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EU vote may spur Draghi to intervene

However, this ballot appears to be very different from the previous election in 2009. The Lisbon Treaty, which came into effect on 1 December 2009, dictates that the European parliament shall elect the president of the European Commission from potential candidates put forward by the European Council.

This provision will apply for the first time in this year’s elections. More importantly, the growth of backing for populist parties threatens to jeopardise the future of the European project. Investors may be tempted to review their allocations to continental Europe depending on their expectations on the vote. Here are some key things to consider ahead of the voting.

Newspapers are finally beginning to pay attention to the upcoming European parliament election. They are especially noting the growing support for populist parties, such as France’s radical right-wing Front National party and Britain’s headline-grabbing Ukip.

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Still facing the headwinds of austerity policies imposed by the European Commission, some voters blame the European Union for rising unemployment, poverty and lacklustre economic growth. This election provides a prime opportunity for them to express their anger, with the populist parties being best positioned to capitalise on this disdain.

Unlike previous elections, a number of these populist parties are openly willing to cooperate in the European Alliance for Freedom, as announced by Geert Wilders and Marine Le Pen on the 13 November 2013.

According to the most recent opinion poll, the Eurosceptic party, European Conservatives and Reformists, are projected to have 40 seats while the anti-Union party, Europe Freedom and Democracy, is expected to get another 30. With approximately 10 per cent of the parliamentary votes, their anti-union sentiment will weigh on future decisions taken in Brussels.

Although EU institutions such as the parliament and national governments are bound by treaties to respect the European Central Bank’s independence, the upcoming vote could affect ECB policy. The election of ECB president Mario Draghi, and the more accommodative stance taken by the ECB since his appointment, illustrated that the Governing Council of the ECB is not a self-governing body, but instead influenced by the parliament itself. Therefore, to forecast a change in the ECB’s policy after the election would be reasonable, depending on the broad voting result.

What is more, the European Union is founded on the principle of solidarity between nations, part of which saw the 27 member states (Croatia joined after the deal was struck) agree to incorporate the European Financial Stability Facility. The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to eurozone member states. Following the Greek bailout in 2010, the EFSF agreed an €85bn (£70bn) rescue package for Ireland in November2010 and a €78bn (£64bn) bailout for Portugal in May 2011.

In the event of a dramatic rise in anti-EU parties at the election, eurozone solidarity would once again be brought into question. The resurgence of the European debt crisis cannot yet be ruled out. If investors are concerned by this possibility, then after having enjoyed strong returns over the past two years, now could be a good time to begin moving out of Europe. As a reminder, the IMA Europe excluding UK sector has averaged a return of plus 44.82 per cent over this period.