Europe: Time to listen…

This was the first opportunity in five years for voters to voice their dissatisfaction with European politics and, despite the traditionally low turnout, those who voted seized their chance with relish.

While the results are unlikely to have many direct policy implications at either the national or European level in the near term, which is why markets took the election in their stride, the increased popularity of these parties could make for more unpredictable national politics, and policy decisions, in some of Europe’s largest economies over the next few years.

Here at home, Ukip solidified its position as a viable alternative in UK politics ahead of the 2015 national elections, where the UK’s continued membership with the EU is likely to be a political hot potato. But it was the results in France that were perhaps the most seismic. The incumbent French government has failed to generate economic growth or reduce the budget deficit, raising questions over whether France is taking on the ‘sick man of Europe’ mantle that Germany held back in the late 1990s. Meanwhile, the lack of leadership within the Union pour un Mouvement Populaire explains its inability to capitalise on the government’s weak position. The victory of the National Front, with 26 per cent of the vote, not only reflects a growing euroscepticism among French voters, but also a lack of credible alternatives.

Results in Greece were largely in line with expectations. Although the anti-austerity opposition party Syriza registered a meaningful win over the New Democracy Party (the senior party in Greece’s coalition government), it failed to deliver the knock-out blow. The better-than-expected performance of PASOK (now known as Olive), the junior partner in the ruling coalition, strengthened the position of the current government and reduced the possibility of early elections. However, the strong performance by Syriza, and the extreme right Golden Dawn, places immense pressure on the government. I would, therefore, remain wary of the political situation and there is still a chance of an early election in Greece.

Italy was the real wild card. Prime Minister Renzi’s centre-left Democratic Party gained much more of the vote than had been expected and pushed the once highly disruptive force of the anti-establishment Five Star Movement into a distant second. The strong outcome provides a significant boost for the three-month old Italian government and was reflected both in the jump in equity markets and the fall in bond yields. It should also re-vitalise Mr Renzi to push ahead with his ambitious plan for much-needed economic and financial reforms.

The scale of the victory from populist parties should not be understated, but even so the balance of power with the EU still lies with the pro-European groups. The centre-right, pro-EU Christian Democrats, led by Luxembourgish politician Jean-Claude Juncker, retained its position as the largest party with 214 (29 per cent) of the 751 seats on offer. But despite holding onto a majority, pro-European politicians cannot ignore the message sent by voters. There is clear frustration with the current state of affairs in Europe, and although there is sometimes a disconnect between European and local politics, this time the populace has voiced their discontent at all levels of government, particularly in France, the UK and Greece.

It does not hurt to give politicians a bloody nose from time to time, but derailing the EU project at this stage could come with substantial headaches. The European Parliamentary Research Service estimates that greater levels of integration could add up to €800bn (£751bn) a year to the European economy, or roughly 6 per cent of the GDP. But a stronger political base for the eurosceptic parties means they could have the ability to impede this integration, and slow down very necessary economic and pro-Europe reform measures.

The outcome of the European elections should have little impact on the economic landscape in the near term, as nothing has significantly undermined stability in the region, which has been reflected in the sanguine reaction of both equity and bond investors. The longer-term outlook is less clear. Voters are calling for a different Europe to the one we have now, and if politicians listen for once, and integrate meaningful reforms alongside policies designed to foster growth, then this kick-in-the-pants could be viewed as a long-term positive for European markets.

Kerry Craig is global market strategist for JP Morgan Asset Management