EU ELECTIONS: BREATHE A SIGH OF RELIEF

No dramatic upset. Despite making headlines in France and Italy, right-wing protest parties raised their share of seats in the European parliament merely from 20% to 23% according to the provisional results and projections. Some of their gains came at the expense of left-wing populists. As the four major pro-European mainstream parties fell merely from 70% to 67% of the seats, the European Parliament can continue to work smoothly – see our overnight comment breathe a sigh of relief. Of course, we have to brace ourselves for some noise as the parties jostle over the top jobs and some groups (Hungarian Conservatives, some Romanian parties?) may shift their allegiance to different factions within parliament.

With the vote, Europe’s political scene has become slightly more fragmented and polarised. Partly as a counter-reaction to the modest gains for right-wing parties, support within the mainstream has shifted somewhat from the traditional centre-right and centre-left towards the liberals and the Greens, that is to groups whose ideas are often the polar opposite of those peddled by the right-wingers. The Greens advanced especially in Germany and France. To simplify a complex picture: whereas some voters care a lot about migration, many others seem to see climate change as the key issue. The vast majority of EU voters apparently wants to safeguard and build on the achievements of European integration.

KEY RESULTS

1. Who gets the top jobs?
EU leaders will try to settle the distribution of top jobs at two summits on 28 May and 20-21 June. As the centre-right has remained by far the strongest single group in parliament, their German “Spitzenkandidat” Manfred Weber sustains his claim to lead the new EU Commission. He will reportedly try today to convince the leaders of the centre-left and the liberals to back him. However, after the losses for his centre-right and the gains for the liberals and German Greens, he is facing an uphill struggle, especially as French President Emmanuel Macron seems to have other ideas.

If Weber still manages to succeed Jean-Claude Juncker at the helm of the European Commission, France would probably nominate Francois Villeroy de Galhau (or Sylvie Goulard) as the next ECB president. If Weber’s bid fails, France may send Michel Barnier (or Sylvie Goulard?) to head the EU Commission. In that case, Germany may claim the ECB for Jens Weidmann, with Finland’s Olli Rehn as a potential compromise candidate acceptable to virtually all euro member governments. In either case, Italy may ask for a consolation price, perhaps an Italian acceptable to Salvini as the EU’s new foreign policy chief. If so, a candidate from a smaller EU member could succeed Donald Tusk as EU Council president. Other candidates to lead the next European Commission (or the European Council) include Belgium’s current prime minister Charles Michel and the Danish EU Commissioner Margrethe Vestager, both from the liberal camp.

2. Germany: Merkel at risk? Probably not – or at least not yet
In the European elections, both parties backing chancellor Angela Merkel’s coalition suffered their worst-ever result in a nationwide vote, with the CDU/CSU down to roughly 28.9% and the SPD to 15.8%. The SPD suffered a double blow. On the national level, the party was overtaken by the Greens (20.5%). In the separate state election in Bremen, which has been led by the SPD for more than 70 years, the SPD fell behind the CDU and is now at risk of losing its hold on power. The right-wing AfD scored 11%, in line with expectations, but managed to become the strongest political force in some East German states.

The badly battered SPD has entered a period of soul-searching during which the position of party chairwoman Andrea Nahles could be at risk. Left-wingers within the party will push for the SPD to walk out of the coalition with the CDU/CSU. If so, this would bring down chancellor Angela Merkel, who would likely be succeeded by her anointed successor Annegret Kramp-Karrenbauer at the helm of a new coalition with the Greens and the liberals. While it is difficult to predict the behaviour of the deeply unsettled SPD, we still consider it more likely that the party will remain in government for now. The SPD may simply postpone any decision about its future until after a string of state elections in East Germany in September and the scheduled mid-term review of its coalition with the CDU/CSU in late 2019. As a majority of Germans prefers Merkel to stay on as chancellor according to opinion polls, we see a 60% probability that Merkel will remain chancellor beyond late 2019 and serve out her term until the autumn of 2021.

3. France: mid-term blues for Macron
That President Emmanuel Macron’s centrist party lost out to Marine Le Pen‘s right-wing party dominates the headlines in France this morning. It is a blow to Macron which called these elections the most important since 1979. His party missed the first place only by a small margin (22.3% vs. 23.4%). Le Pen’s party lost relative to the 2014 European election (24.9%). This puts the attention-grabbing result into perspective. In light of Macron’s low popularity and the yellow vest movement, many observers had thought that Le Pen could do even better. The practical consequences are minimal. With a solid majority in the French parliament for the party he founded, Macron can easily ride out some midterm blues. He still has a lot of time for his reforms to work before he is up for re-election in 2022.

4. Italy: Salvini up, 5Stars down
In Italy, the right-wing Lega surged ahead with 34.3%, slightly exceeding expectations of 30%. Beating the left-wing 5Stars (17.1%), the Social Democrats staged a small revival with 22.7%. Despite missing the mark to become the national party with the most seats in the European Parliament (28 seats vs 29 seats for the German CDU/CSU), the strong showing of the Lega may embolden its leader Matteo Salvini to end his coalition with the left-wing 5Stars and go for new elections in – probably – September. As a potential opening gambit, he has already announced that he now expects the 5Stars to support key parts of his agenda such as a 15% flat tax. For the 5Stars, the fall from grace (32.7% in the 2018 national election and 21.2% in the 2014 European election) has been swift. While the higher probability of a coalition break-up adds further uncertainty, markets may hope that a future government without the 5Stars would be fiscally less reckless than the current coalition.

5. Greece: heading for early elections
After a smashing defeat for his Syriza party with 23.7%, Greek prime minister Alexis Tsipras has announced that he will call early elections, possibly for June already. The centre-right New Democracy under Kyriakos Mitsotakis is in the pole position to gain power following their 33.2% result in the European election. The centre-right would probably safeguard the key achievements of Greece’s harsh adjustment programme and raise trend growth through tax reform and deregulation.

6. UK: Brexit Party ahead
Amid the ongoing Brexit impasse, the strong support for the hardline Brexit Party Party led by Nigel Farage could encourage the current Conservative Party contenders to replace Theresa May as Prime Minister to take an even harder line on Europe. However, while Farage mopped up nearly a third of the vote (31.6%), this should be set against his previous European Election result when he led UKIP to victory in 2014 with 27.5% of the vote. The roughly 7.5pt gain for hardline Brexit parties (adding UKIP’s 2019 result to that of Farage’s new Brexit Party) does not cover the massive losses by the Conservatives and Labour, whose parliamentary parties remain deeply divided over the Brexit question. Together, the major parties lost 26.1% of voters’ support versus 2014. The major winner in the UK is the pro-EU Liberal Democrat Party which won a fifth of voters’ support (up from 6.9%) in 2014. Although the situation is fluid ahead of the leadership contest in the Conservative Party, the EU election result on its own does not worsen the hard Brexit risk (25%), in our view.

7. Poland: PiS in the lead
The populist right-wing PiS cemented its position as the strongest political party with its best-ever result of 45.6% of the vote, comfortably ahead of the liberal opposition with 38.3%. The result is better for the PiS than some earlier projections had suggested. A stronger showing for the liberal opposition would have raised the chances that the opposition could oust the populist PiS government in the Polish election due in November at the latest. Still, as a separate new liberal party Wiosna won 6.0%, the national election could still be interesting, especially if the opponents of PiS were to overcome their divisions and join forces.

The party percentages and seat projections are based on the European Parliament’s election website and some more up-to-date national results.