headlines that you probably did NOT read this week, but which are also true:

  • Pro-European governing party in Italy makes huge gains and comfortably tops the poll.  Gets best ever result for any party in European elections.
  • Anti-European party in Germany wins just 7% of the vote
  • Hard-left Syriza party in Greece underperforms expectations, does not do enough to bring down the government.  Junior governing party outperforms expectations.
  • Centre-left and centre-right moderate bloc holds huge majority in European parliament (469 seats vs 178 for the Greens, Conservatives, Left and far-right Eurosceptics combined).
  • Governing party tops the poll in Spain. Protest party wins just 8%.
  • Far-right vote in the Netherlands well below expectations.  Takes third place with 13% of the vote.

So it's best, of course, to look at the whole story.  Yes the euroseceptic/anti-austerity/protest parties did well in some countries. But they did quite poorly in others.  In no country were the results so dramatic that the government is at risk (with the possible exception of Ireland if the Labour Party were to withdraw from government after it elects a new leader).  And the centrist, moderate bloc of parties still has a very comfortable majority in the European Parliament (which anyway has quite limited powers as most key decisions in Europe are still made by European governments, often by consensus).

In assessing the outlook for European equities and government bonds, therefore, we will continue to focus on the prospects for economic growth, for monetary policy and for corporate earnings growth, all of which are more significant in our view than the 'noise' from the European elections.Indeed it was interesting to note that despite the blizzard of news, much of it seemingly negative, the financial markets largely ignored the elections.  The European stock market rose by more than 1% on Monday, and the euro strengthened marginally.

Valuations remain reasonable for equities (though bonds are expensive, as are most developed market government bonds), there is unlikely to be a significant change for the worse in economic policies, and there is no sign of a return to the crisis days of a couple of years when some commentators expected the eurozone to fall apart.  Gridlock in the European Parliament is very unlikely, and even if it happens, the US has managed quite well for the last couple of years despite complete gridlock in Congress!



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