Tuesday 26 September 2017 by Craig Swanger Opinion

Risks for the EU rising

Germany’s far right nationalism party, the AfD, has become the first far right political party to enter parliament since WWII.  While the AfD only won 12.6% of the vote and are a far cry from the extreme Nazi Party of 1920-1945, the anti immigration and anti EU positions of the AfD will have implications for German government and financial markets 

merkel

Nationalism, anti immigration and anti globalisation – are the catch cry of the new populist political movement that has swept the democratic world since the GFC. The “unheard” population is pushing back against two main perceived villains to blame for their employment or social insecurities: immigration and global trade.

In terms of the economics and investing, this movement will have different impacts by region. Brexit is already having a significant impact on the UK economy as it goes through its painful transition period. Trump has had little real impact on the US economy, but his unpredictable behaviour has certainly impacted the USD by as much as 5-10%. Then there is the EU, which after having near misses in France and Austria, now faces the prospect of having the first extreme right political party in the German parliament since WWII. 

The AfD (Alternative for Deutschland) party won 12.6% of the vote in Germany elections on the weekend.  This is not a one off occurrence, with the AfD winning seats in 13 of Germany’s 16 state parliaments in the past few years. The AfD’s platform was:

  1.  “Stop invasion of foreigners”:
    • Close EU borders
    • Put more security checks on Germany’s borders
  2. “Stop Islamisation” – Fighting perceived Islamic influence in Germany and return to Christian values
  3. Abandonment of the Euro, return to the Deutschmark
  4. No more financial support for other EU nations such as the bailout of Greece
  5. Rejection of the EU/Turkey 2016 deal

Economic consequences for the EU

Arguably the most significant consequence of the AfD’s rise actually has little to do with the AfD itself, but plenty to do with the social division building in Germany that lead to the AfD’s rise.  After the election, The CDU’s former coalition partner, the social democratic SPD, announced that they would not be forming a coalition with the CDU, meaning Merkel’s CDU party will have to form a four party coalition, with the business first FDU party – the second largest partner. 

Germany’s tradition is that the second placed party in a coalition government picks the Finance Minister.  That means the end of the road for the current Finance Minister, Wolfgang Schaubelle.  Schaubelle has been a strong supporter for a more integrated Europe and would have been a strong partner for France’s new leader, Macron.  But the FDU is against further integration of Europe and will likely result in a significant slowdown in further integration work.  This slowdown will in effect weaken the overall position of Europe.

Longer term implications of the rise of populist parties

Populism in the age of social media means more volatility.  In opposition, this has minor consequences for financial markets.  But the odds of populism unexpectedly taking power are clearly very high as evidenced by Trump’s improbable victory and the UK’s decision to vote for Brexit. 

Italy’s election in May 2018 is the next major election with a populist party within reach of power.  The Five Star Movement is also anti EU, anti establishment and anti migrant, having already established a larger power base than the AfD  by winning the Rome and Turin mayoral elections this year.

This social shift to nationalism is not new and typically results in a significant decline in global trade and global capital flows.  Even so, the openness and connectivity of today’s digital global economy means the severe falls due to previous nationalist moves are unlikely to be repeated, but there is nothing positive about this form of politics for global markets.

Conclusions for Australian investors

As always, if you are being paid for taking risk, there is nothing wrong with volatility, uncertainty, or other risks.  But today’s financial markets are alarmingly benign; volatility is exceptionally low.  I would argue that you are not being paid enough for certain risks, and the risks associated with the future uncertainty for the shape of the EU is high on that list.  For Australian long term investors that usually do not need to take Euro currency risk specifically, or to buy assets such as shares or property that are heavily reliant on the success of the EU, there is little justification for allocating to the Euro for now.  Further, it is hard to see that situation changing in the next few years until we understand how the popularity of nationalism will change the future integration or disintegration of the EU.  


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