Those pesky voters. Just as I extolled the improving fundamentals of the eurozone, European markets sold off due to the results of what normally are obscure European Parliament elections. France’s Emmanuel Macron magnified the market impact of the elections by dissolving the French Parliament and calling snap elections.
I think that it is a mistake to generalize the European results. The economic situation in Germany is not the same as that in France. The German economy has been shrinking, with Gross Domestic Product (GDP) per capita contracting by -5.27% over the last year and overall GDP declining -0.20%. There should be no surprise that voters punished the Social Democrat Olaf Scholz. Conversely, Italians rewarded conservative Giorgia Meloni for Italy’s 0.60% growth rate by electing more conservatives. Spain, where GDP grew by 2.40%, moved towards the center-right in the search for more competent and less corrupt leadership. France is an exception since voters rejected President Macron’s party in favor of the nationalist Rassemblement National (RN) despite a healthy 1.10% increase in GDP.
The French system and its constitution are reminiscent of our own, although with important differences. Article 2 of the Constitution defines the Republic’s official maxim as “Liberty, Equality, Fraternity” and the nation’s core principle as “government of the people, by the people and for the people.” France’s constitutional government outlines a separation of powers between the executive, legislative, and judicial branches. Under Article 12, “the President of the Republic may, after consulting the Prime Minister and the Presidents of the Houses of Parliament, declare the National Assembly dissolved.” That is what just happened, and we shall find out after two rounds of voting if President Macron gambled correctly. The first vote is June 30, and the second will be on July 7.
The dissatisfaction in France is partly the result of the 2022 elections. Macron and his allies are centrists, and the President is known as a technocrat. After a decisive win in the presidential election, he failed to gain a clear and effective governing majority in subsequent legislative elections. The resulting political gridlock has led to growing debt, uncontrolled immigration, and the stifling of Macron’s nuclear-energy agenda. Quality of life for the middle and working classes has suffered and dissatisfaction has grown. Now, the president is gambling that the extremes are so great that the electorate will be frightened into granting him a new centrist majority. In the past voters have sometimes voted against extreme candidates during the second round.
I see the political situation (gridlock) as basically unchanged should President Macron fail to achieve a governing majority. That would be too bad but should not be a reason for eurozone stocks to sell off. One advantage of the French system is that the National Assembly can be dissolved, and new elections held in a matter of weeks. The results will be known the day after voting and I shall adjust my views accordingly. For now, the outlook for European securities continues to be positive.
* https://www.elysee.fr/en/french-presidency/constitution-of-4-october-1958